Revitalisation of industrial parks programme: briefing; Budget Vote 34: Trade and Industry: Parliamentary Budget Office briefing

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Trade, Industry and Competition

12 April 2016
Chairperson: Mr M Kalako (ANC)
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Meeting Summary

The Department of Trade and Industry (DTI) told the Portfolio Committee that a structured programme had been developed for the revitalisation of industrial parks, and ten had been identified for this purpose. Strategic partnerships between the Department and other stakeholders were being formed to assist with the implementation of the programme on a national scale. A budget of R189 million had been allocated for the programme so far, which would cater for six of the ten industrial parks.

The objective of the programme was to resuscitate South Africa’s old industrial parks, and for these parks to serve as catalysts for broader economic development. Its aims included job creation in the manufacturing sector and the removal of barriers related to market infrastructure. The first phase of the programme would concentrate on security issues. Perimeter fencing was one of the components of this phase. Other components included installation of CCTV cameras, streetlights, and waste management.

However, the subsequent phases of development for each park would be determined by the nature of the parks themselves, and what infrastructure was already in place or not in place.

Discussions by MPs focused on the type of businesses that were located in the parks; the types of business that had shown an interest in establishing themselves in these parks; how such new businesses could be attracted; what the tax incentives for the industrial parks were; who the owners of the land were in the parks that were being developed; whether the various agencies that had shown support had sufficient budget to run the parks; whether the Department had involved the local communities in job creation; the involvement of local and provincial governments in assisting the Department in the implementation of the programme; and the reasons for the failure of old industrial parks. Criticism was expressed over the absence of a business plan and feasibility study for the programme, and a projection of what the return on investments for these parks would be.

The Parliamentary Budget Office (PBO) presented the 2016 budget analysis on the DTI. It was aimed at providing useful information to the Committee on how the national budget had been appropriated to the three spheres of government, the changes made to the fiscal policy, and the effect of such changes on the DTI.

The country had experienced slower growth in its economy between the period 2008 and 2014, and this had led to an increase in government debt, increased expenditure and increased borrowing. The current fiscal policy was focused on stabilising the net debt to gross domestic product (GDP) ratio. One of the steps that had been taken by government was the reduction of the expenditure ceiling over the medium term expenditure framework (MTEF) by R25 billion. Government was also trying to reprioritise. Its overall expenditure had been reduced by 0.8%. The factors that had contributed to this reduction included compensation of employees, goods and services, and transfers. New priorities that would be funded over the MTEF included allocations for higher education, a new development bank with the BRICS countries, small business development, and an increase in the contingency reserve.

The reprioritisation of national government resources between the different departments was also highlighted. A sum of R96 million had been removed from the 2015/16 budget of the DTI, and its own programmes had had to be reprioritized. The PBO pointed out that the DTI had a history of under-spending in most of its programmes, but more specifically with respect to the programme on special economic development zones.

Guidelines were implemented by the National Treasury in accordance with the Cabinet resolution to cut costs on non-essential spending items. Definitions for contractors, consultants, catering, entertainment, and agency and support/outsourced services were provided in the guidelines.

The Department’s expenditure per economic classification across all the eight programmes was examined. A common trait noticeable across most of the programmes was the reduction of the budget for compensation of employees in the middle year, without a reduction in the number of personnel for such programmes.

Discussion on the presentation raised issues around the communication of the PBO’s findings to the DTI and the reaction of the Department to such communication; the reason for the reduction of the compensation budget without a reduction in the number of employees; the need for a benefit analysis on the cost of investments; the budget allocations for the SEZs; whether or not such a budget analysis was also carried out for other departments; the source of the PBO’s information; the total budget of the Department before the breaking away of some of its programmes; and how the PBO could advise the Committee and the Ministry on measures to combat fiscal dumping.


Meeting report

The meeting was chaired by Mr M Kalako (ANC), who had been nominated by Members at the meeting held on 6 April 2016, to act in the place of the Chairperson who had to attend the South African/European Union International Committee meeting.

Department of Trade and Industry (DTI) on revitalisation of industrial parks programme
Mr Sipho Zikode, Deputy Director General (DDG): Special Economic Zones (SEZs) and Economic Transformation, DTI, said the Department had responded to the call made by the President to work towards full scale industrialization and inclusive growth. A structured programme had been developed for the revitalisation of industrial parks located in the old industrial areas across the country. Ten state-owned industrial parks had been identified for revitalisation. The programme would focus on the physical infrastructure and other support requirements in conformity with Outcomes 4 and 6.

The Department had begun forming strategic partnerships that would assist in implementing the programme on a national scale. A duration of three to four years was being considered for implementation of the programme. The DTI would be working with the Development Bank of South Africa (DBSA), the provinces and municipalities in order to achieve this target.

The DTI had received a budget of R189 million so far. This amount would cover only six of the ten identified industrial parks. Fortunately, an additional budget had been given for the new financial year, which would assist in completing the six parks that were already being worked upon, as well as the remaining four parks to be developed. It was hoped that there would be more budget in future that would allow for targeting another set of industrial parks which would be identified through the partnership with the DBSA, the provinces and municipalities.

The purpose of the programme was to revitalize South Africa’s old industrial parks so that they could serve as catalysts for broader economic and industrial development in their host regions. Because some of these industrial parks -- such as the one in Dimbaza, Eastern Cape -- were in a very bad state, the process would require a long-term plan that would be developed by DTI, together with the provinces. For instance, the Eastern Cape Development Corporation (ECDC), as the owners of the park, would be involved to ensure that other incentives of government were used to incentivize enterprises and businesses to relocate to areas like Dimbasa.

The objectives of the programme were to accelerate economic development; create jobs in manufacturing areas and related sectors; remove barriers related to market infrastructure and market access; and support firm level competitiveness through other government incentives. Other incentives would also be used in support of this programme.

The first phase of the programme would focus on security issues, such as fencing, street-lighting, top structures, and critical electricity requirement. The phases constituted the basic structure of the programme. Overall, the programme would depend on the nature of the parks, in the sense that what should normally obtain as phase 2 (which would focus on engineering designs and the construction of new and existing roads) may be included in phase 1 for some parks (without good roads). In other words, some industrial parks may require some elements of other phases in implementing their phase 1.

A list of the six approved industrial parks was provided. (See page 7 of the attached document). Pictures depicting the state of some industrial parks, with falling top structures, were shown. (See pages 8 and 9 of the attached document).

Ms Stieneke Samuel, Chief Director, DTI, expounded on the scope to be covered in the first phase. One of the critical elements that had been identified during the scanning of the parks was the high crime rate. Once tenants moved out, buildings were often vandalised. Cases of cable theft and removal of bricks were common. The first component of phase 1 would focus on perimeter fencing. The type of fencing to be used was very important. CCTV cameras would be installed. There would be provision of access control at the entry of the park. Access control would also be provided for pedestrian entry points in the form of cards, which would be provided to the employees of the parks.

Streetlights were critical. Some of the parks had infrastructure such as high mast lighting, which had initially been installed but was no longer functioning, and this would be fixed. Where it was not available, it would be installed. Waste management had also being included in the first phase, since it was a health issue. Other critical issues needed in this phase had also been covered.

With regard to the completion of the project for phase 1, the programme had been prioritised as urgent. For instance, the project in Botshabelo had commenced and it was expected that it would be completed in the current week. It had been found that tenants who had given notice of moving out of the premises, had cancelled their notification once they had found out about the revitalization programme. The programme was therefore helping to retain jobs in the areas where jobs were being lost in the past.
It was expected that the first project would be completed in April, while the last one should be completed by June.

Mr G Hill-Lewis (DA) wanted to know what businesses were located in the first industrial parks that were already being worked upon, and how new businesses could be attracted to these parks.

Mr J Esterhuizen (IFP) wanted to know what the tax incentives would be for the industrial parks, since all the special economic zones (SEZs) created by the government revolved around tax benefits for companies that invested in the industrial parks, but the benefits were for only ten years.

Mr N Koornhoff (ANC) wanted to know who the owners of the land, where the development of the parks would be done, were.  Was the DTI certain that there were approved budgets by the various agencies (either municipalities or development agencies) that would run these parks, and whether those agencies had the budget to run the parks properly? Had the Department created jobs by involving the local community in carrying out the work on the parks being developed?

Ms P Mantashe (ANC) wanted to know what businesses had shown an interest in setting up in the revitalized industrial parks, and sought an assurance that new businesses would be starting up in these industrial parks. Would the Department assist the communities in Queendustria to run their own furniture manufacturing factory, as there was a furniture factory on the verge of shutting down.

The Acting Chairperson commented on the issue of implementation, as it required the involvement of local and provincial governments. In most cases, both the provincial and local governments faced the challenge of lack of capacity. Once the approved money was disbursed to the provincial government, the possibility of such funds being diverted to other projects was very high. He wanted to know who was in control of the projects or if the Department was directly in control, and what was being done to ensure physical security at the parks.

Mr D Macpherson (DA) reflected on the reasons for the failure of one of the parks. The infrastructure and the roads in the area were terrible. The remoteness and inaccessibility of the area made it difficult for businesses to run at certain times of the year. It was important to provide incentives through the local municipalities or district municipalities, either by rates rebates or rebates against electricity or water; along with infrastructure upgrading around those specific areas (such as the roads in Queenstown). It was therefore necessary to adopt an integrated approach that would involve provincial and local governments. Unless there was a three-pronged approach, with incentives from local municipalities, it would be difficult to recover businesses that had left certain industrial parks because of these factors. He wanted to know what the DTI’s infrastructure development plan with the other two spheres of governance was, and the incentive programmes to recover lost businesses.

Ms Mantashe objected to the point made about the bad roads in Queenstown. The position was not true. Queenstown was in a farming area and only needed to attract businesses to the industrial parks.

Mr Zikode said that there was a dedicated unit within the Department that concentrated on industrial parks. To develop a policy and strategy on a long term basis, it would consult with other government departments at the national level, as well as the Treasury, in order to look into the development of some incentives that would be dedicated to industrial parks. The SEZs were also industrial parks and a huge amount of incentives had been set aside to develop them and attract investors to them. It was high time the focus was shifted to industrial parks, especially because they were situated in rural areas, with a lot of people living in those areas without jobs.

The success of these industrial parks would depend on the buy-in by the local communities and local governments. Even though the incentives would be provided by DTI, the buy-in must be at the local level. It was for this reason that committees involving the municipalities and communities had been constituted, to ensure that they were updated on the development of the parks, and therefore were able to protect the structures from being vandalised. Physical security through patrols was also part of the development plan. The DTI was negotiating with the agencies responsible for the industrial parks, to make sure that there were patrol officers going round to confirm that no structure was being vandalised.

A turn-around in the occupation rate had been identified in the industrial parks where the first phase had been completed. The occupation rate in most of the industrial parks was still very high. For instance, the occupation rate in Isithebe had been 95% during the DTI’s last visit. Most of the industrial parks could boast of manufacturing businesses and industrial services. However, manufacturing formed a big component of these industrial parks.

The land on which the industrial parks were being developed, was owned by the local governments. The parks were owned by the development agencies within the provinces.

The Department was doing its best to persuade municipalities to set aside some of their budget that would supplement the allocation provided by the DTI, in order to develop these industrial parks. It was important to note that the DTI did not allocate money to either the municipalities or provincial governments. The money allocated to the DTI was secured through the programme designed in collaboration with the DBSA, which used its internal offices to acquire the contractors that would carry out the job. The benefit of this arrangement was that the DBSA had to procure local companies to offer the needed services.

Communities were carried along in the development process. Once in a while, the Department would meet with the communities, alongside the municipalities, to keep them abreast of happenings in their localities.

As part of the long-term plan, the department would need to find a way to design programmes that would obligate local and provincial governments to set aside some business through their procurement contracts. Such contracts would be given to the firms operating within the industrial parks. For instance, the ECDC had started a programme that had adopted this type of procurement.

Ms Samuel mentioned some of the businesses in operation in these parks. In terms of manufacturing, for example, there were companies in Isithebe that made products such as refrigerators, while a neighbouring firm supplied the components. It was expected that this methodology would be utilized in other parks after incentives had been introduced. Nestle operated in Babelegi, while there was a textile manufacturing company in Botshabelo. As mentioned earlier, most of the parks had a high occupation rate, even though such rates differed between provinces.
As far as the land ownership was concerned, there had been a move towards selling some plots at one time, but it had been stopped. The majority of the plots within the parks were state-owned. In essence, the DTI was revitalizing what belonged to the state -- owned by the provincial agencies, such as the Free State Development Corporation (FSDC) and the ECDC in the Eastern Cape.

In terms of the procurement process and stakeholder management within the parks, the DTI had a protocol agreement between itself, the DBSA, and the parks’ management. The agreement laid down the procedure for implementing the programme. It was critical that the programme was a local one, and not a national one. This meant that all procurement should be done locally through the firms based within the specific areas of the parks. There was also a need to engage with the communities, since the parks would be developed within these communities.

The Department agreed that roads were critical as far as accessibility to the parks was concerned. It was for this reason that the roads had been included as part of the phases for implementation of the programme.

The negotiations being carried out by the DTI were at a very early stage. The DTI had organised a workshop that involved concerned parties in terms of implementation of the programme. The workshop was aimed at considering the sustainability of the programme beyond the intervention of DTI. The next phase was to persuade the municipalities to get involved in the programme, and to look into issues such as rates in the parks, reasonable charges, rebates to the occupants of the parks, and so on. It was also important to improve the management of the parks. There was a long-term plan for a capacity building programme for their proper management of the parks, since the overall goal was their sustainability.

Mr Macpherson expressed concern about the unavailability of a business plan or commitments from local and/or provincial governments, despite the approved budget of R190 million allocated for the revitalization programme. It would be impossible to spend such an amount in the corporate world without a feasibility study and a business plan. He suggested that the Department should produce a business plan and feasibility study for the Committee, including the commitments from local governments, provincial governments and a list of interested businesses that were ready to commit to these industrial parks, before the presentation made by the Department could be approved.

Ms Mantashe raised the issue of a manufacturing company that was at the verge of being shut down again in one of the industrial zones. She wanted to know if the Department was ready to rescue the company in order to be seen as being supportive of the manufacturing business. She also commented on the point made by Mr Macpherson on the powers of the Committee to approve presentations, noting that the Committee listened only to the presentations made.

Mr Koornhoff wanted to know if phase 1 of the programme had commenced in the Free State, since it was indicated in the presentation that the phase would have been completed between 7 and 9 April 2016, which was the previous week. He asked the Department to give the Committee a progress report on the vacancy rate, and the status of the operating budget from either the municipalities or the local agencies.

Mr Hill-Lewis asked for a fundamental business case for the parks, as they were artificial creations of the apartheid government that had tried to relocate or dislocate businesses to so-called border areas of the old so-called homelands. He wanted a reason for the preservation of the artificial industrial zones, instead of directing efforts and budgets towards the SEZ programmes. He cited the example of Atlantis, where it had become difficult to attract businesses despite the numerous extravagant incentives that had been introduced. The same situation and trend was noticeable in these industrial parks, many of which were not located close to major ports, major cities, and markets where goods would be sold. This raised the question of having a successful business case for some of the parks.

Mr Macpherson said that the funds allocated to the Eastern Cape, Free State and Limpopo had been spent in entirety. However, the presentation did not speak to what the return on investment was for these provinces – how many businesses had been supported, and how many jobs had been created. The same thing applied for the other projects, where money had been spent into the next financial year. There was no business plan for any of the amounts that had been spent. He pointed out that the Committee had the right to investigate each case to its root, in order to find out the actual status of the projects. He suggested that the Director-General should be asked to come before the Committee, along with the two presenters, to explain the actual state of these industrial parks.

The Acting Chairperson agreed that the Committee may need to engage with the Department again on some of the issues raised. The Department was asked to send responses to questions raised around the business case, business plan, the number of businesses that had committed so far, the commitment of local governments, and generally around the costing of the parks, to the Committee through the Committee secretary.

The purpose of these industrial parks from the previous government, had been to create an impression to the world that there was a type of independent economy, separate from the South African economy. The question of reinventing that impression would always arise. He wanted to know if it was necessary to revitalize all the industrial parks, without considering whether they could all stand on their own. He asked who would be involved in the parks’ management.

Mr Zikode said that of all the industrial parks Dimbaza was the only one that had been identified as not being vibrant. Most of the parks were very vibrant, enterprising, and business-inclined. The main challenge faced by these parks was infrastructure, which was the role of government to provide. Nevertheless, some of the industrial parks would still need huge incentives from government. Even though the industrial parks had been established for apartheid reasons, the fact still remained that people resided in those areas and were without jobs. The problem of migrating people from these areas to the three main centres of industrial activity in South Africa was as a result of failing infrastructure that had not been renovated in these areas. The DTI was making efforts to change this and in the process, deal with the issue of migration from these areas.

A detailed business plan had been developed for the revitalisation programme by the Department, in collaboration with the DBSA. However, the return on investment was not included in the business plan. In drawing up the business plan, it had been noted that government provided incentives and infrastructure to assist entrepreneurs to develop and thrive. The Department could not calculate the return on the R189 million at the moment, because the project was a long-term plan that focused on facilitating the development of local economies. However, it was possible to get municipalities to confirm if they would be able to set aside budgets to ensure the sustainability of these industrial parks. Some municipalities had already committed themselves to the long-term sustainability of this programme.

As regards the manufacturing company that was on the verge of shutting down, the DTI had held a meeting in the past week to consider ways to assist the company.

Ms Samuel said that there were teams within the industrial parks responsible for their operations. The parks had their own maintenance units, fire stations, and other management units. The Department would work only towards strengthening the team, to ensure the sustainability of the parks.

The Acting Chairperson reiterated the need for the Department to send responses to other issues raised to the Committee.

Mr Hill-Lewis said that the Department should also include the vacancy rate in the information that would be sent to the Committee.

Parliamentary Budget Office (PBO) on DTI 2016 budget analysis
Ms Nelia Orlandi, Deputy Director, PBO said that the budget office had been established to support the appropriations and finance committees. However, it supported other committees as well whenever the need arose. The aim of the presentation was to provide MPs with information on how the national budget had been appropriated to the three spheres of government, the changes that had been made to fiscal policy, and how the changes affected the DTI. The performance and expenditure of the Department would also be highlighted for discussion. The analysis carried out by the PBO on the Department was based mainly on the numbers.

Mr Rashaad Amra, PBO analyst, started with an examination of the fiscal policy. South African’s economy performed well between the periods of 1994 and 2007. The government had been able to pay some of the debts incurred during the apartheid era. It had had strong revenue growth, budget surpluses in many years, and overall debt was quite low. This had created a fiscal space for the country, which implied an ability on the part of the government to increase or ramp-up expenditure without much strain.

Between the period of 2008 and 2014, after the 2008 financial crisis, slower growth had been experienced. The effect of this was a growth in government debt, increased expenditure, and increased borrowing in order to keep the economy together. The effect of this was that fiscal space had been eroded. Since then, the government had tried to maintain an anti-cyclical policy stance to essentially increase spending in order to keep the economy growing. However, a point had been reached where this method could no longer be used, mainly because of high levels of debts. Therefore, the period after 2014 had seen a drive towards fiscal consolidation, which had tried to reduce the debt in relation to the gross domestic product (GDP).

The current fiscal policy focused on stabilizing the net debt to GDP ratio. Since the previous budget, the government had tried to reach 2.8% of GDP, but it had been narrowed down to 2.4%. This move was necessary, as the government could not continue to borrow indefinitely. It was important to note that the budget under review was an austerity budget, in terms of a real reduction in expenditure. There was still expenditure growth, although it was at a slower rate of growth. Some categories would experience a real reduction in actual growth, however.

Several steps had been taken by government to maintain or reduce the debt-to-GDP ratio. One of such ways was to reduce the expenditure ceiling by R25 billion over the medium term expenditure framework and at the same time, reprioritise. Government had quite a number of priorities, but the slower expenditure growth required that resources should be allocated to the most important areas. The consequence of the lower expenditure ceiling, the reprioritisation and some revenue proposals, was that government would reach a primary surplus, which would be the first time for such a surplus since 2008/2009.

Reprioritisation was an issue that required serious discussion and application. When compared to the 2015 medium term budget policy statement (MTBPS), government’s overall expenditure had reduced by 0.8%. The components that contributed to this reduction included the compensation of employees by 1.5%, goods and services by 2.5%, and transfers by 1.7%. National government did not bear the burden alone -- provincial and local governments also bore part of the burden. The local government was more significant in terms of its percentage of 2.2%.

The reprioritisation of the spending was determined by recommendations from expenditure reviews, the modelling of remuneration budgets by the National Treasury, and programmes with a history of under-spending or those that had had changes effected to their budgets. The response to under-spending for some programmes may not necessarily be to reduce the budget for such programmes, but the factors or the root causes of underspending for such programmes should rather be looked into. This was because the under-spending may be in areas of socio-economic importance or a growth-oriented priority.

There were new priorities to be funded over the MTEF. They included an increase in allocations for higher education; a new development bank with the BRICS countries; small business development; planning, monitoring and evaluation (PME); and an increase in the contingency reserve.

It was important to consider certain issues in understanding the implications of the fiscal consideration. Questions to be asked in this regard surrounded where the cuts had been made; the effect of the cuts on service delivery; whether or not the department was able to employ further cost-saving measures, and where; how the funded activities within the department helped to create an enabling environment for economic growth over the MTEF; whether or not the resources could have been allocated more efficiently in other areas; and what the implications of the broader fiscal consolidation was and how it could be absorbed.

The PBO had analysed the total spending of certain areas of the economy, such as general manufacturing, textiles, SEZs, sector specific support, and so on, from 1994 till 2015. Some of these areas were no longer within the ambit of the DTI because of the shifts and the creation of new departments. However, the total amount spent by government in terms of resources to support all the sectors (as listed in page 10 of the attached document) over the last 21 years was R436 billion. More than two-thirds of this allocation had gone into the motor vehicle and components sector. It was important to find out what the outcomes of the massive resources dedicated over the years had been to these sectors, as it would be useful in informing further allocation to these sectors.

A graph showing the resources allocated was highlighted, showing that not all resources allocated had been purely expenditure on budget; some of them were off budget. The largest share of the expenditure was tax expenditure. Tax expenditure referred to ‘tax forgone’. Certain sectors were allowed to have tax breaks and tax incentives. This could have been other revenue raised by government, and this tax revenue could have been used to fund other socio-economic priorities. A chart showing the distribution between tax expenditure and rand expenditure was also highlighted and when compared to the 2015 budget, it reflected that almost 31% of the 2015/15 budget had been dedicated over the past 21 years to supporting the industries.

Ms Orlandi highlighted the reprioritisation of the national government between the different departments. R96 million had been taken away from the DTI in the 2015/16 budget, and its budget had been reduced by R178 million and R219 million over the MTBPS. It was not only DTI that had had to sacrifice some of its funds. The Department of Social Development’s (DSD) budget had been reduced by R1.2 billion in 2015. However, the DSD was one of the priorities, so its budget had been increased by R831 million and R3.6 billion in the outer years to make provision for the early childhood development (ECD) priorities. The budget for the Department of Higher Education had also been increased to provide for the new fee structure for university students.

The reprioritisation between the different programmes of the Department was shown. Programme 2 had been reduced in 2015, while a lot of money had been shifted to the economic development zones over the medium term. Programme 6 – the incentive development and administration programme -- had received a huge amount of funding. Money from the industrial development programme’s budget had been shifted to other programmes.

Overall, the DTI had a history of under-expenditure, especially with respect to the programme on the special economic development zones, so it was also from this programme that a lot of money had been taken away. However, the practice of moving money from one programme to another because of under-spending might not always be the appropriate solution. Most of the money had been reprioritized to programme 6, but the programme might have underperformed in terms of expenditure. This was because the programme had achieved only 13 of the 27 targets in 2014/15, as reflected in the annual report.

The National Treasury had implemented some guidelines in line with the Cabinet resolution to cut costs on some non-essential spending items. The guideline provided definitions for the specific items that could be reduced. For instance, money allocated for a consultant must be for a professional person who provided technical and specialist advice. A contractor was defined as a person appointed to provide services which were non-specialised and was not the core business of the department. A few rules had been developed for the provision of catering services, which included using the catering budget for a workshop that lasted for more than five hours, and for hosting visitors from outside of the department. The entertainment allowance within the department was unclear, in terms of allocating it to specific items. If this was done, it meant that the allowances allocated to some programmes were really high, as only specific officials qualified to receive the entertainment allowance. Agency and support/outsourced services was defined as a situation where a third party carried out specific projects on behalf of the institution, and in most cases, it spanned over more than one financial year.

An overview of the Department’s expenditure per economic classification was highlighted. The budget for the compensation of employees had a history of under-expenditure, which was also noticeable over the medium term. The increases between the 2014/15 and 2015/16, as well as between 2015/16 and 2016/17 budget were very high, without any changes made to the numbers. The personnel numbers between 2014/15 and 2015/16 had dropped from 1 770 to 1 617.

A history of under-spending had also been identified in the ‘contractors’ category. The estimated budget for contractors was R39 million in the 2015/16 budget, but that had been reduced by 23% over the medium term. The question to be asked was whether this reduction would be realistic, as there was over-expenditure on the budget historically. The intention had been to reduce on this budget, as it had been identified as one of the areas for more efficiencies. However, the budget had been increased in the later period. It was estimated that R248 million would be spent on operating leases, but the budget was also decreasing over the medium term. There was a history of under-spending for training and development, but the budget kept on increasing over the medium term.

Programme 1 had fast growing sub-programmes for the Director-General and for media and public relations. The compensation budget followed the same trend of the departmental budget as a whole.
Under goods and services, it was estimated that R27.8 million would be spent on contractors for 2015/16. However, the budget had been reduced to R8.3 million, R8.8 million and R9.3 million over the MTEF. It was not certain if this budget was realistic or whether there would be under-spending in 2015/16.
In the previous period, the budget for agency and support services had increased by 167% but it had decreased by 6.2% over the MTEF. It was uncertain whether or not the reduction was realistic, as agency and support services usually spanned over a year.

No real matters had been identified in programme 2.

On the other hand, a lot of money had been taken from special economic zones under programme 3. The compensation budget had also followed the same trend, with a reduction in the middle year. There were specific items to be noted under goods and services, one of which was catering. The actual expenditure for catering had been R71 000 in the 2014/15 budget. This budget had, however, increased to R366 000 in the outer years. The same trend was noticeable for consultants. The expenditure for consultants was had only been R1.3 million in 2014/15 budget, but this had increased to 16.3% over the MTEF.

High reductions were also identified in programme 4. The same trend was noticeable in terms of the compensation budget, while there was no specific matter to be raised regarding the budget for goods and services.

The budgeting for compensation of employees under programme 5 was different from the usual trend of reducing the budget in the middle year, as identified in other programmes. There was a high increase in the budget for stationery over the MTEF. R216 000 had been spent on stationery in 2014, but the budget was increasing to almost R1 million in 2018/19.

Programme 6 was also one of the programmes that had not reduced its budget in the middle year. The budget for stationery had increased by 53.2% over the medium term.

One of the major highlights of programme 7 was the reduction of the budget for the compensation of employees in the middle year. The budget had been reduced by 18.5% over the medium term. R168 million had been spent on compensation in 2015, but the budget was dropping to R91 million in 2018/19, despite the fact that no changes had been made to the number of personnel in this programme. The arrangement for people working within this programme was unclear. In any case, arrangements should be made for transfers of people over the medium term. The budget for catering was increasing from R142 000, to R719 000 in 2018/19.

The same trend of reduction of compensation budget, without a reduction in the number of personnel, had been identified under programme 8. The budget for catering had been increased by 37% from 2014/15, despite the guidelines issued by the National Treasury. Venues and facilities accounted for 4.1% of the total budget for this programme. The budget for travel and subsistence had increased by 7.7% over the medium term. R6.6 million had been allocated for the 2016, 2017 and 2018 years. The amount was almost R400 000 more than the budget in programme 3 for travel and subsistence, which had double the number of personnel members.

The PBO had done some work on the national development plan (NDP). It had carried out an assessment on all the outcomes to see if there was alignment between the NDP and the medium term strategic framework (MTSF) developed by departments. It had also looked into performance at the end of 2014/15 financial year, since it was the latest available information on the programmes of action. The
DTI was responsible for outcome 4, along with other departments. It had already indicated in the MTSF that it would coordinate the monitoring of the outcomes, develop an early warning system, and all departments would report on the findings.

Based on the outcome analysis carried out by the PBO, it had been found that some of the actions identified in the NDP were yet to be taken up in the MTSF. Actions that were yet to be reported on and had no indication, included a reduction in the cost of living for poor households; a reduction in the cost of doing business through micro-economic reforms; development of a proposal for acceptable minimum standards of living; removal of the constraints for growth; and positioning South Africa to attract offshore business services.

The performance on outcome 4 at the end of March 2015 had stood at 45%. This was based on the programme of action report, where some gaps had been identified. These included the non-reporting by some departments, missing information (such as baselines to compare the progress with), no sources for the progress that had been reported, and no means to identify which department had contributed to the programme of action.

In summary, the country had experienced slow growth. The government’s fiscal policy was to stabilise debt. There was a need to consider cost containment by cutting down spending on non-essential expenditure and operational cost. The government was still supportive of capital expenditure. Prioritisation and reprioritisation had to be considered as a means of contributing to economic growth and job creation. All spheres of government had been affected by the budget reductions.

The question to be considered was whether the Department had responded to the requirements of national government, and how performance and reporting could be improved. No consistency could be found in the definitions given for consultants, contractors, catering and entertainment. There was also no consistency in the allocations to these items across the various programmes.

Mr Macpherson wanted to know if the PBO had communicated its findings to the Department on its non-compliance with the regulations laid down by the National Treasury, and if it had, whether the Department had responded in return. He also wanted to know if the findings on the NDP outcomes had also had been communicated to the Department, and what its responses had been.
Mr Mantashe wanted to know why the reduction in personnel compensation had not been highlighted in the summary of the presentation, and what the Department had to say about the budget for consultants and contractors.

Mr Hill-Lewis said that PBO’s analysis on the actual cost and opportunity cost of what the Department had spent on manufacturing since 1994 was fascinating. However, there had been no benefit analysis. He proposed a broader analysis should be carried out that would unpack the details of the cost, and also contain a benefit analysis of the investments made. He said a member of the Department should have been present during this presentation, in order to respond to the issues raised. A written response was needed to explain the anomaly of the reduced compensation budget in the medium term, while the number of employees remained the same. He also wanted to know what would happen to the budget allocations over the medium term for SEZs that had been recently gazetted or were close to being gazetted, since the money allocated for the SEZs had been removed from the budget. He asked why the Department was increasing its compensation of employees’ budget by 18.8% when the public sector was increasing its own compensation budget by 10.5%.

Mr N Matiase (EFF) agreed that the engagement on the presentation would have been better off with the presence of a member of the DTI. The cost containment guidelines developed by the National Treasury were good, but they were not seen to be fiscally disciplined. The effect of this was that the cost-cutting or containment measures would remain meaningless, except if the department was fiscally disciplined.
The fast growing sub-programmes alluded to under programme 1 were not good examples of cost-cutting measures, because the sector provided support services only to the line functions programmes. Why were the sub-programmes regarded as fast-growing? It would be good to see a large part of the expenditure directed at supporting micro enterprises and small businesses, and adopting a strategy to utilize selective protection measures aimed at supporting micro enterprises.

Mr Koornhoff said it would not be fair to ask the PBO to prepare a benefit analysis, as this had not been the intention of the Treasury in creating the PBO. He wanted to know if the PBO had carried out this same analysis for other departments; what the primary source of the PBO’s information was for its analysis; if it was not unfair to make the presentation without the presence of the Department at the meeting; how the office of the Director-General had compared with other departments in terms of media and public relations; and what the real budget of the DTI would have been before the breaking away of some programmes such as Small Business Development and Science and Technology.

The Acting Chairperson said that the Department should have been present at the meeting, but the Chief Operating Officer had had to return to Pretoria due to the sudden death of DTI’s group Chief Financial Officer, Mr Kumaran Naidoo, which had occurred earlier in the morning. The questions raised by Members had been directed at the Department and not PBO. However, the presentation would assist the Committee in interrogating the Department in the various areas analysed.

He wanted to know if the PBO took into consideration the nature of the work in each programme that had been analysed, as a contributing factor to the increase or decrease in the budget for such programmes; and if it was possible to analyse the reason for under-spending in all the programmes identified in the presentation.

Ms Orlandi said that the analysis could not be done for all departments. The PBO supported only the finance and appropriations committees. The National Treasury also analysed draft budgets and made recommendations to the departments, based on the analysis. It was up to the departments to utilize the recommendations given.

The point raised on the unchanging number of personnel in comparison to the reduction in compensation budget should have been highlighted in the summary.

There had been an indication in the budget document that the Department would work with the Treasury and Brand South Africa (BSA) to determine the budget over the medium term. However, the budgets were currently not realistic.

With regard to the 18.8% increase in the compensation budget, it was pointed out that between 2014/15 and 2015/16, there had been big increases. The same trend had been identified between 2015/16 and 2016/17. This was despite the fact that the Department had a history of under-spending on compensation. There might be good reasons for the increases in media expenditure, but the PBO had been unable to analyse the reasons by comparing the annual performance plan (APP) and the targets in the APP, to see if there was a correlation with the budget.

The source of all the information presented to the Committee was contained in the budget book. The PBO had gone through all the programmes and highlighted only the issues that were of concern and required discussion with the Department.

Mr Amra said that the PBO was in the process of considering the outcomes and benefits in terms of employment creation, investments and contribution to the GDP. However, it was not a clean comparison, as there many other factors affecting the economy. Once the analysis being done on the outcomes had been completed, it would be submitted to the Committee for perusal.

All the real economic incentives within the ambit of DTI had been looked into, with the inclusion of small businesses and economic development.

Mr Matiase wanted to know how the PBO could advise the Committee and the Ministry on measures to combat fiscal dumping. He referred to a case in the Free State, where a financing institute – the Free State Development Corporation -- had used billions of rands to bail out South African Airways (SAA). How could such occurrence be curbed or prevented?

The Acting Chairperson noted that the development corporations in different provinces belonged to the provincial governments.

Ms Orlandi said that she had no knowledge of the Free State issue. However, a request on the issue raised could be made to the Select Committee on Appropriations, who would forward it to the PBO for analysis.

The Acting Chairperson said the Committee Secretary would distribute the draft budget vote report for Members to go through. The report would be formally discussed on 19 April 2016.

The meeting was adjourned.

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