Industrialisation linkages with trade, procurement, investment & localisation drive

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Trade and Industry

16 August 2016
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The meeting consisted of three presentations from the Industrial Development Advisory Unit, The National Regulator for Compulsory Specifications, and the South African Revenue Service, as well as discussion with Members. 

Mr Nimrod Zalk, Advisor: Industrial Development Advisory Unit, Department of Trade and Industry, presented the workshop on Industrialisation and its Linkages with Trade, Procurement, Investment and the Localisation Drive. Mr Zalk highlighted policies that have been shown to work for developing countries, most important of which aimed to reduce imports and reduce South Africa’s reliance on temporary capital-flows. He discussed factors effecting the trading environment of South Africa. A theme of the presentation was the importance and positive impact that public policy and intervention can have in guiding a country’s development path.

Mr A Moodley, CEO, National Regulator for Compulsory Specifications, presented Mechanisms to protect the local manufacturing sector from illegal and substandard products on behalf of the National Regulator for Compulsory Specifications. He explained that the NRCS derives its mandate from various legal Acts, with the purpose of administering compulsory specifications in the interests of protecting the consumer and the local environment. The National Regulator has shifted its regulatory activity towards monitoring at the source, which is either a domestic production point or a port-of-entry. This has been far more effective; in 2015 alone the National Regulator processed 1200 Letters of Authority and confiscated R548 million worth of illegal, non-compliant goods. Mr Moodley’s presentation focused on the ongoing work of the NRCS, and important factors at play in the regulatory environment.

Members sought more information on the figure of R548 million. Members also sought clarity on the relationship between the National Regulator for Compulsory Specifications and various other governmental bodies, such as South African Revenue Services and the Department of Home Affairs. Members were concerned about Steel prices and wanted to know to what extent steel was being regulated. Mr Moodley responded that steel was currently not regulated, however, the National Regulator has begun a project to deal with steel that was approved in July. The figures were accurate and based on the market value of the goods confiscated. The general view was that the National Regulator was doing good work, but that the challenge is great and in certain areas such as cement and tile standards have slipped in the past few years.

Mr P Moeng, Acting Group Executive, South African Revenue Service, presented Customs Mechanisms to Protect Industry. The mandate of SARS in respect to Customs and excise is to control the movement of goods across the borders in order to protect the South African economy and society, to support economic competitiveness, and to collect and protect revenue. Mr Moeng explained the methods SARS uses to stop the trade of prohibited and restricted goods. Of particular importance is the risk engine, which uses an algorithm to detect high-risk cargo likely to contain illicit goods. Part of this risk-profiling involved calculating a reference price for each good in question, which could be thought of as the very lowest price one should see for such a good. Prices that were declared significantly below the reference price indicated misrepresentation and the cargo received a higher risk-rating. Inspections are targeted at the highest-risk cargo, while random inspections also occur. Mr Moeng repeatedly stressed the necessity of a real and strong relationship between industry and the regulators.

Members were interested in digitisation at SARS and wanted to know how long this process would take. Communication and cooperation between different regulatory agents was highlighted as a challenge, while it was also noted that digitisation would improve communication and efficiency in this regard. It was also generally agreed that the prosecution of illicit practices and the individuals responsible must be improved. Steel and scrap metals were raised as products that needed more attention.

Mr Garth Strachan, Deputy Director General of the Industrial Development Division and Chief of Customs, SARS, took the floor to discuss the sharing of information and to summarise the situation. Mr Strachan believed that while significant progress had been made, illegal imports, mis-declaration and sub-standard products still constituted a real danger to the economy. All of the relevant bodies need to work together more efficiently to scale up efforts. He highlighted the problem of dishonest importers that acted as intermediaries on behalf of the retailers that were abusing the system. He closed with a brief discussion of the steel industry, including the fact that an export tax on steel has been proposed by the DTI.

Minutes of 11 May, 13 May, and 24 May 2016 were adopted with amendments.

Meeting report

Opening remarks
It was noted that Mr M Kalako (ANC) would be late as he had to attend another meeting with the Portfolio Committee on Communications, on which he was whip. 

On the matter of steel tariffs, the Chairperson noted that the last meeting the committee held was on 24 May. Following this meeting, a letter had been sent to the Minister of Trade and Industry, Mr Rob Davis, requesting details on the proposed establishment of a committee to monitor changes in tariff on primary steel imports and their downstream effects.  The letter of response received from the Minister was signed by him on 1 June. At that point, the monitoring committee had not been appointed, as the committee was only gazetted on 10 June 2016 [National Gazette 40058, Vol 612; page 39].

A further letter was sent to the Minister on 15 June, stressing the fact that the issue of the steel price had not been resolved to the satisfaction of the Portfolio Committee before the constituency period began. Members were concerned to rise before the matter had been resolved, especially as the pricing committee had not been formed at that point. When the committee was gazetted on 10 June, the Portfolio Committee was unhappy as it was under the impression that the DTI would be represented on the pricing committee, which was not the case according to the National Gazette. The second letter therefore asked the Minister to engage with Department of Economic Development on the matter.

On 24 June the Minister responded, stating that the DTI would be represented by Dr Neisha Naidoo at all meetings. This was dissatisfactory to the Committee and was not what they had expected. They had expected a strong representation of the DTI on the committee. The Committee enquired again about the exclusion of the DTI from the committee, and stressed concerns at the long delays between responses and the slow handling with the issue.

The Chairperson was resolute that another letter would be written by the day’s end to request clarity on whether the pricing committee had been formed, whether or not it was operational and why the DTI was not represented on the committee.  

Adoption of minutes
11 May 2016
Mr Williams noted that he was present and should not be marked as absent for sickness. 

Mr G Hill-Lewis (DA) pointed out that the NRCS agreed to communicate a timeline by which they would abide. This was added to the minutes.

Mr B Mkongi (ANC) noted that the minutes did not clearly enough reflect when a decision had been made; decisions did not stick out clearly from the deliberations.

The minutes were adopted with these amendments.

13 May 2016:
Mr Mkongi specifically requested that the term ‘resolution’ on page 7 point 8.1 (with regard to indebtedness and debt forgiveness) be replaced with the word ‘decision’ as per his previous question.

The minutes were adopted with this amendment.

24h May 2016:
Mr Williams said again that he was present at the meeting as recorded on the attendance register but this was not reflected in the minutes.

The Chairperson asked Dr Naidoo if the Minister and herself had received the minutes of the meeting of the 24th. She noted that Dr Naidoo had not been present throughout the meeting. There was a problem of miscommunication or lack of communication between the Portfolio Committee, Dr Naidoo, and the Department of Economic Development, stressing that the appropriate materials from the meetings need to be sufficiently circulated between branches of government.

In accordance with Mr Macpherson’s request, the resolution of the meeting of 24 May was that the Minister and Dr Naidoo were to keep the Committee informed of any developments in terms of the price of steel. Furthermore, the Minister was to convene a special meeting during the constituency period, if a sudden drop in the price of steel occurred. As it so happened, this provision was unnecessary as the price was reasonably constant over the period.

The position of the Committee at the time was that the issue of the steel price would be taken further during the upcoming colloquium on local public procurement.

The minutes of the meeting of 24 May were adopted.

Workshop
The Chairperson said the workshop was intended to create value and insight for Members, especially in preparation for the colloquium. It was not intended as a forum for Members to make deliberations or decisions – these could instead be raised at the next Committee meeting.

Presentation 1: Industrial Development Advisory Unit - workshop on industrialisation and its linkages with trade, procurement, investment and the localisation drive
Mr Nimrod Zalk, Advisor at the Industrial Development Advisory Unit, DTI, presented the workshop on behalf of the DTI.

Mr Zalk noted a positive relationship between the ratio of the manufacturing sector to Gross Domestic Product (GDP) and economic growth across several countries in the world. He mentioned countries that evidenced such a trend, including Indonesia and Thailand. Industrialisation was a process that relied on trade, as trade could contribute to growth and job creation. However, benefiting from trade was not a guaranteed or simple outcome, but rather a process that crucially depends on the strength of trade strategy. This was especially true of countries that could be described as late developers.

Mr Zalk discussed trade policies that had been shown to work for industrialising countries. Import replacement [where a country’s’ imports were replaced instead by the same goods manufactured locally] is a policy route that could lead to export competitiveness. In so doing, it was critical that policy leverages sources of domestic demand in order to expand local production and achieve the economies of scale enjoyed by large firms elsewhere. An important source of domestic demand was from public expenditures.

Mr Zalk suggested that the Apartheid government had largely failed to leverage the public sector in this fashion, in order to create competitive markets. He stressed that the transition to competitiveness was crucial for a developing country in today’s global economy. In addition, trade strategy should include a policy regime that minimises Balance of Payments (BOP) crises’ and constraints. These policies could include: 1) reducing imports, which could be seen as a demand leakage which limits increases in domestic production; and 2) reducing South Africa’s reliance on short-term capital inflows to help balance any current account deficits.

Mr Zalk detailed several factors currently affecting the trading environment of South Africa, including:

  • The economic slowdown being experienced by our majoring trading partners, including the European Union (EU) and the United States of America (USA)  
  • The upward trend being experienced in value-added [non-primary] exports to other regions within Africa. This trend is good as value-added exports are preferable to the primary exports that have traditionally been exported to the global market
  • The globally declining commodity prices which have hurt trade revenues
  • The global slowdown which also affected several of our developing trade partners, such as China, India and African countries, further weakening demand for our goods and services  

These factors called for the strengthening of South Africa’s manufacturing sector and the diversification of exports. He stressed that the country cannot rely on recurring commodity booms [commodity price booms], especially as they did not necessarily cause the necessary structural changes which are the only viable path to achieving long term growth. The weakening exchange rate was a headwind for the export sector and gave us some room to try diversify.

Mr Zalk focused attention on regional integration, stressing that it would be important for South Africa to support industrialisation in the Southern African Development Community (SADC) region and the continent. South Africa was a net exporter in our binary trade relations with various African countries.

Mr Zalk discussed the relationship between industrialisation and investment. He explained that high growth was associated with a high share of fixed investment as a proportion of GDP. Public and private investment could be complimentary. Public investment could help to address infrastructure backlogs and leverage public investment expenditure to where it was needed. In these cases, he believed that public investment could actually ‘crowd-in’ private investment [the economic mainstream maintains that too much public investment could ‘crowd-out’ - i.e. reduce - private investment due to the limited total amount of capital in the system as a whole].

On the role of development finance, the importance of public development finance was that it took a longer term view on investments, especially focusing on high -return sectors and sectors that had a high capacity to create jobs. Development finance should therefore be focused on sectors that exhibit high employment linkages, such as services. These organisations could also support the empowerment of Black Industrialists and the localisation initiative.

The DTI had made significant progress to leverage South Africa’s large-scale investment and procurement programme. Going forward, compliance, supplier development, local content verification, import monitoring and export performance would remain priorities of the DTI. Progress tracking would remain important in government, state-owned entities (SOE’s) and other procuring entities. For example, equipment manufacturers should report their progress in capturing local demand [and therefore replacing imports].

Presentation 2: National Regulator for Compulsory Specifications – mechanisms to protect the local manufacturing sector from illegal and substandard products
Mr A Moodley, CEO, National Regulator for Compulsory Specification (NRCS) provided a background to the acts which establish the mandate of the NRCS. These were: The National Regulator for Compulsory Specifications Act (Act No. 5 of 2008), the Legal Metrology Act (Act No. 9 of 2014), the National Building Regulations and Building Standards Act (Act No. 103 of 1977), and the Foodstuffs, Cosmetics and Disinfectants Act (Act 54 of 1972).

Based on these acts, the mandate of the NRCS was to administer compulsory specifications in the interests of protecting the consumer and the local environment. The principle of fair trade meant that the consumer was getting what the packaging and advertising of products and services suggest.

Mr Moodley outlined the business process of the NRCS:

1) Firstly, the NRCS developed compulsory specifications (VC) and technical regulations (TR). This was done according to international standards. The NRCS worked with other departments including South African Bureau of Standards (SABS) Technical Committees to convert quality standards to safety requirements, which were compulsory in nature. This could take up to two years and included stakeholder consultation.

2) After the specifications and technical regulations were set, the NRCS engaged in surveillance. This was done through product sampling and testing.

The NRCS operated according to the “Lock-out principle,” meaning that unsafe products were locked out of the marketplace. Compliance was easier to monitor at the source of manufacture as opposed to when goods were already in the market, a strategy that was abandoned by the NRCS prior after 2012. In the case of goods manufactured in South Africa, the NRCS examined them at the place of manufacture.  When examining ports of entry, the NRCS was restricted to its territorial jurisdictions, which included: Cape Town, Durban, and Port Elizabeth (Coega). Shipping lines were not capable of self-regulation which was why the industry must work together with the NRCS. `

Mr Moodley discussed the impact that surveillance at source had. The number of applications for Letters of Authority (LOA) received increased from 400 in 2008 to 1200 in 2015. There was a price-differential between the goods that were consistent with regulation and those that were illegal. While applications had increased, there was still a long way to go in introducing a compliance culture in South Africa, especially as consumers were price sensitive.

On inspection planning, the current NRCS’s approach was to profile shipments and containers, and to make targeted inspections of the most sensitive cargo. This approach was combined with randomised inspections over all the containers. The NRCS worked closely with the South African Police Service (SAPS), Customs, the Department of Agriculture, Forestry and Fishery (DAFF), the South African Revenue Service (SARS), and various other governmental bodies and industry groupings.

Over the 2014/2015 period, the NRCS removed R548 million worth of unsafe products from the market. Over the past five years over one billion Rand’s worth of goods had been uncovered. These products could reduce the welfare of the consumer by being dangerous, or of such poor quality that they quickly broke. Over all of the containers stopped for inspection, 70% included regulation product while 30% were non-compliant or not approved.

The NRCS worked with local industry to protect the consumer and the environment. The NRCS encouraged local manufacturers to create products that complied with international standards, as these NRCS standards were usually based on international norms. For example, the NRCS worked closely with tyre manufacturers to ensure that they were manufactured to international standards, and the country currently exported a significant share of tyres to the EU. The NRCS also worked closely with international regulators and companies to ensure that products entering and leaving the country were safe for consumption.  

The NRCS received a large number of complaints from industry. As a result of concerns received from the industry, inspections had been conducted at retailers, and a huge number of non-compliant products were identified and subjected to the sanction process. The majority of these products were imported. Information had also been received on non-compliant, unsafe products being sold in various shopping malls and retail outlets. Several joint projects with SAPS and SARS were implemented to deal with this problem.  Again, huge quantities of non-compliant, unsafe products were confiscated and leads were obtained on the origin of these products. These leads were being investigated to stop the flow of such products.

Mr Moodley explained that NRCS had developed a compliance criterion for local manufactures to be classified as either low risk, medium risk, and high risk. These categories were defined as follows:

Low risk – the company was registered with the NRCS, with a positive compliance record over the past three or more transactions.

Medium risk – the company was registered with the NRCS, with a positive compliance record over the past one or two transactions.

High risk – the company had negative compliance record and/or no history of past compliance in product area. New entrants would be classified as high risk.

Local manufacturers renewals provided for products which had been previously approved. Renewal applications were regarded as low risk and processing was expedited. This process was minimalistic, especially if the product was relatively unchanged. There were also accredited local test laboratories which the NRCS identified as low risk. 

Mr Moodley described project Phakisa. The launch of this project required close interaction with various government departments for the development and sustainability of local industry. In terms of development of the Ocean Economy, the NRCS cooperated closely with DAFF with regard to legislative reform to promote aquaculture development. This involved assisting the industry with the aquaculture requirements of the various trade partners, for example the process of demonstrating compliance with our locally cultured abalone to be accepted in the world market.

The Quantity Mark used on traded goods was regulated by the International Organisation of Legal Metrology. The Quantity Mark gave the consumer assurance that the contents of the goods were the same as advertised on the packaging. Companies allowed to use the Quantity mark had been approved by the International Organisation of Legal Metrology. The Quantity mark (℮ - mark) and measurement mark ( ϶ - mark) schemes were internationally recognised.    

Mr Moodley explained the role that the NRCS played in the calibration of scales and measurement devices. Through its four accredited calibration laboratories, NRCS Legal Metrology ensured traceability of mass and volume verification standards and analytical balances to international standards of measurement ensuring credibility of measurements made in South Africa.

In conclusion Mr Moodley stressed that the NRCS did not discriminate when regulating traded goods. If the goods were compliant, regardless of price, quality or origin, the NRCS is obliged to approve the goods. Likewise, if it were not compliant, regardless of anything else, the NRCS would not approve it.

Discussion
The Chairperson inquired on the relationship between the NRCS and the National Metrology Institute of South Africa (NMISA).

Mr Ivan Willis, Operations Manager of Legal Metrology, NRCS, explained that NMISA was the holder of national standards for all disciplines of measurement. For example, there was a standard for mass which was based on an item held at the NMISA. The other calibration laboratories relied on the maintenance of the prototype standards at NMISA to calibrate their working standards. These working standards were used in the field. The NRCS’s role in this environment could be illustrated by way of example. When a weighing machine was used in a supermarket environment, the machine needed to be verified and traceable back to the official unit of measurement used in South Africa. In order for this to work, there needed to be calibration facilities available for these machines. The calibration facilities were often operated on a private basis.  The NRCS also maintained its own laboratory.

Mr A Williams (ANC) inquired about slide 12 of the NRCS presentation, whereupon it was indicated that 70% of the containers inspected included regulated products. He asked if he was correct in assuming that this meant, of the 0,6% that had been checked, 30% of that was non-compliant [the figure of 0.6% was on the slide but not discussed by Mr Moodley]. By extension, one could therefore assume that 30% of our total was non-compliant; this rate seemed strikingly high.   

Mr Williams also asked how the figure of R548 million in confiscated goods was calculated. How did the NRCS estimate the prices of the goods? How accurate was this figure? Lastly, what percentage of containers was inspected elsewhere in the world? How did South Africa compare in terms of the extent of its inspections?

Ms P Mantashe (ANC) inquired if the calibration done was equally split between domestic and international business.

Mr Mkongi wanted to know if there were a relationship between the NRCS, the Border Management Agency and the Department of Home Affairs. He seconded Mr Williams’ question on the impact slide [12] and the figure of R1 billion in goods uncovered. What were these products and how were they measured?

The Chairperson asked which products and components were most often found to be unsafe or below standard. She was also surprised that there were still so many unsafe paraffin stoves being sold in the country. She suggested that safe production should be encouraged and that measures to stop unsafe practices should be increased.

Gary Pothecary, managing director at Lovric Dittberner Terrazzo Tiles in the building supplies industry, noted that Chinese imports had been driving standards down dramatically. He urged the Committee to take the matter of quality standards more seriously. Poor standards were a threat to South African industry. 

The Chairperson clarified what Mr Pothecary had said: the local manufacturers who complied with regulations were taking issue with the unregulated products arriving from China.

Mr Mkongi wanted to know if the general impression really was that the standards in South African industry were slipping.

Mr Hill-Lewis commented on the “risk-based system for local manufacturers” that was mentioned. Did this mean that the NCRA would not be applying this system to those seeking to bring products into the country?

Mr Hill-Lewis then asked what the NRCS’s preferred method of communication was. His emails had not been returned by them for several months.

Mr Moodley responded that the figures in the slides are correct. However, it could not be extrapolated to the entire import market as the 30% figure was found based on the targeted inspections. These inspections were aimed at investigating the containers most likely to have non-compliant contents. It would make better sense to extrapolate from the random inspections. He responded to Mr Williams that he did not know what percentage of containers was inspected elsewhere in the world.  

In response to Mr Williams and Mr Mkongi’s queries, the figures for the value of confiscated good were simply taken at their market prices – these were the prices the goods would fetch if allowed into the market.

Responding to the Chairperson, components confiscated were most often electro-technical goods: plugs, hairdryers, lights. Chemical and building materials are also important.

The Border Management Agency (BMA) was currently being represented through the Border Control Operational Coordinating Committee (BCOCC). Once the BMA was operational, it would do the first line of surveillance on behalf of the NRCS. With regard to building standards, The NRCS worked with building control offices to encourage compliance with the Building Standards and Regulations Act of 1977.

With regard to steel, steel was currently not regulated. However, the NRCS had begun a project to deal with steel. The project was registered and approved in July and the project plan had been finalised for stakeholder engagement. It aimed to create a regulatory framework for steel.

Unsafe paraffin was admittedly a challenge. The NRCS was able to stop these stoves when they come in as final products. However, a lot of the unsafe stoves that were imported came into the country as unassembled components. Often these components were disguised as other products.

On the issue of cements from China and other countries, cement was a product that was regulated by the South African Bureau of Standards (SABS). The NRCS had previously stopped huge quantities of non-compliant cement. Some building collapses were not only cement-related; it could be the result of bad engineering and bad designs.

Mr Moodley believed the general opinion was that product standards had slipped in the country. He reminded Members that it was the safety standards of products not the quality of products that the NCRA monitored: these standards were only relevant if they had to do with protecting life, fair trade, and the environment. Evidence that the NRCS was doing its job appropriately was if it processed many complaints – the role of the NRCS was not to be popular but to regulate. 

Mr Moodley responded to Mr Hill-Lewis that a risk-based system would also be developed for non-locally sourced goods. 

The Committee broke for lunch.


Mr Moodley continued his response to questions. He explained three factors that could impact local manufacturing in terms of unfair practices, being:

1) False declarations by importers. For example, the documentation said a container was full of an unregulated product like clothing, but when the container was opened the NRCS found products that should be regulated.

2) Second-hand goods which are donated and expired quickly. This was especially true of IT equipment. These goods often become out of use very quickly, and the NRCS was left to deal when them. Disposing of these goods was not a simple process.

3) The ‘Golden Sample’ problem – the samples provided by companies when applying for LOA were of a much higher grade than the products actually produced and traded.

Recalls were very expensive due to finding the products, fetching them and then dealing with them.

Mr Moodley responded to Mr Pothecary’s questions regarding the cement and tile industry.  The domestic industry had high safety and performance standards. Within the industry, the NRCS had compulsory safety specifications that products must comply with. As long as the products complied with the safety compliments, the NRCS took no discretion in approving or rejecting the goods. These products which met NRCS and international standards might not necessarily comply with the performance requirements to which domestic firms were being subjected.

There was some discussion on the question of unsafe gas canisters. Mr Moodley explained that the filling of gas canisters was the first point of danger in the system. The next was calibration of tools used in the process. Both of these points of danger were valid safety issues, but they were not really in the NRCS’s domain.

Ms P Andrews, operations manager, NRCS, discussed the relationship of the NRCS to the DAFF by giving the example of Agriculture. The DAFF was mainly responsible for the animal health side of the food production system, while the NRCS was in charge of food processing standards. So there was a positive relationship with both having regulatory responsibilities.

Presentation 3: South African Revenue Service: Customs Mechanisms to Protect Industry
Mr P Moeng, Acting Group Executive, SARS, gave the presentation. 

The mandate of SARS in respect to Customs and excise. SARS was the first-line of control over the movement of goods across the borders. SARS’s goals were to protect the South African economy and society, to support economic competitiveness, and to collect and protect revenue. Measures to protect the economy included collecting duties, stopping smuggling, and generally levelling the playing field.

SARS aimed to add value to the domestic market in the following ways:

  • Control of goods prior to arrival/departure
  • Facilitation of low-risk goods, including expedient service to support the local economy
  • Revenue coverage to companies dealing with unknown/high-risk trade
  • Protection of the local economy from unfair trade and unfair competition using pricing and reimbursement (P&R)
  • Protection of society from safety and security threats
  • Revenue coverage to know commercial traders

The following critical success factors were identified:

  • Appropriate client management for all firms, through registrations, licensing, and permits for P&R.
  • Control of goods at borders
  • Appropriate information to collect revenue and protect key sectors, for example, Customs declaration. 
  • Customs risk management: understanding what can be released and what should be stopped.
  • Successful quality inspection of documents
  • Physical inspection using professional staff, enabling tools, dogs and scanners.
  • Investigations and sanctions
  • Audit capability

Mr Moeng stressed that strategic stakeholder management was critical for controlling borders and protecting industry. Strategic stakeholder management involved the following activities: industry engagement, processing of Intellectual Property Rights (IPR) and Permits for R&P, stakeholder registration, licensing and accreditation of preferred traders, outreach and education with improved information, Customs Mutual Administrative Assistance, and border cooperation & coordination with government.

In addition to stakeholder management, risk and intelligence management was pivotal. SARS had to optimise the Risk Engine to better detect high-risk cargo. Finally, the Customs operations carried out by SARS include: border management, goods control, declaration processing, documentation inspection, physical inspection, enforcement teams, audit, and investigations. He added that SARS partnered with the NRCS to reduce the risk to consumers. SARS helps the NRCS to understand the origin, valuation and tariff schedules of various goods.

On SARS’s compliance vision. SARS aimed to make the tax and Customs process less labour intensive and cumbersome, to make it simpler, quicker and hassle free for clients, and to improve the service offered to clients while ensuring maximum compliance.    

Mr Moeng spoke about SARS objective of encouraging voluntary compliance. SARS aimed to make it as easy as possible for those trying to comply, by providing expedited service for legitimate taxpayers and traders. Conversely, SARS aimed to make it as difficult as possible for companies to avoid paying their fair share, by interdicting illegitimate traders and taxpayers.

Mr Moeng discussed prohibited and restricted goods. Customs identify contraventions of other legislation whilst enforcing the requirements of the Customs and Excise Act, where they detained specific goods and notified the relevant authority. Examples of such goods were:

  • Second-hand vehicles imported without the necessary permits from the International Trade Administration Commission
  • Medicaments imported out of regulatory control
  • Habit forming drugs which were not declared
  • Counterfeit goods
  • Goods imported or exported in contravention of restrictions or prohibitions

Sometimes such detentions could create problems if the relative authorities did not take the actions required by them which left Customs with the decision of what to do with the goods and whether they should be detained or released.

SARS could not ‘win the battle alone’, and had to draw on the experiences and knowledge that existed in industry already. This was why SARS had the partnership approach. SARS partnered with several key industries, including clothing and textiles, tyres, tobacco and alcohol, poultry, plastics, etc. SARS had a relationship with these partners in various forms, such as through industry groups, government departments, trade unions, and stakeholder groups. There were sub-working groups and task teams implemented to tackle specific issues. There were peer-review mechanisms to address trade anomalies. These relationships helped to create a coordinated strategy to optimise the protection of industry.

Reference pricing was a scientific approach to understanding the underlying costs of key products within industries that were protected. The reference price provided a platform to consider the risk parameters within the automated Customs risk engine rules. The Customs risk engine identified high risk transactions of specific products which were identified by their Customs tariff code. Customs could then challenge potentially undervalued transactions and their associated invoices through documentary inspection, physical inspection, sample taking, and audit as required. Industry supported Customs with expert knowledge to verify product classification, valuation and origin. The reference price was a guideline to which transaction prices and declaration prices could be compared. It was based on the absolute cheapest price that could be found in the international market, and excluded the costs of labour, trimmings, overheads, transport costs, and royalties. For goods where the classification was based on kilograms (kg) the reference price was based on the international price of the constituent material.

Mr Moeng explained how SARS estimated the attitude that a company took towards compliance based on the difference between the reference price and the value the company reports. If there were a 0.01% - 25% difference, SARS assumed that the agent was trying to comply but did not always succeed. If the difference was 25.01%-60%, SARS assumed that the company was not trying to comply. Finally, if the difference was greater than 60.01%, SARS assumed that the company decided to actively avoid compliance. SARS had prescribed actions that it used to deal with each of these cases. Since the introduction of the risk engine and reference prices, the unit prices quoted by companies had jumped up towards more accurate (honest) figures.

Mr Moeng presented a case study of the clothing and textile industries. Following the introduction of the reference pricing tool in 2011, there had been an improvement in the declaration of clothing and textile imports. The modernisation of the Customs systems enabled Customs to detect those importers who were shifting their ports of entry in order to avoid their under-declared consignments being detected. The tighter controls also prompted unscrupulous traders to mis-declare their clothing and textile imports as other products. Our systems again were able to detect this. Customs requested the creation of additional tariff subheadings to “ring fence” problematic products. In particular, there were now two specific tariff headings for denim jeans, women’s and men’s. The same was also done for bedding, curtains and towels, where additional subheadings were created for embellished and embroidered goods.

On modernisation in SARS, with the new high-tech scanners in Durban, Cape Town and Beit Bridge SARS was doing end-to-end integrated cargo scanning on selected containers. The SARS risk engine‚ case management system and scanner software were integrated into one solution that was automated and real-time‚ with the whole process recorded on the SARS system from beginning to end.

Mr Moeng again stressed the necessity of a real and strong relationship between industry and the regulators. The legislative environment supporting SARS was strong, but that would need to continue to garner the skills and experience of the private sector. He also stressed the importance of considering job creation and inequality when deciding policy.

Discussion
Mr Williams commended SARS on the work done in the textile and clothing industry.

Mr Hill-Lewis wanted to know the amount of work done by SARS in terms of actively looking to find businesses and individuals avoiding duties. He asked why SARS was not more proactive in shutting down these businesses which were often very clear to see.

Ms Mantashe asked why Durban seemed to be such a hub for Customs control problems and illegal exports, in particular in the case of scrap metals.

The Chairperson commented that she had personally not seen sniffer dogs at ports although there were several scanners in use. Officials at the ports had requested more of the advanced scanners. At present Customs was under-resourced and their service was slowing down trade.

Mr Moeng responded to Mr Hill-Lewis that the NRCS had limited resources, which limited the extent of their operations. In particular, they focused on activity in the ports. There was also a hotline at SARS through which suspicious activity could be reported.

Mr Moeng agreed with Ms Mantashe, the steel industry was particularly problematic and the NRCS needed to look into it. Port Elizabeth was another area that required focus. SARS recently extended a differentiated approach with experts working in each industry, including steel.

On the Chairperson’s question of not seeing the dogs at the harbour, the NRCS had detector dogs that were deployed on a risk-based approach. Obvious the NRCS did not have the resources to monitor every shipment, but it was working at capacity.

Ms Helena Tripmaker, Senior Manager, Customs, SARS, discussed scrap metals. Scrap metal was an industry earmarked for local beneficiation, which put them under the authority of the International Trade Administration Commission (ITAC). Exporters must offer the metals they trade to local industry at 20% less than the international steel price for scrap metal. Local industries did not want to take up this offer however. The only obligation of SARS was to check that export permits were in place.

The Chairperson pointed out that there was a challenge in finding an effective way to deal with the relationship between ITAC, SARS and the NRCS. For example, a license to trade passed through several hands before reaching its end point. This was a problem for accuracy and accountability.

Mr Moeng responded that the entire system was moving to a digitised version which would resolve many of these problems.

The Chairperson inquired as to how long digitalisation would take. She asked if the information that one body (such as Customs) learnt was passed to other bodies. For example, the most high-risk products and sources – was this information shared around?

Mr Moeng responded that the details on the timing of digitisation was not available at present.

Mr Garth Strachan, Deputy Director General of the Industrial Development Division and Chief of Customs, SARS, discussed the sharing of information. Industrial policy was incredibly complex. There was a large array of policy instruments such as compulsory specifications, which in and of itself was incredibly complex. In addition, government had to ensure that all policy instruments that were cross-cutting, as well as sector-specific incentives act in an interlocking and mutually supportive way. 

Mr Strachan believed that while significant progress had been made, illegal imports, mis-declaration, and sub-standard products still constituted a real danger to the economy. All of the relevant bodies needed to work together and scale up the effort to tackle this problem. Another serious problem not covered in the presentation was the abuse of tariff codes. Mis-declaration was used to avoid tariffs, especially the classification of goods as “and other”. Another issue was staged consignments. Another issue was the import of pre-fabricated goods and structures that comprised inputs such as steel and cement that should be sourced and constructed locally.

Mr Strachan stressed the importance of selecting the correct sectors to support. South Africa needs to encourage competitive industry. otherwise jobs would move overseas. Regulators need to protect strategically in those industries where South Africa was most productive. So there needs to be a prioritisation of sectors for protection measures.

He agreed with Mr Hill-Lewis in that after-port prosecutions should be more thorough and significant. Throughout retail stores there was still a plethora of illegal goods being traded; there should be criminal prosecution of those responsible. A driving factor of this was the number of dishonest importers who abused the system. It was a misconception to think that these issues only related to the small-scale retail of illegal goods. In reality the violations were occurring within the biggest firms and the biggest retailers – a problem that ran deep within the existing system. The retailers could escape responsibility because they were not the importers. Intermediaries acting on behalf of retailers should be identified, monitored, and prosecuted if they facilitated the trade of illegal goods. Retailers were hiding behind the intermediaries, and it was the intermediaries that were “cooking the books”.

On the steel industry, SARS had been informed by domestic steel producers that the ITEC system was not working. He agreed with Mr Moeng that there should be a closer relationship between ITEC, Customs and the NRCS. The Department of Trade and Industry had also proposed a tax on steel imports which would help. Steel was beneficiated but we are still exporting it at too great a quantity especially given that the steel fetched low prices on the international market.

The meeting adjourned.

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