Black Industrialists Policy (BIP); Special Economic Zone (SEZ) regulations

Meeting report

The Chairperson told the Director General that the Committee would have loved to attend the Black Industrialist invitations, but there were pressing priorities in Parliament.
 
Briefing by the DTI on the Black Industrialist Policy (BIP)
Mr Lionel October, DTI Director General, and Ms Malebo Mabitje-Thompson, Deputy Director General: Incentive Development and Administration Division (IDAD), presented. The Black Industrialists Policy aimed at expanding the base of industrialists from the current small base of predominantly White industrialists. Black industrialists had to contend with obstacles related to limited access to finance, markets and contracts. It provided policy directives to accelerate the participation of Black industrialists in the national economy. Empowerment of Black industrialists was to promote economic growth and employment creation. The Black industrialist eligible for empowerment had to have a high level of ownership (50%) and control over the business, had to take personal risks, and had to show a long-term commitment to the business. The manufacturing sector was prioritised. There had to be requisite expertise in the field. Targeted priority sectors included ship building, agro processing, and chemicals, pharmaceuticals and plastics. Access to finance would be through a financing forum that included Development Finance Institutions (DFIs), the Industrial Development Corporation (IDC), the Development Bank of South Africa (DBSA), the National Employment Fund (NEF) and the Land Bank. The DTI incentive offering consisted of a cost-sharing grant ranging from 30% to 50% to a maximum of R50 million. A suite of non-financial instruments would be designed, especially for training and capacity building. Overall oversight would be by the Presidency supported by Cabinet, with advice from the Presidential Advisory Council on Broad-Based Black Economic Empowerment (B-BBEE). The BIP would be coordinated by the DTI. Monitoring of the policy would be undertaken with the Presidency every three years.

Discussion
Mr A Williams (ANC) asked if there had been engagement with the Department of Small Business Development to identify Black industrialists. He asked what would prevent targeted businesses from going bankrupt and selling off to Whites. People could receive the R50 million, set up the business and then sell it to a White person. He noted that slide 14 mentioned that the amount of money received depended on the degree of ownership and control. He asked if the programme could be accessed with 49% ownership. He asked about steps that could be taken to get government money back, in case managers committed fraud or mismanaged.

Mr D Macpherson (DA) remarked that he was confused about the intention of the policy. It was not clear what would be done and how, to develop a hundred Black industrialists. The policy objective was to develop policy directors for development The question was how to support them. He asked who would determine the provision of government funding to get to identified Black industrialists. There had to be a feasibility model. The National Empowerment Fund (NEF) had focused analysts who could look at the feasibility of the programme. He asked how the policy differed from the NEF, the IDC and the Public Investment Corporation (PIC). He suggested that it would be more feasible to put the one billion or one and a half billion Rand in the NEF and run it through that entity. He asked how many jobs would be created besides the 100 Black industrialists, and whether that could exceed 80 000. This was the figure projected by the NEF that could be created if the NEF were funded. Industrialists were not created, they were grown. He wished to echo Mr Williams in asking how abuse in the form of friends and pals being beneficiaries, could be prevented.

Adv A Alberts (FF+) remarked that the premise that only 3% of JSE stock owned by Blacks, was nonsense. It sounded like Malema speaking. To phrase it that way was abrasive, as it sounded as if a handful of evil whites owned the economy. Few people had direct ownership of shares. A handful of industrialists owned the bulk of the JSE, and they were indeed mostly White. But many people owned shares indirectly through pension funds. The fact was that a very few people owned the majority of the JSE. These people were indeed White, but it would not do to counter that with a few rich Blacks. It was not wrong in itself, but the economy needed a black middle class, and it had to be broad-based. When participants were selected, the question had to be how broad the empowerment should be. Some companies were controlled by three White people who were obscenely rich. How could it be prevented that one or two Blacks would become obscenely rich through political connections. In such a scenario the poor would stay poor. Broad-based black empowerment had to become a reality. The question was how to incubate start-ups. South Africa had experienced a brain drain. There were black people already settled in highly skilled positions. The question was how to attract them. He asked about space for White and Coloured people to participate. If government wanted to eradicate poverty it would do better to follow a sustainable and pragmatic approach, rather than one driven by ideology.

Mr J Esterhuizen (IFP) commented that not everyone could become an industrial entrepreneur. It could not simply be achieved by giving people money. He asked how the 100 industrialists would be chosen. Billions of government money were involved. He was concerned about patronage given to people who did not meet the requirements. The programme did not need people who could secure contracts for their families, become big players, and move on. It would be better to call someone who met the requirements simply an industrialist, rather than a Black industrialist. Black industrialists had to have the power to manage broad-based Black economic development.

Mr B Mkongi (ANC) said that Coloured people in South Africa had to be considered Black. They had fought in the collective liberation struggle. The generic definition of Black was all who were not white. It created a wrong impression of the course taken since 1994, to ignore that. White people had control of the commanding heights of the economy. The trickle-down effect had been minimal. That fact could not be denied in 2016. B-BBEE was currently represented by Black industrialisation. Ownership of land and capital, capital stock and finance was in White hands. Banks were owned by Whites and were reluctant to loan to Blacks. These facts had to be faced to deal with the problems created by Apartheid and colonisation. The KZN oversight visit of the week before revealed that Toyota was buying components from overseas countries. There were good young black engineers. They could be assisted to study in Germany, to come back and create the components themselves. He had purposefully studied the demographics at Samsung. There were only five Africans in engineering. Possibly they were window-shopping. The CFO was very uncomfortable when confronted. Samsung declared that it bought components in China. The question was why twenty young South Africans could not be trained to produce them locally, to develop capacity to sell to Samsung. He referred to 50% Black ownership. Laser cutting produced a lot of material, and there were not enough incentives from the DTI. He had received three communications from Black industrialists about challenges, which he proposed to relate to the Committee.

The Chairperson asked Mr Mkongi to bring his contribution to a close. She remarked that definitions of what B-BBEE referred to, had to be clear. She had asked the Secretary to distribute the first three pages of the Act, to obtain clarity on that. It would be on its way.

Mr N Koornhof (ANC) said that the creation of Black industrialists would establish role models, also for youth. He asked that the grant offering be unpacked to show how it worked. He asked how it differed from the Manufacturing Competitiveness Enhancement Programme (MCEP) programme. Mr Mkongi had referred to laser cutting. The industry had been buffeted from the onset with lack of money. Laser cutting was experiencing cash flow problems. The ingredients for a future success story were there, if support could be forthcoming. He asked if funding would take the form of subsidy or direct aid. The question was if aid would eventually be written off, or would be paid back.

Ms P Mantashe (ANC) said that the presentation was talking above the heads of her constituents. She referred to training and capacity building. Her constituency had established cooperatives. There was a team to supply training in finance skills. It could be sustainable if assisted. The question was whether the DTI would help, or leave it to someone else. The economy in the townships had been destroyed. She asked if cooperatives would be trained and given money.

Mr M Kalako (ANC) agreed that there should be further clarity as the policy progressed. It was a first discussion. He understood the position of the Department. The programme had to move the economy forward. All programmes, multi-national as well as local, would benefit from the BIP. There had to be clarity about the distinctive features of broad-based empowerment. It had to be made difficult for opportunists to exploit the programme. Such people could be dealt with through a dedicated team. There had to be a monitoring mechanism to process applications. The IDC could assist with that. The DTI had to have an in-house monitoring mechanism, so that a product could be visible within five years. There were very few with experience among those who were Black in terms of the Constitution. Among Black, Coloured and Indian ranks very few had extensive experience. Experience and an operational track record were necessary. He foresaw problems with people who would want in, but lacked experience. There might be management and finance experience at some levels, but the key was the factory line. He asked why the tooling industry was not included in the list of industries. There had been a presentation in 2015 that showed there was a major problem there. There was lack of production and skills loss. Skills had to be regained in that sector. It was expensive to import skills.
 
The Chairperson wanted to emphasise what the Committee was saying about experience. There were many potential applicants who had never owned a factory. They would put together a team with engineers and others, and then become factory owners for the first time. She asked what was meant by "experience", and whether a person had to own a factory to apply. The MCEP became oversubscribed, and then there no more funds available. The question was whether the BIP would become oversubscribed, within the context of fiscal constraints. Selection criteria had to be defined. She asked if it would be done on a first come first, served basis, or whether sifting would be done in terms of priorities, in a more scientific manner. The presentation had dealt with operational matters, but many other questions were raised about policy. She asked that the DTI respond to policy issues while it dealt with operational questions.

Mr October responded to the question about a pathway from small business start-up. There was a Gazelle programme to incubate small firms. Training given would feed into the BIP programme. The programme was for people experienced in business, but the object was to scale them up. There was the good example of Dan Goti, a Nigerian industrialist who owned cement plants across the Continent, and wanted to open a petro-chemical plant in Nigeria. The object of BIP was to produce Venters and Ruperts, through assisting Black entrepreneurs who ran and owned their business. The DTI preferred Black ownership of 51%. There was insistence that the business be Black owned. It was also necessary that the industrialist be active in the business, but that criterion could not be as strictly applied. There were even White owners who sometimes owned only 20 to 30 percent of a company. Strategic control was most important. There had to be substantial interest. The industrialist had to put up own money and take risks. Small business start-ups would be linked to BIP. There would be a strong dynamic between small business and BIP.

Mr October replied about the possible abuse of grants and loans, saying that the object was to have a syndicated forum in the form of a one-stop shop. There were many windows like the NEF and the IDC, but except for the NEF those were not dedicated to Black business. The most important BIP innovation was the financing forum. An applicant selected for the programme would be tested for strategic control and viability. Only profitable enterprises would be financed. Money would not be wasted on middlemen and project promoters. Companies would apply directly. Sometimes 10 or 20 percent of the money went to consultants. There was no space for middlemen and consultants. Entrepreneurs had to take risks and run their business full-time. It was necessary that the entrepreneur had been in business for a while. He agreed with Mr Macpherson that industrialists could not be invented. Applicants would be put through the Gazelle programme. Things would not be done instantly on a first run. Ms Mabitje-Thompson would chair the selection committee. Ship-building was a viable terrain as there was substantial Black ownership. If an application was approved, and the DTI saw business opportunities and that things were running well, it could be handed to the PIC, which could come up with the big money. But companies had to also meet PIC criteria. Companies could also be referred to the NEF or the IDC.

Mr October continued that the DTI was responsible for grants. Other entities in the forum would loan at low prices. The bulk of the money would come from loans. The DTI would supply a small percentage in the form of grants which did not have to be paid back. Black industrialist transformation was slow, especially regarding manufacturing. There were almost no Black owners. The programme had to be combined with the overall growth of the economy. It was fortunate that the country had been able to attract multi-nationals like Mercedes Benz, Samsung and Toyota. They brought technology and access to markets. The DTI was tightening up programmes. To get into the MCEP programme one had to be level four. For the automotive programme level eight was required. VW in Uitenhage wanted to open a supplier park to develop vehicle components given to Black suppliers. Companies well established in South Africa with productive plants, like BMW, had to commit to empowerment. The South African plant was the most productive in the BMW stable. He agreed with Mr Alberts that the objective had to be to eradicate poverty. South Africa had a poor White problem in the first half of the previous century. The Carnegie Commission was appointed in the 1930s to launch an academic enquiry as to why White people were poor. The Commission reported that the roots of White (mostly Afrikaner) poverty was exclusion from ownership and skilled positions in the economy. At that time mineral wealth was held by the British, through Oppenheimer and others. It was resolved to solve the poor white problem through economic empowerment. The South African problem was that people were excluded from the economy. Ninety percent of the population had to be empowered to participate. It was not just a matter of ownership, but also of skilled positions. Skilled positions like mining engineers were taken from Black people. There had to be skilled Black people who owned and managed companies. The entire senior management of MTN was Black. The object was gradual transformation of the economy. He agreed that the bulk of the JSE was made up of pension funds and investors. But it was essential to deracialise, or there would someday be a search for populist solutions. The DTI would learn and improve as it went along, in order to gradually deracialise the economy. This was a unique problem that required creative solutions.

Mr Sipho Zikode, Deputy Director General: SEZ, added that according to the current DTI model, applicants had to be convincing about managerial and technical skills. Gaps had to be closed with regard to access to markets and skills. There were forums who assisted from a non-financial side, to look at a project and identify lack of experience. Currently the DTI only intervened when a project failed. In the BIP project, companies would be assisted from the beginning. The DTI and other stakeholders would put together a plan to empower cooperatives, but criteria had to be met.

Ms Mabitje-Thompson responded to questions about how to ensure that there was no abuse. The BIP programme was part of a suite of programmes with clear criteria. It would be possible to see if a company was not performing, and it would be possible to claw back the money. Programmes would be approved on merit and reviewed every three years, to evaluate if outcomes were achieved.

Mr Macpherson asked about the number of jobs likely to be created.

Mr Alberts remarked with reference to the broad-based aspect, that employee empowerment could be achieved along the lines of the German model. He asked what form such a model could assume in South Africa.

Mr Mkongi likewise referred to the German model. The CFO at Unilever had explained the model. It sounded interesting. The model could be borrowed. It had to be driven by the State as a priority, and then extended to the private sector to broaden it. He asked about the role of preferential procurement in driving the BIP programme.

Mr October responded that the new South African economy had created six million jobs since 1994. There were 200 000 to 300 000 jobs created each year. The Industrial Policy Action Plan (IPAP) targeted labour-intensive enterprises. Agriculture was the most labour-intensive sector. There were a suite of programmes involved. The DTI would learn as it went along. When companies scaled up there would be employment. The objective was to diversify and industrialise simultaneously. Imports were to be replaced. If buses, trains and ships could be made locally, it would be possible to deracialise in the process. Multi-billion rand tenders for tugs and boats could go to Black owners. The aim was to assist a Black industrial revolution. If industry could be de-racialised it would create jobs. MyCiti buses were already made in South Africa. It created industry, managerial ability and skilled people.

Mr October continued that the BIP was a growth programme, and agreed that the German model was successful. It was one of the most successful models because it was driven by the real economy, not just by finance. The automotive industry was considering the German model. Labour unions were willing to come on board. Employees could share in ownership schemes. Germany had a social market economy. Workers, communities and the state worked together. The people were involved.

Mr Macpherson remarked that he was astounded by the admission that the DTI did not know how many jobs could be created. Billions of Rands would be injected into manufacturing, and the only certainty was that there was to be a hundred Black industrialists empowered. There had to be a predictable outcome linked to investment. A hundred Black industrialists were not enough. There were agencies within the DTI, like the NEF, that reported that 80 000 jobs could be created. He asked the DG to do some modelling. Hundreds of thousands of jobs had to be created. A hundred Black industrialists were not enough.

Mr October replied that the NEF was very successful, but in terms of capitalisation it was not possible to get funding directly from the fiscus. The NEF would become a subsidiary of the IDC, which had a big balance sheet and access to streams of funding. There was a conglomerate of government support that included the IDC, the PIC, the NEF and the Land Bank. Job creation was the responsibility of the government economic cluster and the DTI. Six million jobs had been created in the new South Africa. It was not possible to pronounce upfront on job creation. If agro processing grew, there would be many jobs in the agricultural sector. Ship-building was good for capital accumulation. Lekgotlas were focusing on the labour-intensive sectors. Gareth Ackerman had committed Pick and Pay to creating 20 jobs per day. Christo Wiese, who was involved with Pep Stores and Absa, and Jannie Mouton through PSG, were committed to creating jobs. There was a general concern about job creation. The BIP would create new business and expand the entrepreneurial base. South Africa had a narrow entrepreneurial base, as the economy had failed to open the marketplace to Blacks.

The Chairperson noted that the Carnegie Commission had called for radical transformation of social, political and economic issues. Only White Afrikaners were poor, because they had been excluded from the elite. The Commission called for government intervention. Neither the public nor the private sector could address the problem on its own. The two groupings had to be linked up. The DTI had to deepen its relations with the private sector. The private sector had to be on board. She told Mr Alberts that it was not just an exclusionary policy. The object was not so much to exclude White ownership. There could be 49% White ownership. He could use the tea break to improve his understanding. The object was to change the demographics of control and ownership. The real aim was to have Black ownership in a productive enterprise. Mr Alberts could take a look at the German model. The Committee would monitor the BIP project closely, as it was a flagship programme. She asked the DTI to report on a monthly basis about progress with jobs created and other issues.

The Chairperson pointed out that the first three pages of the B-BBEE Act had been distributed. It appeared that the reference was to African, Coloured, Indian and Chinese, indeed all those who had been excluded by the Nationalist Party government.

Special Economic Zones (SEZ) regulations: briefing
Mr Alfred Tau, Acting Deputy Director General: SEZ and Economic Transformation Division, noted that the SEZ Act of 2014 allowed the Minister, after consultation with the Advisory Board, to make regulations for the proper implementation of the Act. The SEZ Fund consisted of money voted for by Parliament as part of an budget appropriation of the DTI and potential interest on investments. Monies from the SEZ Fund could be distributed for feasibility studies; start-up costs; site preparation; infrastructure development; business incubation; skills development; and business development and performance improvement. Support from the SEZ Fund could be applied for by any sphere of government; a public or municipal entity; a public-private partnership wishing to establish an SEZ; an SEZ entity; an SEZ operator appointed by a PPP: state owned operators; and qualifying enterprises already located within the SEZ. Types of service or businesses that could locate in SEZs were manufacturing; internationally tradable services; or warehousing, distribution and logistics services. There were regulations concerning the governance and management of an SEZ, regarding the role and responsibilities of SEZ entity boards. The Advisory Board had to report to the Minister twice in the financial year on progress regarding the establishment and development of SEZs in the Republic. An industrial development zone (IDZ) operator had to, within twelve months of the commencement of the Act, submit a plan with timelines to the Director General on how the zone would comply with the framework regulating SEZs according to the Act.
 
Discussion
The Chairperson noted that the Committee had just made an oversight visit to Industrial Development Zone (IDZ) entities. Regulations were now coming into effect. The SEZ was an important instrument for the growth of the economy and jobs.

Mr Williams asked the DTI to furnish reports with page numbers in future. He asked if the DTI had measures to discourage entities from leaving, once incentives like tax breaks had expired. Samsung seemed ready to enter the programme. Yet on oversight, it turned out that the building for the assembly plant was not yet ready, it had not been painted. It looked as if Samsung could pack up and leave the next day, even though they might lose a couple hundred thousands. The question was how to keep people in once incentives expired. He asked for a breakdown and justification for the huge salaries paid to board members and senior managers. It went into millions. If some board members worked for the department, and it had to fork out millions for these salaries, it would be dodgy. If boards were to be private, the question was how it was to make money to pay these salaries.

Mr Esterhuizen remarked that long-term interests had to be placed first. Good support measures were not complete. The revision of the Income Tax Act outlined benefits available. Potential investors needed every incentive possible, given high labour costs and energy shortages. Lower taxes benefitted up and running businesses, but not the new. Tax incentives for SEZ was only for a ten year period. Most large enterprises took years to develop and plan, and new concerns would feel the clock ticking against them. Previous investors could get the same benefits outside of IDZ. He was concerned that not less than 90 per cent of the income of that company is derived from the carrying on of business or provision of services within that SEZ.

Mr Mkongi referred to transformation imperatives as it related to tax incentives. Oversight visits to IDZs revealed that enterprises were not following what had been said by the Commission. During oversight, there had been an incubator who produced cucumbers. There was no transformation. Workers were just working without knowing the basic conditions of employment. A lot of concessions had been given. Durban port had not managed to establish an effective one-stop shop. There had to be an effective one-stop shop relation between Dube and Durban. Goods were going through the ports and out of the country. He asked about relations between provincial and national, and who it was that determined in times of misconduct, and took decisions on the compensation of the board. Problems could not be left at the provincial level. The performance of loans varied between provinces. The Western Cape differed from other provinces. He asked about the role of the Minister in terms of establishment and disbandment of boards, and misconduct. He asked for a progress report on the Oliver Tambo IDZ.

Mr Kalako noted that the regulations referred to transition from IDZ, and the establishment of SEZs. He asked for the reason for the change. Three years were allowed for transition. There were a lot of problems in Saldanha. A structure was created that was considered a board, but the Black community were excluded from it. He asked if the problem was being sorted out. Only the 'white' Chamber of Commerce was invited. It was a predominantly Coloured area. Coloureds were excluded and not benefitting. The Coloured community could provide business, especially construction. He asked if the matter had been looked into, in the interests of transition.

The Chairperson referred to the Coega issue. Bonuses were not to be allowed. More funds were requested for bonuses, whilst it already was in deficit. B-BEE and other legislation had to be complied with. Some IDZs and SEZs were not complying with the legislation. Amendments had just been passed. She hoped that the DTI was monitoring that, and that it not being left to slide.

Mr October responded that there would not be room for fly-by-nights who would leave after expiry of incentives. There was no automaticity, a concern did not qualify simply by its presence in the zone. It used to be possible to get labour incentives in Atlantis, and some business concerns came in for seven years and then left. An application was received from Samsung, who could show a range of things and a long-term commitment to South Africa. The labour incentive alone was not sufficient. Production and machines had to be brought in. There were more regulations for partnership between provinces. DTI incentives were only for capital. The DTI would help for three to five years. Legislation created a national framework. Provinces had to create entities owned by them.

Mr October continued that exclusion from boards was not only an IDZ problem, but also reflected a national problem. He would advise that an inclusive board be created. There had to be a robust engagement with the provinces through monitoring. Exclusion, excessive salaries and high running costs had to be monitored. There was an Act, and the Minister had real powers to regulate, and to extend regulations. He agreed with Mr Mkongi that there was as yet no one-stop shop. It had happened that the DTI was prepared to grant a work permit, but Home Affairs had its own idea.

Mr Tau added that there had been an appeal for improvement of tax incentives. When IDZ started out there were no tax incentives. An improved incentive package could attract investment. It had to be seen what attracted investment in industry.

Mr Mkongi agreed that there had to be strong regulation. There were transitional period challenges with regard to relations between provincial and national. Loopholes had to be closed.

The Chairperson remarked that when things went off track, which was rare for the DTI, it had to be traced back to governance and leadership issues.

Mr Esterhuizen commented that there had to be more incentives on the way forward. In South Africa, amid global turmoil, investors had to be drawn. His questions about 90 percent of business inside and the ten year flow, were still unanswered. There had to be a package to offer to investors.

Mr October responded that the tax incentive was a 15% corporate tax rate. It currently stood at 28% elsewhere. The reduced rate had been decided on some years before, but would come into effect with the regulations. It was only possible to get 100 percent of the 12(i) tax incentive inside a zone. Only 50 percent could be obtained outside of IDZs. It had to be seen as a main attraction. Companies like Aspen wanted the tax incentive because it wanted to roll out, but did not qualify as yet, and wanted to be in the IDZ. Building infrastructure in IDZs was most important. Companies were showing appetite at Harrismith and Musina. Incentives were not to be the only reason. Viable companies were desirable. Samsung had to become like Mercedes Benz and Toyota. The targeted strategy was to start with basic assembly and then deepen downstream. Entities only interested in the tax incentive were likely to leave when that was gone. Industrialisation had to be deepened. Mercedes Benz had hundreds of companies that supplied it. It had to start off slowly with what was called screwdriver operations, but that was necessary. It could n ot start with a Toyota engine plant, but had to start with assembly. Of 300 000 automotive concerns, only 30000 dealt with assembly. The 270 000 could not exist without the 30 000.

The Chairperson said that it became apparent on the oversight visit that Toyota was making the right moves, but there was concern at Samsung. The leadership agreed with the Committee concern when it asked why it did not transform to component production. The Committee asked if Samsung had a business plan for that. Samsung had asked that the Committee engage with it on that score. There was engagement about incentives. A staff member had to get information through to those who had not yet been Committee Members at that time. There had to be a compilation of reports. There was to be an engagement with Unilever on 16 February and a briefing on incentives. The oversight report would be considered on 24 February. Members who had anything to add had to do so by 17 February. The subcommittee on gambling would meet on Friday, 12 February, at 9am

Committee matters
Minutes were adopted for 16, 22 and 23 September 2015. Under matters arising from 23 September minutes, Mr Macpherson asked about a report he had tabled, which was a forensic report on the Centurion Aviation Village. He asked about movement on the matter. There was an onus on the Committee to either consider the report or not.

The Chairperson told Mr Macpherson that things did not work that way. The Committee was not obliged to consider the report. She would however allow him to address the matter in a following Committee meeting.

Subcommittee on Gambling
The Chairperson advised in terms of ongoing oversight, that expert comment on gambling matters be invited. Mr Mkongi headed the subcommittee on gambling. It might be advisable to look at the Remote Gambling Bill. A business plan had to be prepared and reported to the Portfolio Committee after the first meeting.

Draft terms of reference were adopted.

The Chairperson adjourned the meeting.