Economic Development Department, Competition Tribunal & IDC on their 2015/16 Annual Reports, with Minister & Deputy

Meeting report

Opening Remarks

The Chairperson officially welcomed the Members along with the delegation from the Department of Economic Development, and warmly appreciated the presence of the Minister and his Deputy for making the effort to come forth and account to the Committee. She proceeded to hand over to the Minister for the submission of the Department’s presentation on its 2015/16 annual report.

Briefing by the Department of Economic Development on its Annual Report

Minister Patel took the members through the annual report, and highlighted that the EDD spent 99.8% of its allocated budget and met its performance target of the 23 indicators included in the APP (Annual Performance Plan). Planned targets for the year were 164 and these were achieved along with the additional 68 targets. The Minister highlighted the following key aspects in the year under review:

• Total jobs at the end of 2015/16 were 15,6 million
• Employment grew by 204 000
• Jobs held by women 6,8 million
• Youth jobs 6.2 million
• GDP growth 1.3% (2015 calendar year)
• Investment grew by 5.7% (2015 calendar year)
• Total infrastructure spend R 269 billion
• Manufacturing value add R 475.5 billion (2015 calendar year)
• Agricultural value add R 85.1 billion (2015 calendar year)

In light of the above key aspects, the Minister emphasised that the country needed to create more jobs and raise growth through: infrastructure, industrialisation, innovation, investment, inclusion and integration. The country also needed to work more effectively through the institution-building and implementation, because this is how the NDP and the Nine Point Plan can be implemented. He stressed that government spent R269 billion in the reporting period on infrastructure to create jobs and grow the economy. There were 191 142 jobs created through infrastructure in PICC (Presidential Infrastructure Coordinating Commission) monitored projects. Furthermore, the PICC and the Department worked with the NDB (New Development Bank) to facilitate the approval of a $180 million loan from the NDB for Eskom to fund transmission lines, and the significance of the work is to unblock the implementation of infrastructure projects and building relationships with the NDB.

As far as investments is concerned the Department provided some oversight and strategic guidance to the IDC, and as a result of the engagements the following highlights came to the fore:

• R14.5 billion was approved of 180 transactions
• R11.4 billion was disbursed in the year under review
• 15 272 jobs were supported
• A R4.9 billion was approved for black empowered businesses including black industrialists
• R970 million for youth empowerment enterprises; and
• R1.2 billion was approved for women empowered businesses.

Through those engagements, two important agreements were signed, a R10 billion pledge by the China Construction Bank initiated through the Department’s ministerial engagement during the China state visit. As well as the Beijing Automotive International Group (BAIC) to establish an automotive plant in SA.

Annual Performance Plan

With regards to Human Resources and employment, the Department had a staff turnover of 18% in the year under review – this was a deline in comparison to the previous financial year. However, the Department implemented a staffing model that permitted mobilisation of resources as required. These measures have enabled the Department to deliver on its strategic objectives through responsive and appropriately resourced project teams and the facilitation of employment was more eminent on other partner organisations.

Financial Performance

The overview of the financial performance reveals that in the year under review the Department spent 99.77% of the allocated budget as compared to 99.72% in the previous financial year. Under-spending was reduced in the current financial year by 0.5%. With regards to programmes, the Department’s actual expenditure has increased in comparison to the previous financial year, with only the administration programme in which the expenditure declined. The majority of the budgeted funds are allocated for the Investment, Competition and Trade programme, which the expenditure increased from R585 452 million to R773 884 million. Following is the Growth Path and Social Dialogue with previous expenditure of R22 042 million to R26 705 million in the year under review. The Minister stated that the Department no longer reports on penalties collected by the Competition Commission in line with the reporting requirements reflected in the Accounting Manual issued by OAG. However, in the current financial year the Department received R676 million from Competition Commission for fines and penalties imposed by the Competition Tribunal, of which it is no longer recognised as Departmental Revenue, and this was paid to the National Revenue Fund.

Furthermore, the Minister dissected that the Department obtained an unqualified audit opinion. The AG highlighted that the Department must ensure that Programme 2’s (Growth Path and Social Dialogue) targets must be more specific and measurable and its indicators must be defined better than currently. The AG also shared some concerns regarding financial controls and systems, and the Department acknowledged these concerns contained in the final Audit Report by AG and needless to say remedial actions have been put in place to address them.

Briefing by the Competition Tribunal on its annual integrated report for the year ended 2015/16

Mr Norman Manoim, Tribunal Chairperson, took the Committee through the presentation and highlighted the following key points that occurred during the year under review:

There were three major mergers in telecommunications including;

• Vodacom/Neotel
• MTN/Telkom
• Telkom/BCX

Only one merger proceeded, which was Telkom/BCX, and BCX is one of the largest ICT companies on the JSE in terms of turnover, assets, and staff amounting to 6700. The number of jobs that will be lost in this merger will only be limited to 60 in the three years; this was one of the imposed conditions in the merger. One of the notable cases that the Tribunal dealt with was the Media24 case which is around the issue of predatory pricing. Media24 was underpricing to dominate the market and drive out its rival Gold Net News. This was Media24’s first offence; therefore the appropriate remedy granted for GNN was that publications for printing or distribution in the Welkom and Goldfields area must be paid for by Media24 for GNN in 90 days instead of paying upfront.

The Tribunal imposed fines of R337.25 million on 19 firms for collusion, and the largest of them all was R103.98 million on Nippon Yusen Kabushiki Kaisha.

The tribunal received an unqualified audit report from the AG, and there were no findings with regard to the usefulness and reliability of the performance information. The disclosures by the AG included fruitless and wasteful expenditure and irregular expenditure. The fruitless and wasteful expenditure amounting to R518 224.25 was paid to SARS which was in relation to incorrect application of perks tax on cellphone allowances from 1 August 2011 until 29 August 2016. The expenditure also included a R167 090 VAT paid on non VAT registered supplier; however, the monies have been recovered.

Financial overview

• Income – R35.44 million
• 59.01% - grant
• 37.93% - filing fees
• 3.06% - other income
• Expenditure – R35.13 million
• 60.62% - personnel expenses

Briefing by the Industrial Development Corporation on its annual results for the year ended 31 March 2016

Mr Geoffrey Qhena, CEO, IDC, took the Committee through the annual results focusing on notable key aspects in the year under review:

• Increasing number of clients in distress (R7.8 billion of funding approvals last FY (financial year) for distressed funding), impairments (R3.6 billion last year) and balance sheet erosion;
• Sporadic recovery in some sectors and exchange rate supportive of export growth but sustainability of such recoveries remains a concern.
• SA economy’s growth decelerated over the past 4 years to its lowest rate (0.6% over the 2016 FY period) since the 2009 recession.
• Drought conditions impacted severely on agricultural output in the 2015/16 financial year.
• The sharp drop in mining output in the final quarter of the financial year led to a modest contraction in mining GDP for the year as a whole.
• Tighter fiscal conditions due to a revenue squeeze have been reflected in slower growth in spending on general government services.
• The profit for the current year, R223 million, is significant decrease as compared to the previous financial year, however, the corporation remains with a strong liquidity position. Approvals are on track, but jobs are lagging

The IDC has increased funding approvals, playing its counter cyclical role in the economy.

• Net approvals increased 26% year on year to a record level of R14.5 billion in 2015/16.
• Disbursements increased by 4.6% year on year to R11.4 billion.
• For the last 5 years ending 2016, disbursements totalled R57.8 billion, compared to R26.0 billion in the preceding 5 year period ending 2011

The performance of IDC’s largest subsidiaries is poor as they are showing negative profits for the current financial year. There are various initiatives to improve the situation. At Foskor, the asset replacement programme is currently being implemented and satisfactory progress has been made to date. The recapitalisation of Foskor is to assist the company gain operational efficiencies and return to profitability. The lower than expected global prices for phosphoric acid and granular fertiliser are expected to have a material impact on Foskor’s performance against budgets. A review of Foskor plans is therefore under way to evaluate possible responses.

At SCAW, besides the key initiative to find Strategic Equity Partners, there are several initiatives that the company is working on, including:

• Improving efficiency through process reviews and closing loss making operations;
• Restructuring the company balance sheet;
• Strategic sourcing initiative, the company is in advanced negotiations to source raw material from Masorini Iron Beneficiation which is expected to improve efficiency;
• Right sizing of the workforce; and
• Repositioning the company to enhance exports to the African continent.

Initiatives at Sefa include efforts aimed at increasing collection rates that will contribute to impairment reduction, lowering operational costs and improvement of revenue streams; and a complete review of Sefa’s operating model, especially its business channels. Further than that, IDC performs regular deep dives and quarterly business reviews for all major exposures and develops plans to react accordingly.

The metal products and mining industries contributed 11.5% towards South Africa’s GDP in 2014, with employment accounting for 9.3% of all formal non-agricultural employment in Q4 2015/16. The disbursements into these sectors have increased by 35% for 2015/16.

Discussion

Ms Z Rantho (ANC) apologised for coming late and said that Mr Stone Sizani’s mom passed away and she was responsible for making provisions for the members to attend the funeral which will be taking place tomorrow. She expressed some appreciation of the presentation and the work that the Department has done. She highlighted that the Department has reached its targets and and even went beyond them. In reaching the targets, what was the impact of exceeding the targets if the Department went beyond the budget, and how did the Department even go over budget? Secondly, the AG once mentioned that departments set themselves targets that are easy to achieve. Were there any strategies put in place to ensure that the targets set are reliable as per the AG’s suggestion? Lastly, with regards to the youth, did the Department have a programme in its vision in growing the economy to attract the youth in getting involved in the agricultural sector in order to assist towards growing that sector?

Mr I Pikinini (ANC) welcomed the report, and said that it is evident from the report that the Department is one that intervenes and dealt with matters that will help the country in the trying times. For instance, it is quite apparent that the government is bailing out companies to safeguard jobs. This is something that needs to be publicised and not end within the confinement of the Committee. It is clear that government investment which is not something highly spoken about is actually taking place. It should not end here. In terms of outcome four of the service delivery item, the most important thing is the impact that the Department is fostering.

Thirdly, notwithstanding the findings of the AG, what do these successes mean within the context of a struggling economy? As a multi-party democracy it is time to get closer to LMs (Local Municipalities) through IDPs, because the country has a problem of shortage in water, therefore, that warrants for innovation. The LMs need to be influenced to ensure that each one has a catchment dam. It will be profitable if during the winter times the rain is harnessed and preserved in order to assist the country during dry times.

Mr M Cardo (DA) asked about the Minister’s forecast for growth and jobs, given that the IMF, the World Bank and National Treasury have predicted growth of less than 1%. Secondly, he asked about the chances of a ratings downgrade in December, and what the Department has done in the year under review to mitigate the likelihood of a downgrade, and its priorities in that regard for the rest of the year.

Mr Cardo asked whether the implementation of legislative provisions on the criminalisation of cartel conduct will work and if there is any indication that it has worked up until now. He lamented that it will not serve as a disincentive for companies to come forward with information given that the directors might face jail time and queired if there are any legislative amendments in the pipeline. He stated that IDC’s profits fell by 87% from R1.65 billion in 2014/15 to R223 million in 2015/16. The Steel producer Scaw Metals, which is 74% owned by the IDC, posted a loss of R1.1 billion, while the agrochemicals group Foskor, which is 59% owned by the corporation, lost R568 million. He asked what plans are there to sell off Scaw and Foskor, if there are any.

Since the enactment of the Infrastructure Development Act, how many regulatory approvals has EDD helped to facilitate? Lastly, he asked for more information on the monitoring and evaluation of the Youth Employment Accord (slide 43), especially with regards to the Employment Tax Incentive.

Mr S Tleane (ANC) was pleased with the work that the Department is doing as it relates to job creation, economic transformation and development. He asked about the PICC monitored projects (312), which resulted in the number of jobs outlined in the presentation, the impact of the projects in the communities particularly in the rural areas. Secondly, the company based in the Western Cape involved in the noble activity of developing instruments that help doctors detect breast cancer much quicker, the IDC is assisting the company, unfortunately there are un-avoidables regarding the complex process relating to the acquisition of licensing. So what can be done to ensure that the process of speeding up the granting of licenses is fast-tracked, because the company seeks to empower even in the townships to help local clinics and hospitals and other health institutions located in the townships. Thirdly, regarding the investment by the IDC in the DRC, whilst the initiative is appreciated, is there a coordinated plan that shows what the road map is in trying to create that relationship with the SADC countries and also trying to make a footprint in the African Continent. Lastly, he stated that the success of the Department relies on the employees of the department, He asked the Minister to report on whether the employees are well looked after as far as health schemes for employees set up by the Department.

Ms C Matsimbi (ANC) asked about the irregular expenditure and people being allowed to work beyond their normal working hours, and overtime. Those issues are caused by vacancies that are not filled. She suggested that the Department should perhaps fast track the filling in of vacancies as well as in the entities. This would help mitigate the issue of irregular expenditure, somehow.

Mr M Cele (ANC) referred the members to slide 39 to ask about the AB Inbev R1 billion fund aimed to support emerging businesses. Was it is accessible to any business including those that are already in a privileged position, and is a mechanism in place to monitor these funds once disbursed to businesses?

The Chairperson asked how far the Department has gone in terms of encouraging local content, when the drive to encourage local content emanated from the Social Localisation Accord in 2011. And whilst appreciating the role of the FDRs especially in the Auto Industry, the plans and programmes put in place especially on OEMs, are we not sort of discouraging localisation through the incentive schemes, and importantly if there is any success in as far encouraging local content? Which areas has the Department succeeded in getting the higher percentage of local content, perhaps the Minister can also focus on the sectors that are identified in the NDP. This will help in giving ideas about whether there is success in the Localisation Accord or not.

The Chairperson also asked about whether the SABS can assist the companies that are involved in innovative products to acquire their certification and licensing quicker so that they can be compliant with international standards, as well as how far is the government regarding the 75% procurement of its goods and services to local service providers in terms of the MTSF, because this is something that assists in supporting local businesses and manufacturing of goods and services. Lastly, the Department is working very hard to ensure that the provinces and municipalities are aligned with the national departments’ work, so has the Department seen any improvements in this regard, or has it been stagnant, and which areas can the Committee check in order to ascertain the impact of the Department in this regard?

The Minister replied that it’s important to meet the targets as the Department; however, what’s more important is the impact in meeting the target. Meeting targets as Departments has become about chasing compliance than actually fostering impact. In his view, the test is in the impact in the communities and the economy at large. In the next coming period the direction that the Department will take is less focus on the numbers and more on the quality of it. He would ask the DG to evaluate whether a completed piece of work meets the standard that has been set, and if it doesn’t then it must not be put forward as a completed task and labelled rather as a pending project and not be reported on, and the DG is in accord with this approach. Not all the targets met require a specific financial spending, e.g. the Imbizo on energy, government must also work in a smart way and fiscal constraints sometimes force one to work in a more creative way on how to meet the targets in an impactful manner. This is a conversation to be had with the AG because, the AG would prefer a target that says six Ministerial engagements with the competition authorities and economic regulators but that is not a fully meaningful one, so we want to stretch the envelop a bit and set tougher targets. This is the job that the Department will be take going forward, and getting into parliamentary evaluations and other evaluations with the AG. The big push back will be ensuring better quality outcomes by the Department and more time will be spent in this regard. With regards to youth in agriculture, the Department is not sufficiently successful in getting young people involved in the agricultural sector, the data in the last three years provides that the net increase has been about 15 000 young people in this sector and this sector can be the most significant generator of jobs in the country. Work needs to be done on two fronts, one shaping the perception. People often refuse to work in the agricultural sector due to various stereotypical perceptions and this is something that needs to be changed, because young people nowadays prefer working in the cities. It’s not that there is a net loss of jobs in the sector there is job creation but it’s much too small to be the kind of success that is preferred. The IDC has put some money on Agri-Process and this can be a very important entry point for young people.

The Minister stated that a broader partnership in the society needs to be strengthened. Companies must realise that they have a responsibility if this is going to be a sustainable economy. They should be very reluctant to fire workers and ensure that it is a last resort. The task is to create more job opportunities and this can be achieved if other entities in the private sector and unions partner together with the government to make it a more fruitful exercise to achieve the ultimate goal of job creation. Some of the work that has been done involves shifting the market, and the Department would intervene in some initiatives, e.g. with the competition authorities and the private sector the Department would intervene to try and minimise the loss of jobs, and this gives some certainty to some other market players that government seeks to play a significant role in job creation. In the work that the IDC has done, the Department has asked it to focus more in future job growth and the IDC has quite an interesting challenge, and the challenge was that years ago it was given a mandate to help grow the renewable sector and the green economy. So a significant amount of funding was allocated to help grow that sector, and that funding would have otherwise gone to other established sectors and companies to preserve and facilitate job creation. The funding into the renewable sector was necessary because energy can be harnessed through the sun and the wind, and to attempt mitigating the shortage of energy in the country, the jobs impact in each billion rand invested in that sector is low compared to the other sectors. So the IDC needs to strike a balance by also investing more in a more labour intensive sector. The issue of infrastructure investment is absolutely critical under the context of a struggling economy, because it is not only counter-cyclical, it helps to kick start an economy and it provides the basis for fresh investment by companies. One of the constraints in growing the economy is long term energy security; the moment we overcome the issue of load shedding then a counter-cyclical effect will kick into the economy.

The Minister stated that it would be interesting to see what the LMs and IDPs are doing regarding catchment dams. The Ministry had a team of people do a site visit at the Ntlangazi Village in King Sabata Dalindyebo Local Municipality to look into opportunities of development for catchment dams. There is land and people but the water is the big constraint and that’s why the infrastructure team went there.

The overall trend line of growth is clearly much more subdued and there is a whole a lot of things that need to be done. With regards to the ratings downgrade, the Department has taken the view to do the right things for the country. There needs to be a pro growth plan. The ratings agencies want to see the growth strategy plan and not only the balancing of income with expenditures, hence, the implementation of the Nine Point Plan. Boosting the levels of investments is part of doing what is right for the country. Another aspect is moving speedily on the integration with neighbouring countries regarding the free trade area that involves 26 countries and this will create the kind of economies of scale in the market that will attract a lot investment. Foreign investment is at the moment an important part of the overall investment envelop and most importantly as a country the savings domestic rate needs to be boosted in order to attract investments from foreign sources. The Chinese economy is doing so well as far as domestic savings because its savings is very successful and its now converted into investment and they have relied on domestic savings to attract foreign investments.

With regards to the IDC investment in the DRC, the Minister stated that he is in support of Mr Tleane’s view, that investment by SA countries in the rest of the continent if well structured can be an enormous boost for SA and it’s not an act of charity but a strategic boost for development. This investment will boost mining in the DRC, and give people opportunities who are working in the agricultural sector, and it will give the DRC a boost in foreign exchange and promote the tax revenue, as well as opportunities for small businesses in the DRC. The value proposition for SA is within the dividend flows which will support its activities and will create opportunities for SA suppliers of capital equipment (machinery) that will be exported to the DRC to be used in mining. There are other procurement and construction works that SA companies are well equipped to be the beneficiaries of if those take off. The value proposition is enormously important. The IDC is candid and wants significant infrastructure investment; a lot of the opportunity in the continent is constraint by infrastructure. The IDC has gone where there is a big market for opportunities.

The constraint now is that given the fiscal challenges, the Department will re-engineer the staffing and use turnover to try and bring in the right skill. The challenge is not to chase the filling of vacancies but to make sure the most capable people within the society are attracted and prepared to work for these salaries in the public sector. Filling vacancies is easy but making sure that there is the type of personnel that can go into any discussion with the relevant stakeholders and do justice to the mandate of the Department is the area in which the Department seeks to get right.

On the AB Inbev R1 billion fund to support emerging businesses, the Minister explained that this money has three components to it. Firstly, its the agricultural development value chain with about R610 million allocated to this, to support the emerging small scale farmers that can produce hops and barleys, and the company is looking for catchment areas where it can move the hops and the barleys into the processing plants. Secondly, there is a R200 million enterprise development allocation that will support the supply chain to AB Inbev, but it can go beyond that, it can also boost broader entrepreneurship. Thirdly, the R190 million will be available for the societal initiatives to bring more water saving technologies into the brewing processes and agricultural processes. It is going beyond just the beverage value chain, and if there are entrepreneurs who have ideas should approach it and if they are favourable they will be certainly be considered.

On the Auto Sector, with the OEMs (Original Equipment Manufacturers) in the programme that existed in a year and half ago, the main focus was to drive the assembly of components of cars in SA, an assembly plant. Most of these OEMs are foreign countries. These create jobs but even more jobs can be created if the supply chain is local, the DTI tweaked the incentive scheme to make it more attractive for the OEMs to use local companies or supplier for their parts, in fact there are certain minimum standards now that are set which forces them to localise more, and there are success stories already.

Mr M Mbatha (EFF) stated that the expensiveness of the ports in the country are not doing much to help sustain the economy in a manner that they are ought to, for instance the Maputo Port is very affordable as compared to South African Ports for gas and oil, because the Durban Port is actually one of the most expensive Ports, and more international bodies are moving towards making use of the Maputo Port now. So when do catalyst institutions of the state actually become the catalysts of the economy, because when they are profit driven they lose that.

The Minister replied that he went to one of the ports about 3 weeks ago to look at the infrastructure component to expand the port in Saldanah where an offshore port for oil and gas is being built for support and servicing because one of the issues is to compete internationally for the business. There are rigs and ships that are basically in the oil and gas that are in the western part of the African continent and they can go in many different places. This is to ensure that SA has a competitive platform for that. A few years back the Department looked at the port charges and these port charges are regulated by the Port Regulator, it was interesting to discover that the price to export raw materials like minerals, SA is broadly competitive but when you look at the export of finished products the charges are un-competitive. This is the reverse of how it should be, because if you have a public policy that supports beneficiation then you don’t want to make it very expensive to export your value added products and very cheap just to export the raw materials, because one creates financial incentives for companies to export un-beneficiated raw materials. In an intervention that was done at a time the port set aside a billion rand to support value added products but there is a need for a structural solution to that. Secondly, to make sure that state owned entities in that space see that their job is to keep the cost of doing business as low as possible, the principal objective is not to make a profit, when these companies facilitate and the more they are able to contain costs, the more they are able to make SA competitive. There is enough economic activity to sustain both Maputo and the Port expansion that are being built now. As we build a second port the capacity will be very significantly enhanced along that coast line, and this will also increase trade, there are some inherent benefits for Maputo but also Mozambique’s business trade is also important for South Africa.

With regards to the disincentive effect of criminalisation, there is a corporate leniency programme to protect people who were previously involved in collusion and prepared to blow the whistle and can have an agreement with the competition authorities where they get a reduced fine in sharing all the information and naming other cartels. It’s worked well because some cartels were broken as a result; however, the problem is that not enough have been done because there is still high level of cartelisation. There was a study that was done by the World Bank, and as result the findings showed that if the SA government can break cartels in the four sectors such as the maize, pharmaceuticals and others, about 200 000 people could be lifted from poverty. Even though the competition authorities have done a great job in identifying the cartels and penalising them and the penalties have become stiffer now, it has not acted as a sufficient deterrent in bringing cartels into an end. So there is a huge cost on the economy by these hidden cartels. This is not going to be solved by simply using the penalty regime, because the opportunity cost of staying in the cartel is very low as opposed to going forward to the competition authority. This mindset doesn’t help to create a competitive economy, the equation needs to be altered and this is why something different needs to be explored, the current system is working but its not doing enough. There is a need for prosecutorial capacity to prosecute these cartels.

Dr Cardo asked about the views of the tribunal regarding the establishment of the R1.25 billion socio economic development fund involving six construction companies that was announced recently. Secondly, what was the tribunal involvement in the creation of the fund, and whether the R1.25bn is over and above the R1.4bn worth of fines that the tribunal levied in 2013 for collusion in tendering practises. Furthermore, he asked about the role of the tribunal in the administration of the fund, and who will oversee the expenditure of the fund. Lastly, he asked the tribunal whether it effectively settled potential claims from state-owned companies and municipalities flowing from the 2010 World Cup.

Dr Cardo stated that the penalties have declined from R725 million in the previous financial year to R337.25 million in the year under review. He asked how this happened, and where did the money received from the penalties go? He also wanted to know why the consumers do not get compensated for anti-competitive behaviour when they are the ones hurt by it, and lastly, how do the competition agencies prevent companies from hiking prices just to pay their fines.

Mr Tleane asked about the merger between Telkom and BCX, particularly the fact that the number of job losses have been limited to 60 in three years. So why in the other mergers involving the SAB and others, one of the conditionality there is that there will be no adverse effects on employment for a period of five years. Secondly, with regards to the two irregular payments, he shared some weariness about this issue because the institution is of reputable nature and such activities may question the integrity and credibility that it is fighting great battle for the country.

Mr Mbatha stated that the organisation is running a tight ship. With just 28 employees it should not be a difficult exercise to ensure that due processes are done, so how does it process payments to a non-vendor for VAT? The normal practise is that when businesses get into transactions with other organisations, there are necessary due checks that must be conducted to ensure that the receiving organisation complies with basic non-juristic person’s regulations as prescribed by legislation. He then asked if the consequences of the arrangements will sink down to many affected parties. There were public funds stolen by these construction companies in municipalities, and the stadiums, it could be said, were built on theft if the actual prices can not be detected.

The Chairperson stated that some cautions must be robust around the wasteful (irregular) expenditure, it appears that it is a historical transaction, but what arrangements have been made and plans put in place for future non occurrence. This practise can not be allowed to continue. Secondly, what is regarded as other income in the financials, it’s quite a significant amount. In addition, she asked for a date on the management programme. Lastly, the Media24 issue that is happening in the Free State, what can be done by the tribunal to ensure that more players come into the market by minimising the intimidating nature of the monopolies?

Ms De Klerk stated that the other income in the financials is interest that is earned in excessive funds that are not utilised, and this income is put into the CPD (Corporation for Public Deposits) and transferred from the CPD back into the ABSA account when the tribunal needs the money. The EDD often pays the grant in a three piece meal basis, and the money is not always needed and the tribunal ensures that it retains enough money for two months operations and put the rest into the CPD to earn interest for when it needs the money. So that retained income figure is a historic figure.

The Chairperson asked if that is registered with the National Treasury.

Ms De Klerk confirmed that it is, the excess funds must be invested with a CPD unless there is an existing investment policy, the tribunal had an investment policy but it is safer and there is more interest earned in the CPD which is within the Reserve Bank of South Africa. With regards to fruitless expenditure, the money paid to the non-registered VAT vendor that was paid to one of the tribunal registered member, and the members can be paid either through the payroll or through their companies or firms. Some of these issues are historical, and before there were no proper procedures put in place to ensure that these activities are checked. The tribunal is now fixing this and to date the tribunal has recovered some of the money. It’s been recovered by ways of services rendered that the person would have otherwise been paid for, for sitting in tribunal hearings and so on. When the AG finds an issue of financial question you have to go back to the date in which the error occurred and perform a historic analysis, therefore, the tribunal had to go back to when the cellphone allowance was first introduced and be rectified retrospectively. The payroll code was changed somehow, hence it was difficult to pick this error up, and the calculation was done to pay the tax due for the cellphone allowance. Controls have been put in place to ensure that the codes and procedures are monitored, and the errors not repeated going forward. Irregular expenditure is defined as any expenditure that did not comply with proper legislation, the issue here is there is is no proper deviation process in place, while the reasons for using a particular supplier may be well justified it was not documented very well. There should be a very well structured memo that will be signed off by the accounting authorities saying why the tribunal is continuing with the supplier. Unfortunately, the tribunal has until recently been a very small organisation and some of these things slip through the cracks. Now there is more staff available to address some of these problem to ensure that they do not occur going forward. It’s not that the tribunal didn’t pay for work that was not delivered but rather it was an issue of proper documentation and noting deviation from regulation and this error was retrospectively rectified.

Mr Manoim said that in relation to these issues there is no suggestion by the AG of any dishonesty involved. It was either the tribunal paid too much for the services rendered and lacked compliance with legislation when the tribunal deviated from it. With regards to the construction funding, the tribunal had nothing to do with that fund, when a cartel is found that it has broken the law, the firms were fined based on the conduct, and were therefore liable to pay penalties and administrative fees. Secondly, those injured by the activity can sue for damages separately to the penalty. Which means the cartels can be liable for penalties and civil damages. Subsequent to the findings, the cartel firms issued certificates which stated that the particular contravention has taken place and along with that, injured parties can approach the high court for a civil case to claim for damages. The fines are assessed before the civil damages can be processed, because through the engagements with the Tribunal, concrete evidence emanates that can be favourable to the injured parties to use in the court of law to strengthen their case. There have been cases from the high court in which the courts have now recognised a class act for those aggrieved parties that can not afford legal fees against the cartels. It emerged as one of the great cartel cases and was eventually settled out of the court. There is both penalties and civil action that can be bought against a cartel. In relation to the Media24 case, the Commission had to fight a very huge battle against a well resourced firm, the enforcement of the action itself has been productive thus far. He could not comment further on the details.

With regards to Telkom and BCX you can see that with different cases there are different numbers in terms of the number of jobs that will be lost or retained. There isn’t a consistent number, each case has its own facts and is assessed accordingly. The difference between the SAB Miller and the Telkom BCX case is that there was no overlap in relation to employment because AB Inbev had no production facilities in the country; hence, it was willing to give a strong concession firstly to the ministry relating to the order. In relation to Telkom there was a specific overlap, and the tribunal was quite concerned with the loss of jobs in the lower part of the organisation because they are most likely not to find employment elsewhere as opposed to higher end level jobs.

The drop in penalties depended on what comes up in a particular year. This year for instance, the penalties came from furniture shops and most of them are medium-sized businesses. This also depended on the turnover size of the business. Another example is the ArcelorMittal case which will be heard in November,  and the proposed penalty in that case is R1.5 billion which is the highest penalty the tribunal has ever received thus far, if things proceed favourably as they have thus far. Therefore, there is no otherwise pattern that can be identified - it all depends on the companies and firms that cases are bought against.

The Chairperson highlighted that the issue of Skaw has been in the forefront for some time now, and the nation needs to be informed of the role of the IDC. It is important that people get clarity on that otherwise there will be public confusion surfacing from time to time. The issue that the corporation is dealing with is a very sensitive issue, and the fact that it is operating under very volatile conditions. It is important that this is clearly understood as well as the responsibility to guard the investments made.

Mr Cele stated that as the ANC deeply regards the issues of accountability important, he asked if Oakbay is back at being serviced (funded/supported) by the Corporation and whether the IDC has lost any money in it. Secondly, is the IDC already spending too much money on already established companies at the expense of venturing into new and innovating companies?

Mr Mbatha asked that in the focus on the black industrialist programme, does the IDC assist them in the training of new opportunities that the government has identified? If that is the case they could venture into new opportunities that have a better focus than joining other established companies as BEE partners. The history of BEE in the country has not been a good one; it would be fruitless if the black industrialist companies follow the same route, because these processes work like last-in-first-out when the going gets tough in the mainstream economy.

Ms Matsimbi stated that some of the companies that the IDC is shareholding have been involved in the cartels and other inappropriate or anti-competitive behaviour, therefore, how does the corporation ensure that these companies comply with the State’s regulation and laws?

Mr Cardo stated that Scaw and Foskor were largely responsible for the almost 90% decline in the Corporation’s profits. The Corporation often speaks of the introduction of strategic equity partners, but are these two subsidiaries not albatrosses around the neck and shouldn’t they be sold off altogether. Secondly, Africa’s biggest private fixed-income money manager, Futuregrowth Asset Management, recently announced that it would hold back loans worth R1.8bn to the IDC and other state-owned enterprises. The fund manager said it would only resume offering loans and rolling over debt once it has been assured that proper oversight and governance mechanisms are in place at these public entities. Has Futuregrowth conducted its due diligence on the IDC and what recommendations emerged from it?

Mr Tleane asked whether there is any opportunity where the IDC can take the lead and strive for more cooperation with sister institutions such as the Development Bank of South Africa to come together in specific initiatives in order to be able to make significant impacts in society. Lastly, is there any facilitation that the IDC can do through the Department to provide more support to the Western Cape Company (company developing instruments for breast cancer), because the foundations have been provided but it can’t really operate because of the licensing issues?

Ms Nonkululeko replied that the issue with Futuregrowth is that it is reading a lot of different things in the papers (media) so it is not specific about which issues it is raising. Based on what they read, Futuregrowth, chose six state-owned institutions and decided to withhold funding in those institutions until they understood what was happening regarding governance within those companies. There had been a number of interactions with Futuregrowth to understand where they were coming from after they sent some detailed questions that the IDC has now responded to. The IDC then invited them to the head offices in Johannesburg where they specifically met with the board members and all the relevant chairpersons of the different functions within the organisations and all the IDC policies and procedures were furnished to them to peruse. The sense is that this process and the engagements with the board members provided some comfort in terms of how the IDC operates. There is nothing fundamental they have picked up in the work that has been done so far but it might come up with a report with a few recommendations because they do things differently. The work (facilitating funding) it has done in the IDC will be taken through its credit committee and then write up a report to their shareholders and hopefully by the end of October this matter will be resolved.

She highlighted the IDC has about R36 billion in debt - 6bn of this comes from the bond market which comes from the asset managers. From that figure, Futuregrowth holds R2bn in debt. It is important to keep the relationship with Futuregrowth because it is one of the asset managers of the IDC. It is important to note that the IDC is comfortable that this conversation will be closed soon.

Mr David Javis, Corporate Strategy at IDC, stated that if funding is invested in existing clients and it is expanding their capacities, it is lucrative to invest more in those types of companies because they are beneficial to the economy at large. In this distressed environment the IDC does support some facility to companies that are not performing very well as part of the strategy is to look for new opportunities and focus more on innovation which consequently amounts to new clients. The IDC does take a lot of risk as compared to most financial institutions. However, it is part of the due diligence to look at the risk aspect of the clients, and such risks are often mitigated as well by providing the risky clients with some business support where analysis and technical issues are eminent. The corporation established a unit that looks at the development impact support that comprises of specialists that are responsible for making sure that the corporation develops youth entrepreneurship to avoid potential financial trouble. The unit also looks at how the IDC does deals in order to bring in more youth and new entrants. In terms of the black industrialist, the IDC seeks to supports these entities; the new focus is putting more emphasis on black industrialist than empowerment to ensure that they have controlling shareholding. There is also concessionary finance available for them and the corporation looks for opportunities where it can develop black industrialist and also partners with other stakeholders in identifying them.

Mr Qhena stated that the role that the EDD plays particularly in the Massmart deal where it provides the black industrialist with this opportunity to partner with Massmart and link them with Massmart. When you bring in a new product it takes time to become commercially successful so this is where a well-known organisation like Massmart may come into the fore to provide that trust of the product to the consumers in order for the product to gain market access and become lucrative.

The role that the EDD has played has been really commendable particularly in the regulatory aspects, the EDD comes to the fore and play a significant role filling up the gaps that would otherwise prolong the processes. The IDC cooperates with DBSA in a number of projects, and has co-invested in some areas with the National Empowerment Fund and on provincial level as well. The Department has also played a significant role with regards to the PICC particularly on infrastructure.

With regards to Amsa and IDC opening up the steel part of Highveld, there has been good progress made thus far, however, this is an area which is disappointing. When Highveld went into business rescue the corporation put in R150 million to stabilise it and spent months trying to find a strategic partner and working with a business rescue practitioner and it became a big disappointment. There is close to about 2000 people who lost their jobs in this business, so to mitigate the extreme job loss, IDC looked at some aspects of Highveld that can be stabilised and utilised to sustain some of the jobs. This aspect included the manufacturing of beams which are only produced and manufactured by Highveld in SA, therefore, in the absence of Highveld these beams would have to be imported from abroad. However, this creates an opportunity and that’s the part that the IDC is working with Amsa to bring it back to facilitate import replacement of these construction beams and save jobs.

With regards to Oakbay the IDC has not lost any money, R250 million was invested on the capital side and R75 million is outstanding and it will be paid as well. When these transactions occurred there is a portion of the interest that was converted into shares when the company was listed, as a result the IDC owns 3.57% stake in the company. The share price is now worth R540 million, in addition for the capital that is still outstanding the IDC is charging interest at prime rate. Therefore, no money has been lost in Oakbay and this has been a very lucrative deal in fact.

With regards to Foskor there is a lot of income that is coming from it, the CEO confirmed a R6 billion turnover, and it is important to note that it is key on agriculture. However, the biggest setback has been on the capitalisation of the Richards Bay Plant, because it is an old plant it requires some re-capitalisation. More attention has been directed to it, and Foskor exports the phosphoric acid largely to India because of its biggest market in terms of agriculture due to its population size. It wants to further beneficiate more acid than it has, it is worrisome if this acid becomes a commodity and now India will dictate the price as the largest consumer and also the fact that there are new competitors emerging from the middle east and who already started building new plants. Foskor is now looking at improving supplying the granules in other African countries, because when the phosphoric acid price is weak, it does provide a strain in profitability. Perhaps when the talks to sell it surfaced during the time it was profitable, it should have been sold, but the IDC was worried about the impact that it would have on the agricultural sector. However, it is time that Foskor comes to the fore and stands on its own feet because it cannot continue receiving bail funding from the IDC.

When the IDC bought 74% ownership in Scaw it was specifically because it wanted industrialisation to stay in South Africa and that has been achieved. However, the IDC was aware that it was an old plant that needed new technology and equipment. When the mining strikes or protests were occurring it affected Scaw significantly because Scaw supports part of its activity into the mining sector. Adverts were put out by the IDC for interested partners to partner with the corporation wholly or in parts of the division of Scaw, and a few local and international players who were eagerly interested came forward but the offers made were not very attractive and lucrative offers.

He highlighted that the IDC doesn’t just invest but looks after its investments, there is a newly established function for post investments activities headed up by one of the executives in the IDC to ensure that investments are well looked after, and the projects invested in are indeed proving to be lucrative and are actually delivering returns.

The IDC engages with its entities twice a year, and at inception of the investments it is made clear that every company must comply with the laws and regulations of the State. Indeed the corporation continues to ensure that its entities perpetually comply and play their role in abiding with the laws and regulation. With regards to Cape Ray, the IDC will engage with it to ensure that the entity is assisted where it is necessary.

The meeting was adjourned.