Minister's briefing on Economic Development Department Jan-Jun 2016 performance

Economic Development

13 September 2016
Chairperson: 13 September 2016
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Meeting Summary

The Minister, Mr Ebrahim Patel, said the 4th quarter was normally challenging as it came after the Christmas period, but the 4th quarter had experienced even rougher economic conditions and mining and agriculture had declined. The year had seen rising employment until the 4th quarter where in three months 355 000 jobs were lost.

The Advanced Dynamic Social Accounting Matrix (DySAM), which was used as a modelling engine to measure output and the direct and indirect employment effects of policy interventions, had been completed by public officials. The Department had completed the scoping of a Limpopo Mapping Framework as well as the development of a national agriculture and agro-processing dashboard. The Department had received a R6m grant from the Government of Flanders to develop a policy framework for the social economy. He said that the Department had spent 99.77% of the total allocated budget. For the quarter, the Department had spent R231.4m, most of which were transfers to entities (R186.5m).

Regarding the steel industry, he said China had shifted away from infrastructure build to a balanced growth path leading to an oversupply of steel to the market. These unfavourable circumstances led to the development of a comprehensive package of measures to support South Africa’s primary steel production capabilities.

The Department had supported the Free State on industrialisation and the Deputy Minister had supported work in all provinces. The Department had successfully unblocked a R46m funding shortfall for the Mpumalanga University Road interchange upgrade. The Department had also unblocked investment initiatives like that of Canara Bank who had applied for a banking licence.

He said the report on the review of the capacity and role of regulators was completed and there was a need for the more systematic training of regulators. The EDD had convened a workshop on excessive pricing with economic regulators. The challenges for regulators were: what a fair price was and what was excessive pricing in law.

He said judgement in the SA Metals scrap metal court case effectively upheld the right of the Minister to issue the Price Preference System and found that ITAC did not commit an error of law when it refused to grant the dealer permits outside the Price Preference System. This had been the 4th legal challenge against the Price Preference System introduced by the Minister. The Department had initiated the development of a “risk engine” to track illicit scrap metal exports and coordinated meetings with stakeholders to reduce illicit trade in scrap metal.

1st Quarter 2016/17
The Minister said that while GDP had recovered, the country was not out of the woods yet. Exports had been supported through the weaker rand and 67 000 jobs were created in manufacturing. Most of the jobs losses were in the Western Cape which lost 90 000 jobs.

He reported back to the Committee on the World Economic Forum Africa, held in Rwanda with the theme ‘Connecting Africa’s Resources through Digital Transformation'. The forum had discussed the Fourth Industrial Revolution, which referred to major economic and technological trends that were maturing to their ‘tipping points’ within the next 10-15 years. The implications of this industrial revolution were profound as it would probably destroy more work through increased automation and there would be growing supply with no demand.

The Department had given strategic support for increased investment for African regional integration
in the form of the IDC approval to take a 20% equity in Ethiopia's Habesha Cement Share Company.

He said the Department had gazetted in June the establishment of a Committee of ITAC to monitor and make
recommendations to ITAC on the impact of changes of steel tariffs on primary steel; the commitments made by applicants for changes in tariffs on primary steel; jobs in the steel value chain; and import and export trends in the steel value chain. The Steel Committee would be making its first report to ITAC in the third quarter.

On youth entrepreneurship and economic activities, he said that total disbursements of the IDC was R11,4 billion but a key concern was the rate of new job creation, which needed to be boosted significantly in future. He said the Department, together with the Presidential Infrastructure Coordinating Commission (PICC), had worked with the New Development Bank on a $180m loan to Eskom which had been approved.

He said there had been significant areas of progress on competition matters in these four cases: the attempted acquisition of Neotel by Vodacom; the merger of three Coca-Cola bottling plants; the acquisition of SAB Miller by AB InBev; and the promulgation of the criminalisation provisions of the Competition Amendment Act.

The Minister said the Trade Report indicated important changes in export destinations. In 2006, South Africa’s exports to the EU were more than double that to the rest of Africa and over three times that of BRIC. By 2013 the differences between the three regions was negligible as BRICS and rest of Africa exports increased in value and EU exports decreased in value. Exports to the US remained flat over this period but trade with the US was still significant in terms of value. The key issue in trade was its aggregate impact. Work was currently underway to quantify the employment impacts of both imports and exports but more work was required on the methodology used.

The Department's vacancy rate was 15%. He noted that the recruitment of executive positions followed a frustrating process. The Department has spent 24% this quarter of the total allocated budget.

Members asked which industries had been affected the most in the 90 000 jobs lost in the Western Cape and what was the government doing about these losses. What ideas were discussed at WEF regarding the SADC region? Would the Minister be engaging with the Minister of Education on training youth for the demands of the Fourth Industrial Revolution? Was the country looking at opportunities to trade directly given Britain's exit from the European Union? Could the Postbank not be used to provide small business loans at better interest rates than the private sector offered? Was the Minister discussing if Postbank could be used as a vehicle for such funding? Members asked for more detail on the grant from Flanders. Members wanted an update on the Price Preference System gazetted the previous year. Members asked for more information on constitutionally entrenched rights pertaining to the public interest guidelines finalised in June 2016. Members asked what impact DySam had had on the economy. What other plans were in place to reduce high youth unemployment? Members asked how many spaza shops would benefit from the agreement reached with Coca Cola. Who would determine who would get spaza shops?

The Chairperson was concerned about the long term sustainability of youth entrepreneur businesses. She invited the Department to conduct a study to determine how much had been invested in youth entrepreneur businesses since 1997 and its impact. How many had been successful, how many had failed, what lessons had been learnt and how were systems being improved? She asked that it be delivered by the end of the 2016/17 financial year. She asked how risk averse the IDC investments were in countries not regarded as stable. She asked when the new amendments to the International Trade Administration Commission (ITAC) and Competition Acts would be coming to the Committee.
 

Meeting report

Minister's briefing on Economic Development Department (EDD) 4th Quarter 2015/16 performance
The Minister, Mr Ebrahim Patel, said the 4th quarter was normally challenging as it came after the Christmas period, but the 4th quarter had experienced even rougher economic conditions and mining and agriculture had declined. Upon analysing data, the CPI figures for the poorest 20% of South Africans was 8.1%, compared to 5.9% for the richest 20%. The year had seen rising employment until the 4th quarter in which 355 000 jobs were lost, of which 195 000 were in Gauteng.

He said the Advanced Dynamic Social Accounting Matrix (DySAM), which was used as a modelling engine to measure output and the direct and indirect employment effects of policy interventions, had been completed by public officials.

The Department had completed the scoping of a Limpopo Mapping Framework as well as the development of a national agriculture and agro-processing dashboard. The dashboard provided an analysis of agricultural sector performance in the province. Employment in agriculture in Limpopo totalled 869 000 and employment in agro-processing totalled 332 000.

He said the Department had received a R6m grant from the Flemish government to develop a policy framework for the social economy.

Regarding the steel industry, he said China had shifted away from infrastructure build to a balanced growth path leading to an oversupply of steel to the market. These unfavourable circumstances led to the development of a comprehensive package of measures to support South Africa’s primary steel production capabilities. The interventions were to ensure the sustainability of the steel industry and reduce job losses. The interventions included:
• The establishment of inter-governmental task team on a developmental price for steel
• Additional capacity for the International Trade Administration Commission (ITAC) to monitor the implementation of the scrap metal policy
• An increase in the rate of customs duty to 10%.

He said the Department had supported the Free State on industrialisation and the Deputy Minister had supported work in all provinces.

He said the Department worked to unblock infrastructure projects. The Department and the PICC had worked with BRICS' New Development Bank (NDB) on a loan to Eskom and had successfully unblocked a R46m funding shortfall for the Mpumalanga University Road interchange upgrade. The Department had also unblocked investment initiatives like that of Canara Bank.

He said the report on the review of the capacity and role of regulators was completed and there was a need for the more systematic training of regulators. The EDD had convened a workshop on excessive pricing with economic regulators on 23 March 2016. The challenge for regulators were: what was a fair price and what was excessive pricing in law?

He said judgement in the SA Metals scrap metal court case effectively upheld the right of the Minister to issue the Price Preference System and found that ITAC did not commit an error of law when it refused to grant the dealer permits outside the Price Preference System. This had been the fourth legal challenge against the Price Preference System introduced by the Minister.

The Department had initiated the development of a “risk engine” to track illicit scrap metal exports and coordinated meetings with stakeholders to reduce the illicit trade in scrap metal.

He said that the Department had spent 99.77% of the 2015/16 total allocated budget. For the quarter, the Department had spent R231.4m, most of which were transfers to entities (R186.5m).

1st Quarter 2016/17 EDD performance
The Minister continued and briefed the Committee on the 1st quarter performance and said that while GDP had recovered, the country was not out of the woods yet. He said exports had been supported through the weaker rand and 67 000 jobs were created in manufacturing. Most of the jobs losses were in the Western Cape which lost 90 000 jobs, almost half the job losses in SA.

He reported back to the Committee on the World Economic Forum Africa, held in Rwanda with the theme ‘Connecting Africa’s Resources through Digital Transformation'. The forum had discussed the 4th Industrial revolution which referred to major economic and technological trends that were maturing to their ‘tipping points’ within the next 10-15 years, with 21 such tipping point technologies identified. These developments included for example, 3D printing that transformed manufacturing and advanced robotics that expanded the range of automation in industry. The implications of the 4th industrial revolution for the continent were profound. He said it would probably destroy more work through increased automation and there would be growing supply with no demand.

He said the Department had given strategic support for increased investment for African Regional Integration
in the form of the IDC approval to take a 20% equity in Ethiopia's Habesha Cement Share Company.

He said the Department had gazetted the establishment of a Committee of ITAC to monitor and make
recommendations on:
•  The impact of changes of steel tariffs on primary steel
•  Commitments made by applicants for changes in tariffs on primary steel
•  Jobs in the steel value chain
•  Import and export trends in the steel value chain
The Committee would be making its first report to ITAC in the third quarter.

He then spoke to youth entrepreneurship and economic activities. The Department had also met with investors both globally and locally.

He said that the total disbursements of the IDC was R11,4b. A key concern was the rate of new job creation, which needed to be boosted significantly in future.

He said the Department, together with the PICC, had worked with New Development Bank on a $180m loan to Eskom which had been approved.

There had been significant areas of progress on competition matters in four cases; the attempted acquisition of Neotel by Vodacom; the merger of three Coca-Cola bottling plants; the acquisition of SAB Miller by AB InBev; and the promulgation of the criminalisation provisions of the Competition Amendment Act.

In the Vodacom case, the Department had been concerned about the impact of the merger in increasing economic concentration in the industry and consolidating the position of the largest player at the expense of competitors. This would make Vodacom a monopoly supplier. The high court had overturned an ICASA decision and felt it was a bad transaction. Vodacom had subsequently stopped its merger process. The withdrawal of the proposed transaction meant current levels of competition would be maintained and avoided a further concentration of market dominance.

In the Coca-Cola case, it wanted three of its bottling companies to be merged into a single operation and that the Appletiser brand be transferred to Coca-Cola. Key issues here were potential job losses/ bottling monopoly and the closure of markets to new competitors. Following a meeting between the stakeholders and the Minister, a package of commitments was agreed to that addressed the concerns of government on the merger.

He said the provisions in the Competition Amendment Act that criminalised collusion by companies, was promulgated. Directors could go to jail for 10 years if found guilty of collusion.

Minister Patel said the Trade Report indicated important changes in export destinations. In 2006, South Africa’s exports to the EU were more than double that to the rest of Africa and over three times that of BRIC. By 2013 the differences between the three regions in nominal export values was negligible as BRIC and rest of Africa exports increased in value and EU exports decreased in value. Exports to the US remained flat over this period but trade with the US was still significant in terms of value.

The key issue in trade was its aggregate impact. Work was currently underway to quantify the employment impacts of both imports and exports but more work was required on the methodology used.

He said the Department's vacancy rate was 15%. He noted that the recruitment of executive positions followed a frustrating process.

Mr Malcolm Simpson, Acting Director General (DG) said the department has spent R163.8m, or 24%, of the total allocated budget.

Discussion
Mr P Atkinson (DA) said that, given high youth unemployment, the youth would be more affected in a Fourth Industrial Revolution and the key issue would be training. Would the Minister be engaging with the Minister of Education? Was the country looking at opportunities to trade directly given Britain's exit from the European Union? South African Postbank could take deposits but could not lend money. Could the Postbank not be used to provide small business loans at better interest rates than the private sector offered? Was the Minister discussing whether Postbank could be used as a vehicle for such funding?

Mr S Tleane (ANC) asked which industries had been affected the most in the 90 000 jobs that were lost in the Western Cape and what was the government doing about these losses. What ideas were discussed at WEF about the SADC region?

Dr M Cardo (DA) asked for more detail on the Flemish government's grant. He wanted an update on the Price Preference System gazetted the previous year. He asked for more information on constitutionally entrenched rights pertaining to the public interest guidelines finalised in June 2016.

Ms C Matsimbi (ANC) asked what impact DySam had had on the economy. What other plans were in place to reduce the high youth unemployment?

Mr Cele (ANC) asked how many spaza shops would benefit from the agreement reached with Coca Cola. Who would determine who would get spaza shops?

The Chairperson was concerned over the long term sustainability of youth entrepreneur businesses. She invited the Department to conduct a study to determine how much had been invested in youth entrepreneur businesses since 1997. How many had been successful, how many had failed, what lessons had been learnt and how were systems being improved? She asked how risk averse the IDC's investments were in other countries especially those not regarded as being stable. She asked when the new amendments to the ITAC and Competition Acts would be coming to the Committee.

Deputy Minister, Mr Madala Masuku, welcomed the Chairperson’s call for a study on the success or otherwise of youth entrepreneurship businesses. He said the Department was doing a study on youth incentives currently.

On the question of the sustainability of youth entrepreneurship businesses and assisting them to be prepared for the challenges they faced, this kind of interaction was precisely what the Department was engaged in. It was meeting with the youth and interacting with them to find out what their challenges and frustrations were. For example, the Department had identified blockages in their dialogues within various industries, access to funding or access to the market and the Department or market players tried to assist them in overcoming these blockages. Another challenge youth entrepreneurs faced was upscaling the marketing of their products.

Minister Patel said engagement with the Minister of Education on training for the challenges presented by the Fourth Industrial Revolution would be an excellent idea.

On Brexit, he said that at this stage everyone was waiting for the UK to trigger the exit. This would trigger engagement by Britain with all its trading partners.

On the Postbank as a lending institution for small loans, he said he might need more time to answer and do justice to the idea. He replied that one opportunity would be that Small Enterprise Finance Agency (SEFA) structures would not need to be duplicated around the country as Postbank could have a real or virtual SEFA presence. He said the big challenge was to avoid risky investments and he needed to have discussions with the head of Postbank.

On the Western Cape job losses, he said the key drivers were the agricultural industry which lost 40 000 jobs in Quarter 1 and 26 000 jobs were lost in the government sector.

Regarding WEF and whether it discussed Zimbabwe, he said the discussion had been more around how to create conditions for peace, because lack of conflict boosted development. Consequently there had been a focus area on infrastructure development.

On mergers and the monitoring of commitments made by companies, he said there were a few mechanisms and he had asked that these be further strengthened. He said, firstly, companies were obliged to inform the Competition Commission and the Commission could investigate if there was any doubt. Secondly, boards, where government officials were involved, had been created to receive reports. Thirdly, following the example of the Walmart case, the Department had started high level discussions between the company and government to see whether claims made at the micro level were in fact true. Fourthly, he had asked for a 'light performance audit' to take place, such as site visits or speaking to customers and clients, to see whether companies were compliant. He added that unions also played a role with regard to monitoring the jobs issues. The consequences of breaching compliance were a high risk for companies.

On the Flanders project, Minister Patel said that it was a three year project with three focus areas. These were policy development - what work government should do to help strengthen the social economy. Secondly, there was provision for the employment of a technical specialist and, thirdly, advocacy work with stakeholders. A social economy was not something government could create, it could only support it, such as strengthening people's access to skills.

On the Price Preference system gazetted the previous year, the Minister said there had been a second problem in the steel industry, the second hand scrap metal market and the theft of copper cable from public infrastructure. The Department had worked with the Department of Justice on a Criminal Matters Amendment Act where the sentencing and policing regime was beefed up. This work focussed on discouraging theft by working on the export of copper. ITAC had not reported back to the Department on where they were on the issue and he was awaiting their report.

On the public interest guidelines, he said the competition authorities had to use the Competition Act as their basis. There were four public interest tests, one of which was the impact on industries and regions, but the question was which industries and which regions. Since the Act did not explicitly delineate what the authorities should use as their basis, the overriding issue was then to give effect to the Constitution.

On DySam, the Minister said it had given public officials a better sense of how to measure the impact of policy. Training had been given to officials of the Departments of Public Works; Trade and Industry; and Environmental Affairs. He said there had been extravagant claims of the impact of policy but that these were not rigorous enough. DySam brought that dimension into play.

On youth unemployment and sustainability, he said the Department should do the study and look at the impact of public support for enterprises.

The IDC, he said, gave a better rate of interest to smaller and new youth companies. The IDC needed to take more risk but also apply themselves more. There were investment monies for the youth and the IDC needed to market this more aggressively.

On the question of Coca Cola's amalgamation plan for bottlers, he said part of the agreement reached with the company was that R400m was going to be spent on developing a potential of 25 000 new retail outlets. The Department's attention was more on overall development rather than who appointed what retailer.

On the quality of young entrepreneurs, he said that young people had less experience but that they had other advantages in that they took risks, had passion and savvy. He said the Department was doing this work to help the economy.

The Minister said the fight against corruption was important for economic development. No economy had developed where corruption existed.

On whether the youth could navigate the Fourth Industrial Revolution, he said that that the country had to find opportunities in it and the question of research and development and higher education was fundamental.

On the service provided to the youth by agencies or departments, Minister Patel said the Department was working with the IDC such that even if they disapproved a funding application, they should provide the reasons why the application was not successful.

On the IDC investing in risky locations, Minister Patel said said that South Africa was also regarded as risky and that the IDC took out political risk cover.

On Competition Act amendments, he said that as they engaged with stakeholders and the decisions of the appeal court, the Department refined its own position. The Department had engaged in workshops and there were three conferences coming up soon. The Department would report back to the Committee in their report for the third quarter.

On the ITAC Act amendments, he said that ITAC had said that it was having a rethink and had requested more time.

The Chairperson had said that the Department should brief the Committee on its international visits and conferences but the Committee would decide which ones had to be included in the quarterly reports.

She said the study on the impact of investment on youth entrepreneur businesses should be presented by the end of the fourth quarter of 2016/17.

The meeting was adjourned.

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