Department of Trade & Industry on its 2016 Annual Performance Plan & 3rd quarter 2015 performance, with Deputy Minister

Meeting report

The Chairperson commended the Department under the administration of the Minister on the style and integrity of the negotiations in the Africa Growth and Opportunity Act (AGOA) outcome with the United States.

dti 2016 Strategic Plan & 3rd quarter 2015 performance
Mr Lionel October, dti Director General, presented the Annual Performance Plan for 2016-2019 and the Third Quarterly Report for 2015. He introduced the presentation with some economic context – in 2016, there had been a general slowdown of economies by 0.2 percentage points (as indicated by the International Monetary Fund in its Economic Outlook update). This resulted in a rise of the interest rate in the United States (US), which led the US government to end the fiscal stimulus and return to normal monetary policy. As a consequence, money was flowing back into the US and emerging markets (such as South Africa) experienced devaluation and oil commodities’ suffering. The weakening of currencies was both positive and negative for developing countries. China had managed to stabilise its economy. South Africa’s domestic economic context indicated that in the Third Quarter of 2015, the economy grew by 0.7%. However, South Africa was experiencing a severe drought in five provinces, which posed a significant threat to future economic growth.

Mr October presented an overview of South Africa’s job and trade performance. There had been no overall jobs losses, and substantial job creation in the agriculture, construction and financial services sectors. The sector experienced job loss was mining. The main imports include oil, pharmaceutical products and manufacturing goods, and overall imports increased by 11.9%. This could be attributed to South Africa having to pay in dollar terms in the presence of a weaker currency. Exports increased by 3.7% in Q3 of 2015. The trade deficit still remained because of the increased growth of imports relative to exports.

Mr October highlighted the New Programme 8 pertaining to investment in South Africa. This programme came about with the splitting of Trade and Investment South Africa (TISA) into two programmes: Trade Export South Africa dealing with exports and the New Programme dealing with investment. The new programmes would address growing the manufacturing sector, industrial development, job creation, investment and exports. Key interventions of the Department were to upscale the Industrial Policy Action Plan (IPAP) to deepen industrialisation into capital equipment and beneficiation, and shift the IPAP focus to more labour intensive sectors. There was further intervention on private sector investment, industrial decentralisation with the Special Economic Zones (SEZ) and an initiative to improve direct export revenues to R800 million. The Department would also look to facilitate investment in a low emissions and climate resilient economy, also known as the ‘Green Economy’, with an R800 million investment in Value of Greener.

The dti planned to increase regional development through increased trade in Africa, specifically through the Southern African Customs Union (SACU) and the Southern African Development Community Free Trade Area (SADC-FTA). This was a key area to grow the economy. The conclusion of the Economic Partnership Agreement (EPA) with the European Union (EU) was underway, which would permit South Africa to start exporting sugar to the EU countries (see document).

The renewed AGOA strengthened bilateral engagements with the United States. AGOA gave South Africa a 10-year preference in the US market to export commodities such as citrus, wine, macadamia nuts. To reach agreement, South Africa had to compromise on 60 000 tonnes of chicken, but Mr October saw AGOA as a win for South Africa in ensuring stability with the US for the next decade (see document). Mr October further pointed out investment into a targeted sector with the R50 billion investment facilitation in the Pipeline project.

The dti’s key development programme, the Black Industrialist Programme (BI) was approved by Cabinet in November 2015 and launched by Minister Davis in December, so was in its first year of implementation. The target was to reach 100 black industrialists over the next three years. Mr October also referred to the revitalisation of Industrial Parks as broadening economic participation through industrial decentralisation (see document).

In terms of regulation, the Department’s main work would be surrounding liquor and gambling legislation. Intellectual Property and Copyright/Performers Protection was also a key area of regulation.

Mr October indicated the administration targets, with the motive to attract, develop and retain profession and skilled Department officials. These targets included an increase in the employment of people with disabilities and women in senior management positions (see document attached for details). It is important that the dti be in accordance with legislative requirements.

On the budget, there had been fiscal consolidation and a tightening of budgets across all departments issued by National Treasury. The total budget had steadily reduced from R10 327 517 in 2016/2017, to R9 290 480 the next fiscal year to R8 631 385 in 2018/2019.

On the strategic risks that would impede the achievement of the dti’s strategic objectives, the worst were external, such as the current South African drought or changes in the South African currency that affected imports/exports. The DTI was attempting to achieve little or no corruption and maintain the highest standards. In management of these strategic risks, the DTI prioritised the African continent as a source of demand, skills development programmes and energy efficiency programmes to manage reputation risks. The mandate of the dti was to work smarter under fiscal consolidation to achieve its Programme targets.

Key achievements of the dti’s trade, investment and exports were thoroughly discussed by Mr October (see document). A highlight was the opening of the first Unilever ice-cream factory in Africa, in Gauteng in October 2015. Furthermore, the Film and Television industry received an over subscription of local and international filmmakers and production companies. This was a growing industry needing increased lobbying support and engagement with National Treasury. The EXL Delivery Centre was launched in November 2015 and created 60 jobs in Cape Town, with the potential for a further 3000 jobs particularly among young people. This indicated another successful project. Ethiopia was highlighted as the next Africa powerhouse, and so the finalisation of the Tripartite Free Trade Agreement (T-FTA) was vital for South Africa’s growth. The Export, Marketing and Investment Assistance (EMIA) scheme included the participation of 408 companies. The Sixth Forum on China-Africa Cooperation (FOCAC) was convened for the first time at Heads of States level on African soil in December 2015. Good progress was made to ensure Chinese investment (see attached document for more details). Alongside the FOCAC, Chinese, African and South African exhibitors were involved in the China Africa Business Forum. The Special Economic Zones (SEZ) to facilitate broad-based economic participation through targeted interventions was approved by Minister Davis in December 2015, and the programme was now fully up and running and the regulations had been resolved – a new SEZ was being implemented in Limpopo. The verification manual for Black Economic Empowerment (BEE) was finalised in the final Quarter. Seven multinational companies were approved for the Equity Equivalent Programme, a programme where multinationals could engage in supplier development or entrepreneurial development instead of direct equity. IBM was a key firm in this programme.

Regulation 45 issued by Minister Davies was a key regulation policy to implement an interest rate cap and force lenders to charge lower interest rates. Regulation policies had been implemented for gambling and liquor, as well as copywriting (see document).

Mr Shabeer Khan, dti CFO, gave an overview of the Department’s budget. For the period under review, the Department’s spending stood at 97.26% of the YTD projections of R7 billion, implying an under-spending of 2.74%. The majority of the dti’s spending went towards incentive programmes, which was 59% of the YTD expenditure. Compensation of Employees stood at 9% and Goods and Services at 6% (see document for details). The Department was still within its allocated budget; it simply could not exceed this. Mr Khan discussed the various reasons for material expenditure variance (see document), however a key reason was the change in interest rate and world fluctuations experienced locally.

Discussion
Ms P Mantashe (ANC) thanked the dti for the report, and acknowledged that the creation of Industrial Parks brought about a successful change to the apartheid legacy of the Eastern Cape Province.

Mr October responded that these Industrial Parks were in areas that were former homelands or areas next to large townships, such as Mthatha in the Eastern Cape. Thus, job creation in these areas was vital.

Mr N Koornhof (ANC) asked with regard to liquor and gambling, whether the Policy would be brought before the Trade and Industry Committee after it received Cabinet’s approval, and whether there would be a public participation process. He queried what negative feedback was received from foreign investors after the signing of the Protection of Investment Bill.

Mr October said it was a priority that the Department deal with the high levels of abuse in South Africa. It was most likely that Cabinet would finalise the legislature and then it would be presented to the Committee to decide if public involvement were necessary. Government had made all the necessary changes and all the relevant departments had been consulted. There might be some public debate or contest given that it involves liquor and gambling tightening.

Mr A Williams (ANC) referring to the strategic risks on slide 27 of the presentation and the risk of corruption and non-achievement of performance tasks by entities, requested more details. He asked what actions the dti planned to take and whether the beneficiation of the mining sector would require participation from government or the private sector. He asked on what products the DTI planned to implement this beneficiation – jewellery etc. He requested more detailed figures into the 51 jobs created by the DTI on slide 33 of the presentation.

Mr October responded that the area within the mining industry that required prioritisation was mining equipment. A programme similar to the automotive programmes would be implemented – capital resource goods council. Furthermore, the mining industry has recommitted to use South African-made mining equipment. This mining equipment would also be exported on a larger scale. In terms of platinum beneficiation the Impala Platinum Plant on fuel cells in Springs would be linked to Gauteng IDZ. The Department was also working with the Department of Science and Technology to use fuel cells to power mining trains.

A member of the DTI added that the Department had appointed an external service provider to conduct a thorough fraud risk assessment, and further provide a series of recommendations to improve internal controls. The Department’s internal audit unit also audited the incentive administration division and monitored the AGs findings on a regular basis. Referring to non-achievement of the public entities’ targets, he dti realised that the Quarterly monitoring process was reactive, and so a front-running, integrated approach had been adopted instead. This allowed the dti to assess the quality of the initial targets, and not simply their non-achievement.

Mr G Hill-Lewis (DA), referring to the performance indicators from the APP document, mentioned that the DTI’s investment target had changed from R14.4 billion this year to R10 billion in three years time and this was the lowest investment target since 2010. He asked what the reason was for the DTI’s evident decline of their investment leverage targets, and how this related to the prospect of attracting investment in the coming years.

Mr October replied there have been no withdrawals of investment. The Investment Act brought in German investment through BMW and Volkswagen recommitting to the building of SUVs in South Africa, a safe and long-term investment for these German companies. There had been investment from China, the United States and Germany under the European Union (EU) through Unilever using South Africa as a base. He assured the Committee that partners were fully committed. Investment is currently 17% of the national R4 trillion GDP, and the goal was now to double investment to at least 30% to ensure a 5% annual growth. This meant the need to double the foreign direct investment from Unilever, for example, from four factories to eight factories. It was easy to get frustrated when there was no obvious change in unemployment, but the key was to retain investment and expand it. The investment target reductions were in fact the end of the Manufacturing Competitiveness Enhancement Programme (MCEP). Initially, as a backup plan with European stagnation and the looming EU crisis, National Treasury allocated the Department R1 billion a year for five years for MCEP. The five-year time frame had come to an end, which reflected a reduction in the investment target. It was not good economics to continuously subsidise the private sector, but rather the Department should use other programmes to stimulate manufacturing and sharpen exports to the continent.

Mr D Macpherson (DA) referred to the Black Industrialist programme and stated that although the Department was spending billions on this programme, they did not know how many jobs would be created as a result. Referring to the dti’s budget summary, administration costs had increased from R730 million to R780 million, while the incentive programmes experienced dropped from R6.9 billion to about R5 billion (see document). This seemed a bit odd given that the Department’s sole mandate was to encourage and facilitate industrialisation and incentives were a large part of achieving that. Mr Macpherson asked if the DTI was going to reprioritise the budget – rather spend less on administration and allocate more to incentive programmes and creating employment. On the issue of the film influx into South Africa, the film industry required specific skills, and was highly specialised. He asked how the dti planned to create more jobs in unskilled sectors like manufacturing, as opposed to only skilled and very niched sectors like film.

Mr October responded that in terms of the film industry, the Industry Policy Action Plan’s (IPAP) premise was to create a diversified economy. He used Germany as an example of a well-developed, diverse economy. South Africa should stimulate the film industry (a high skilled sector) and also stimulate labour intensive sectors such as footwear. The only way to reach full employment was to grow all sectors of the economy, and not rely on specialisation but rather diversification. A key sector was agricultural processing, which would stimulate the agriculture sector as a result.

Mr Khan added that Programme One was the backbone of the Department, and within it was the finance division and the entire corporate services including Human Resources and the offices of the CIO, risks and internal audit. The Department was mindful of fiscal constraints and had reduced the budget accordingly.

A member of dti said that on the issue of incentives, the target Mr October mentioned referred to direct job creation and support the dti provided. However for reporting purposes, indirect jobs were not included. When incentive proposals were considered, the dti considered other issues such as local procurement, exports and innovation as important measures for how the budget was structured and the programme was implemented. The Department allocated a large portion of the budget to industrial infrastructure such as the clusters mentioned by Mr Mantashe. While direct jobs may be counted, investment in Special Economic Zones (SEZ) added to the value-chain by creating jobs indirectly and assisting with local procurement, and the targets shown on the presentation did not include this.

Mr L Kalako (ANC) asked what impact does the vacancy rate had on the performance of the Department; whether these positions were vital or strategic for the dti, or whether they could be phased out after the announcement on the freezing of posts by Minister Davis.

Mr October responded that staff payments only made up 10% of the budget. Through detailed negotiations with the US under AGOA, the staff had been secured for a further 10 years. Trade had also increased in the EU. For these negotiations to be successful, the Department needed a highly skilled staff. The Department’s overhead costs were very low in comparison to the total budget. More details about the freezing of posts would be discussed at a later stage.

The Chairperson noted that the programmes seemed more tightly and strategically focused. She referred to the private sector investment on page 15 of the presentation, and asked whether the Department’s intent was on crowding in and leveraging the private sector if there were going to be a spread across skilled and unskilled categories. She requested a tighter focus on the dti’s strategic approach to job creation, and queried if the import/export deficit that remained was a result of the exchange rate condition that was increasing the value of fewer imports. She further asked if the imports were heavy duty such as Capex or smaller, frivolous items.

Mr October said there was a very complex relationship between direct and indirect jobs, and because an economy was an integrated whole, the sectors fed off one another. He used the automotive industry as an example – by assembling a car, the plastic, rubber and steel industries were simulated because of the parts required. Thus, the down-stream linkages and local job opportunities were huge. If the steel plant were to close, the other sectors linked would close down too. This idea could be applied to the manufacturing sector, which was pivotal as a bridge between agriculture and mining. If the critical manufacturing sector were stimulated, the real down-stream effect would create jobs indirectly. This was how the Department designed incentive programmes around the manufacturing industry.

Mr Mzwandile Masina, Deputy Minister of Trade and Industry, picked up where Mr October left off. He said that the role of the services sector has become crucial as we reach a slowdown of the South African economy. Film, tourism and retail sectors fell under this category. The second impact was from the Protection of Investment Bill. Laws that might prove problematic were BI, BEE, the Private Security Industry Regulation Amendment Bill and those dealing with property rights. In terms of investment, South Africa was strengthening its understanding between investors such as the United States, and there was a need to further understand investors' ongoing programmes such as ‘BuyBack America’. Mr Masina referred to Ms Mantashe, and her point on the importance of stimulating local economies like the Eastern Cape, and retaining good working relationships with these provinces. The BI Programme was about sustaining already existing jobs as well as creating new jobs.

Mr Macpherson expressed his confusion at Mr October’s statement that the private sector did not require incentives, followed by the example of the automotive industry that was hugely successful due to incentives. It was not advisable to look at one sector and apply its success across the board. Table 34.1 of the Estimates of National Expenditure on Vote 34 to illustrated this point. Table 34.1 included the performance indicators with new jobs and projected jobs. The number of jobs retained from approved enterprises was high in 2013 versus 2018/2019. This was the effect of pulling back support from the South African industry and not reprioritising the budget to support incentive programmes. It was a crucial time and important decisions need to be made.

Mr Koornhof requested a breakdown of the percentage of revenue going to South African filmmakers and the percentage going to foreign filmmakers in the film industry.

Mr Hill-Lewis said Mr October specifically referred to the R50 billion pipeline investments that has been leveraged, when the actual target is R14.4 billion and this then declined to R10 billion in 2018/2019. Judging by the performance indicators, there was a lesson that reliance could not be placed on the Department’s presentation. In reality, all the indicators showed that more expensive administration programmes and more highly paid staff delivered the lowest performances, a nearly twenty-fold drop in one particular item. He noted that infrastructure projects dropped, as well as job creation from 33000 jobs to 3000 jobs, and direct jobs from 28000 to 3000. There was a trend of steep drops on every line of Table 34.1, but the presentation indicated otherwise (see document).

Mr October clarified that the R50 billion investment was for the Pipeline project, which the dti was monitoring. On incentives, he referred to infant industries. South Africa had to go through the learning curve with new industries, and the criticism was the dti could not incentivise the industry indefinitely. A timeframe was required. MCEP was a generic programme applied to a time of an imminent Euro crisis, and National Treasury granted the dti a five-year period in which to implement the programme. Agro-processing was created through MCEP, which allowed the dti to stimulate agriculture through a large multiplier. The Department would only support incentive programmes with fixed terms. Low growth for the South African economy was expected, and the dti was simply being realistic in the investment goals they were trying to achieve. The R50 billion Pipeline project might exceed the Department’s expectations, but with the low growth prognosis, the current drought and the completion of the five-year MCEP, investment targets had been lowered.

The Chairperson indicated that the researcher included the National Budget for 2016/17 in the presentation. The previous week the South African Bureau of Standards (SABS) visited the Committee and identified that a key weak/vulnerable area was a reliance on self-verification in growing the local manufacturing base. She asked if the DTI was able to factor this into the budget, given that if inspections were increased, costs would need to be increased in the private or public sector. Was there another way to change the process of inspections to secure the critical tenders? This was a budget issue as well as a policy priority question.

Mr October said regarding the SABS, whenever the Department attempted to regulate, it was pushed back and accused of over regulation of the economy, and asked to achieve ‘the light touch’. The dti would welcome financial and public support for inspections.

Mr Hill-Lewis raised the MCEP matter, and challenged the argument presented by Mr October. The MCEP was designed to help businesses purchase cutting edge technology in order to make them more efficient and globally competitive. He reiterated the importance of this programme in helping South African manufacturers become substantially more competitive internationally.

Mr Mantashe asked whether the assessments provided by an external service provider would be on a permanent basis or at a specific time period.

Ms Jodi Scholtz, Group Chief Operating Officer, dti, said the appointment was not permanent; it was for 12 months. The dti also managed to build in a skills transfer element.

Mr Macpherson brought up the MCEP debate again. He said the key thing about MCEP was that it included a job provision: either to create jobs or to maintain jobs. He was not satisfied with Mr October’s response on MCEP, indicating that the automotive industry was a unique case that could not be generalised. He referred to Table 34.1, which showed the spiralling effect of not supporting local manufacturing industry. In tough economic times locally and internationally, the Department needed to help its industries to become more competitive. The Department needed to drive the manufacturing industry to take advantage of the current competitive exchange rate, which the Department had wished for in the past. The key question addressed when the dti was going to reprioritise the budget.

Mr Masina explained that Mr October was simply saying the particular MCEP had ended, but that did not mean state support for the manufacturing industry stopped completely. He warned that the Department must not be so focused on a specific industry, but look into other sectors outside of manufacturing such as services.

Mr October added that there was a need for a change in culture and a movement towards high levels of localisation to create jobs, a process Mr Masina had explained. The budget process of the Department required some integrity. Sometimes the Department had no choice as instructions were issued by National Treasury, such as the sunset clause that set MCEP with a five-year term. The bulk of MCEP went into agro-processing. The dti needed to create unskilled and low skilled labour intensive jobs and agriculture was the most labour-intensive sector. The Department would like to turn MCEP into a targeted sector after government ended all involvement in the private sector in the 1990s. On reprioritisation of the budget, the Department had experienced rigorous budget cuts from Minister Davies. Given these cuts, the Department was trying to make things work with initiatives such as exporting wine and sugar to the EU.

Mr Kalako asked whether the ‘one stop shop’ programmes implemented by government to facilitate investment, would be housed under the Department. He questioned the need for additional human/financial resources for these programmes. He also requested clarity on the amount allocated for the Broad Based Black Economic Empowerment (BBBEE) Commission in the budget.

Mr October said the ‘one stop shop’ programme was a concept to address multiple problems within the dti such as water, Home Affairs and electricity. The idea of the programme was when a company arrived to invest in a community/area and the company required permits for water and electricity, it would be able to obtain all the necessary permits at a ‘shop’ located physically within the dti. Thus the Department would be able to address all needs and turn around bottlenecks effectively. He credited President Zuma for being the champion of the ‘one stop shop’.

Ambassador Sadick Jaffer, dti, said that President Zuma was responsible for the ‘one stop shop’ programme. It was currently in the draft phase, but would be implemented in Special Economic Zones and local districts.

Mr Sipho Zikode, Deputy Director General: Special Economic Zones and Economic Transformation, dti, introduced the budget for the BBBEE Commission, and explained that the Department was allocated R10 million for the Commission.

The Chairperson queried the involvement of the Sector Education and Training Authorities (SETAs) in the programmes within the dti. She requested an understanding of the early systems economic intelligence, particularly the skills development, entity management and improving the crafting of legislation. She also noted that the dti would like to avoid the problems of the past. Had the plans of the agro-processing programme changed given that the country was experiencing a drought?

Mr October said the Department did not have all of the SETAs support, such as manufacturing, but managed some of the SETA programmes such as call centre training. The drought affects five provinces, and the Department of Agriculture had initiated a programme to stimulate the areas affected. A press briefing on the economic cluster held on the morning of Tuesday 8 March indicated the response to the drought. The Nine Point Plan included clear measures and regulations to mitigate the labour conflict and manage labour volatility.

The Chairperson, referring to the Annual Performance Plan Third Quarter projects from page 28 to 48, said it was very clear that the revisions to the APP were a result of the fiscal restructuring of the budget. She requested clarification surrounding the earlier revisions to programmes before budget tightening.

Ms Scholtz said Minister Davies did approve earlier revisions to the targets in the APP, and the revisions were not removed per se, they were simply nuanced and made crisper. The DTI would undertake a phased implementation of BEE, as well as the BI Project, the cluster projects reflected under the industrial parks, and the liquor and gambling restrictions. These targets needed finesse and now appeared in the APP as indicated.

The Chairperson said BI has become a flagship programme for the Department and for South Africa as a country. She asked whether there would be a build-up on the number of entities in the programme, or whether the programme would remain the same.

Mr October said that the overall target was to create 100 businesses over the course of three years. Thus, for the period of 2016/2017, the target was 25. The Department aimed to exceed these targets, but these targets were achievable and realistic. The dti had received a large amount of traction and applications for the BI programme, however taking a small business to medium sized was a hard task.

The Chairperson said the problem with BI, similar to BBBEE, was that firms were concerned about receiving the correct ratings on paper, but somehow the implementation of the project and the impact of the rating was not what the Department expected. Issues of transformation of the South Africa economy were often successful only on paper. She used the example of a person owning a house, but the house was actually owned by the bank. She questioned whether BI would repeat the mistakes of BBBEE.

Mr October acknowledged that the Chairperson’s question was an important issue. He said that once BEE was implemented into legislation, there was public resistance. Public opinion indicated that the Department through BEE was driving away foreign investment. He reminded the Committee of the need to change the economy from 1994 to a developing economy. BEE was successful in some sectors, but in agriculture and retail sectors there was no evidence of success. To ensure companies complied with BEE, the Department tied incentives to the BEE ratings. Transformation was growth in an economy – if black people were employed, you were transforming industries and employing more people thus growing the economy. He felt it necessary to tighten the legislation of the policies such as BEE and BI.

Ms Malebo Mabitje-Thompson, DDG: Incentive Development and Administration Division (IDAD), DTI added that the BI process would include due diligence, and was not simply a question of ownership but of the nature of ownership. She referred to the Chairperson’s example of the house as becoming the point of negotiation on how the Department did its transactions.

Mr Khan commented on the budget. He said the budget process this year was robust - it began in early August and was finalised close to the Minister of Finance's budget speech. The Department did manage to increase the budget from R9.5 billion to R10.3 billion, despite the Treasury’s harsh guidelines. However, the reduction in 2018/2019 was a result of the end of MCEP.

Mr October added that the key was to win the battle of the budget from National Treasury. This year, the dti was given a mandate by National Treasury not to begin any new programmes. However, the DTI implemented the ‘one stop shop’ programme and the clusters.

The Chairperson thanked the DTI for their presentation.

Adoption of Minutes
The minutes of 9, 16, 17, 23, 24 February were adopted.

The meeting was adjourned.