Department of Trade and Industry on its 2015/16 Annual Report

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Meeting Summary

Annual Reports 2015/16 

The Department of Trade and Industry reported that it had once again received an unqualified audit report with two findings reported by the Auditor General of SA (AGSA). The first finding was on the dti's Annual Performance Report and second finding was a non-compliance finding in respect of the Annual Financial Statements. There were highly technical matters on the Annual Financial Statement which the AGSA deemed the accounting adjustments to be material. These matters arose largely as a result of the differences in opinion on the accounting treatment. 

The Department conceded that new policies on gambling and alcohol were needed. Detail on the administration of DTI was provided to the Committee. Its vacancy rate sat at 8.9% and there was female representation at senior management level was 49%. The figure on disabled persons employed by DTI was 3%. Payment of all eligible creditors was well within 30 days with most being paid within 15 days. On financials for 2015/16 the DTI had almost spent 100% of its allocated budget of R9.5bn.

The DTI had also taken on the challenge of revitalising SA’s clothing and textile industry through its Clothing and Textiles Competitiveness Programme. There were also initiatives on stimulating growth in the agro-processing sector ie local farmers were encouraged to produce chicory. The DTI also provided huge incentives to foreign filmmakers to shoot their movies in SA. It also supported the local film industry ie film and tv incentive. Efforts were furthermore being made to revive SA’s boat and ship building industry. New partnerships included the launching of the Burgan Terminals fuel storage project in Cape Town between the DTI and the Dutch government. The point of all these investments was not only the capital investments but also the jobs that it created or would be created. Provincial figures were provided on approvals on incentives for movie making and on the Central Infrastructure Programme (CIP) etc.

The Committee asked the DTI to provide it with the annual reports and any other reports of its entities. Members pointed out that there seemed to be a huge disparity between the numbers of bills that the DTI intended to process and on what had been done. The DTI was asked to explain what the issues were that Volkswagen SA had problems with. Volkswagen SA was after all a huge job creator in SA. Members asked what the extent or percentage of black people were that were benefitting from investments made by international companies. On the state of SA’s economy members asked whether SA was heading towards a junk status. If it was correct that the DTI was investing R1 for every R4 that private sector invested in initiatives in certain provinces, in which provinces did the DTI struggle to get buy in on? Members felt that SA could do so much better than what it was as a destination for international film shoots. Of the 16 entities under the DTI members asked which of these pulled the performance of the DTI down. Members highlighted Turkey as a prospective trade partner for SA as its economy had grown tremendously over the last ten years. Members appreciated the efforts of the DTI in trying to combat gambling and liquor problems. Legislation on both gambling and liquor was in the pipeline. The DTI based on its own assessments was asked whether things had gone better under the old Industrial Development Zones or under the newer Special Economic Zones. Members did note that in some instances government had created deindustrialisation in certain areas. Concerns were raised that investments were repeatedly made in provinces where investments had already been made. Case in point was the fact that most of the DTI’s approvals were in provinces where investment had already occurred. Not much was being done in rural areas. What was being done in rural areas? Even if there was a lack of uptake in rural areas more should be done to encourage uptake. 

Meeting report

The DTI briefed the Committee on its Annual Report 2015/16. The delegation comprised of amongst others Mr Lionel October Director General, Mr Stephan Hanival Chief Economist, Mr Shabeer Khan Chief Financial Officer, Mr Tumelo Baleni Chief Operations Officer: Consumer and Corporate Relations, Ms Malebo Mabitje-Thompson Deputy Director General: Incentive Development and Administration and Ms Hayley Rodkin Chief Director: SMEO.

Briefing by the Department of Trade and Industry (DTI) on its 2015/16 Annual Report

Mr Lionel October, Director-General, dti, initially spoke to the economic context in which SA found itself in. Thereafter the strategic goals and objectives of the DTI were highlighted.

SA’s economy remained a mining economy but there had been a decline in mineral commodity prices on platinum, gold, iron-ore and coal from 2012 peak levels. There was also over production capacity in manufacturing. The steel surplus on world markets was case in point. On the domestic front SA’s Gross Domestic Product (GDP) had rebounded strongly in Quarter 2 of 2016 after having contracted by 1.2% in Quarter 1. In Quarter 2 GDP grew by a robust 3.3% underpinned by amongst others manufacturing growing at 8% and mining growing at 11%. SA’s economy had been affected by the drought, the effects of which were still being felt although the worst was expected to be over. SA luckily had avoided a technical recession. Business confidence was improving. On jobs between Quarter 3 of 2010 and Quarter 4 in 2015, 2.3m net new jobs had been created. New jobs were not being created fast enough to absorb the amount of people entering the job market. On SA‘s trade with the rest of the world SA’s exports to the world increased to R294bn in Quarter 2 of 2016. SA imported goods from the world contracted in the first two quarters of 2016 which could be attributed to weak domestic demand of manufactured commodities by 2.3% which accounted for 84% of the total imports in Quarter 2 of 2016. In Quarter 2 of 2016 SA registered a trade surplus with the rest of the world totalling R23bn.  The briefing continued with highlights on some of the DTI’s key achievements. On industrial development there were huge investments made by automotive giants like BMW, Toyota, Daimler, Ford, Volkswagen and Volvo.

The DTI had also taken on the challenge of revitalising SA’s clothing and textile industry through its Clothing and Textiles Competitiveness Programme. There were also initiatives on stimulating growth in the agro-processing sector ie local farmers were encouraged to produce chicory. The DTI also provided huge incentives to foreign filmmakers to shoot their movies in SA. It also supported the local film industry ie film and tv incentive. Efforts were furthermore being made to revive SA’s boat and ship building industry. New partnerships included the launching of the Burgan Terminals fuel storage project in Cape Town between the DTI and the Dutch government. The point of all these investments was not only the capital investments but also the jobs that it created or would be created. Provincial figures were provided on approvals on incentives for movie making and on the Central Infrastructure Programme (CIP) etc.

Mr October gave insight into trade and investment initiatives into Africa that the DTI had embarked on. SA had also entered into a solar power plant initiative with Saudi Arabia in the Northern Cape. The Beijing Automobile International Corporation (BAIC) had entered into an R11bn deal with the Coega Development Corporation. In as much as investors from abroad wished to make investments in SA it was understandable if they had concerns on the safety of their investments. To put investors at ease the Protection of Investments Act 2015 was passed which provided protection to foreign investors in a manner that was consistent with the constitution and that was in accordance with international best practice and international customary law.  On Special Economic Zones and economic transformation cabinet had approved the Guidelines for Good Practice for South African companies operating in Africa in 2015. This was especially mentioned given the issue that Sweden had with a local wine manufacturing company in Robertson regarding unfair labour practices. The amended Codes of Good Practice came into operation in May 2015. Cabinet also approved the Black Industrialist Policy in November 2015, and it was launched in December 2015 with guidelines and application forms.

Mr October said the Special Economic Zone Act, 2014 Regulations were approved and gazetted and were effective from February 2016. The briefing also touched on legislation and regulation, with the National Gambling Policy having been approved by cabinet. The DTI conceded that new policies on gambling and alcohol were needed. Detail on the administration of DTI was provided to the Committee. Its vacancy rate sat at 8.9% and there was female representation at senior management level was 49%. The figure on disabled persons employed by DTI was 3%. Payment of all eligible creditors was well within 30 days with most being paid within 15 days. On financials for 2015/16 the DTI had almost spent 100% of its allocated budget of R9.5bn.

The DTI had once again received an unqualified audit report with two findings reported by the Auditor General of SA (AGSA). The first finding was on the dti's Annual Performance Report and second finding was a non-compliance finding in respect of the Annual Financial Statements. 

Finding on Performance Reporting

•The finding related to the reliability of the following performance indicator on the Annual Performance Report i.e. “number of students enrolled in the tool-making apprenticeship programme per year.” 

•The tool-making apprenticeship programme is a programme set up by the dti. The programme is largely funded by the dti and during the financial year leveraged additional funding from the National Skills Fund with the objective to increase the intake of students on the programme. the dti reported on the performance of the entire programme whilst the AGSA were of the opinion that only the dti funded students should be reported on. In previous years, the dti consistently reported on the performance of the entire programme.

Finding on the Annual Financial Statements (AFS)

There were highly technical matters on the AFS which the AGSA deemed the accounting adjustments to be material. These matters arose largely as a result of the differences in opinion on the accounting treatment.

•The Department included foreign lease commitments for the first year only and a narrative, highlighting to the user of the AFS that the administrative budget for the foreign offices is in the process of being transferred to the Department of International Relations and Cooperation (Dirco) during the 2016/17 financial year. The intention of this was to highlight to the user of the AFS that there will be no lease commitment for later than one year due to the transfer of budget. This is also in line with the objectives of the Foreign Services Bill which has been approved by Cabinet. The AGSA was of the view that the lease commitments up to 5 years should have be disclosed as per the accounting standard, as the transfer of the budget relating to foreign officials will only take place during the 2016/17 financial year.

the dti through the Critical Infrastructure Programme incentive disbursed funds to DBSA for the revitalisation of the industrial parks. There was difference in opinion on whether the above arrangement constituted a principal agent arrangement in accounting terms. This was subsequently clarified by independent accounting expert that no principal agent arrangement  existed in the transaction and that an advance be raised for unspent funds by DBSA at financial year end.

It should be noted that the matters above were unique and technical in nature and was not due to the dti’s internal control systems being ineffective to produce an accurate and complete set of AFS. 

Discussion

Mr M Rayi (ANC, Eastern Cape) suggested that once the DTI tabled its Annual Report in Parliament it should be circulated to members. The presentation on the annual report could be circulated later to members.

The Chairperson, looking at the percentage of the DTI’s budget that went to its entities, said that the Committee should also look at the Annual Reports and relevant reports of those entities as well. The task of the Committee was legislative. He noted that there was a huge imbalance between what laws the DTI intended to pass and what was actually done. He pointed out that there were some issues that the motor vehicle manufacturer Volkswagen (VW) had concerns with and asked for an explanation. He was concerned as VW was a job creator.

Mr October noted the point made about the reports of entities being made available to the Committee. VW had stated that if the DTI pulled back on its incentives it would hurt the industry. He explained that the DTI was busy building an up down auto industry and as far as it was concerned there was no problem. The DTI wished to have an active industrial policy. The DTI needed to accelerate black economic empowerment. The DTI had told VW that it was not even a level 8 company when it came to black economic empowerment and this was after it had been in SA for 60 years. VW was informed that if it wished to qualify for incentives it at least had to get onto the black economic empowerment scorecard. If VW in the United States of America could bring in black suppliers why could it not be done in SA? VW was really just complaining about black economic empowerment. On outstanding bills, the Copyright Amendment Bill and the Performer Amendment Bill were still with the State Law Adviser’s Office. 

Mr S Mthimunye (ANC, Mpumalanga) asked what was the extent or percentage of black people who were benefitting from investments made by international companies. He also asked how many applications the DTI had received in respect of the film industry projects. He added that the Department of Arts and Culture had released a good documentary on the liberation struggle. On the state of SA’s economy he asked whether SA was heading towards junk status.

Mr October replied that the DTI was revamping its incentives. Companies had to perform better on black economic empowerment. If companies like Siemens, which was a German company could do it, why could VW not do it. The DTI had an active strategy in place. Companies had to at least be at level 2 on the black economic empowerment scorecard. There were good incentives in place so companies had to come on board. On the matter of junk status, he said that things were difficult in SA. Growth was below 1%. However the fundamentals of the South African economy were strong. SA would always have a strong mining industry.  The intention was to grow the agricultural and the manufacturing industry in SA. SA’s downgrade was cyclical. More movies on SA’s history were being produced. There was one on Oliver Tambo. The DTI worked with the Lotteries Board to fund the making of movies. 

Ms Malebo Mabitje-Thompson, Deputy Director General: Incentive Development and Administration, dti, noted that statistics on movies was reflective of applications received. There was unfortunately low off-take in Mpumalanga. The DTI had a working agreement with the South African Broadcasting Corporation (SABC) to flight local movies that the DTI had supported. The DTI tried to stimulate demand for incentives in provinces where there was low off-take. The DTI encouraged Hollywood, Bollywood and Nollywood to come to SA to make their movies.  The DTI did support communities and wished for people in provinces to know about incentives. 

Mr J Londt (DA, Western Cape) appreciated the provincial breakdown of figures that the DTI had provided. If it was correct that the DTI invested R1 for every R4 that the private sector invested he asked whether this was the case in all provinces. If not in which provinces did the DTI struggle to get buy in on? He felt that SA could do so much better as a destination for movie makers. SA had so much natural beauty and had diverse locations to choose from. Besides SA was a cheap destination for foreigners. On the DTI’s audit findings he noted that there was R38m in debtors that were outstanding for more than 12 months. The DTI had sixteen entities. Which of these pulled the DTI’s performance down? There was a reduction in the demand for platinum internationally. SA still exported raw products. When would SA become competitive with China on the sale of steel?

Mr October said that the idea was for provinces to build film studios. The DTI was revitalising industrial parks in provinces. The problem was the distribution of economic activity. The DTI’s strategic goal was to diversify the economy. It was creating new economic zones in provinces. The global demand for platinum and steel had gone down as there was an overproduction in the world. The work that the DTI was doing in SA on steel was defensive. The DTI had imposed tariffs on the importation of steel in order to protect the local steel industry. The USA was very protectionist on its local steel industry. Most of the DTI’s entities showed improvements. Six to seven of the DTI’s entities had received clean audits. The Companies and Intellectual Property Commission (CIPC), which was previously called the CIPRO, had a debtors issue to contend with. The DTI had a plan on the National Regulator for Compulsory Specifications. Work was being done to improve things and they were on the DTI’s watchlist. After consulting with his team Mr October noted that there were 10 out of 13 entities of the DTI that had received clean audits.

Mr Shabeer Khan, Chief Financial Officer, dti, on the payment of service providers within 30 days, said that it was gaining traction across government. The culture in departments was changing.

Dr Y Vawda (EFF, Mpumalanga), on movies being shot in SA, said that if the DTI was in discussions with Hollywood was it also in discussions with Bollywood. He was glad that SA was growing chicory again. There a huge demand for chicory. He pointed out that Turkey had become a huge economy over the last ten years and had shown interest in investing in SA. There were very few countries like Turkey that did not owe the International Monetary Fund (IMF) any money. He agreed with the efforts of the DTI on trying to combat gambling and liquor problems. On socio- economic justice, SA should not wait on countries like Sweden to stop buying from wine producers who infringed on workers’ rights. Socio economic justice would give dignity to the nation.

Mr October said that the DTI was also focussing on Bollywood and Nollywood. He noted that bills on liquor and gambling had been approved by cabinet but had been put out for public comment again. Efforts were being made to have a legotla/indaba on the liquor and gambling bills.

The Chairperson said that the Committee was expecting a briefing on the liquor bill.

Ms M Dikgale (ANC, Limpopo) said that she had seen the DTI’s projects in villages in her province. However of late there had been problems with Eskom’s electricity costs at projects. She noted that on oversight to the Eastern Cape Province the Committee had come across huge problems with kids consuming liquor and even taking it to school. She agreed that liquor was a huge problem. She was disappointed with the DTI’s audit report in relation to impairment of receivables. 

Mr October noted that there was a liquor bill being worked on which was raising the allowed legal age limit for the consumption of alcohol. The bill was out for public comment at present. Education programmes needed to be put in place.

Mr Khan explained that impairment of receivables was not an audit finding. It was just a matter that was highlighted in the audit report. It was not a finding that had an impact on the audit finding. Impairment of receivables was an accounting transaction. The Minister of Trade and Industry Mr Rob Davis had set a high standard and the DTI tried to get a clean audit. There were two issues that prevented a clean audit. 

The Chairperson said that the electricity issue raised by Ms Dikgale had not been covered and he would try to assist. The DTI tried to bring entrepreneurs together in one space. Industrial parks were one such place. If more people set up shop at industrial parks then the costs would come down.  

Mr October said that when companies concentrate together at a location then everything that was needed like skills and supplies were right there. For example Beijing Automotive had chosen to set up business at Coega in the Eastern Cape because all the suppliers and parts were right there. The DTI revived industrial parks and economic zones. The DTI provided cheap land and electricity at industrial parks.

Mr Stephan Hanival, Chief Economist, dti, on the Eskom electricity issue, said there were three broad areas of intervention. The DTI had firstly played a core role to address supply challenges. Secondly DTI had engagements with the National Energy Regulator of SA (NERSA) on the impact that high electricity costs had on sectors. There was thirdly the Manufacturing Competitiveness Enhancement Programme (MCEP) of the DTI. Companies would apply for assistance to install environmentally friendly energy sources in order to bring down electricity costs. Unfortunately the Programme had to be stopped until funding could be secured for it again. The incentive was there if the funds were there. The DTI also looked at water pricing.

Ms Dikgale said that windmills should be used when it came to water.

Mr M Rayi (ANC, Eastern Cape) pointed out that there seemed to be eight bills that had not been tabled or passed. In the DTI’s assessment he asked when things were going better, was it under the old Industrial Development Zones or now under the Special Economic Zones as they were now called? He noted that big investment in the Eastern Cape which meant that Port Elizabeth and East London would be competing with one another. He stated that in some cases government created deindustrialisation in some areas. This could for example be due to the closure of railway lines in certain areas. On industrial parks he said that there was a link between product development and village parks.

Mr October explained that at Coega there was a Special Economic Zone Fund. The DTI was working on ten new Special Economic Zones. Incentives were created to get new investors. Special Economic Zones had also taken off at Saldanha Bay and Richards Bay etc. He explained that deindustrialisation was tied in with a legacy issue. The DTI was investing in a manganese rail line from Sishen near Pretoria to Coega in the Eastern Cape. Saldanha Bay would deal with oil and gas. The areas where blacks lived were deindustrialised. The DTI must not be criticised for investing in urban areas. The need to invest might be there.

Mr B Nthebe (ANC, North West) noted that the problem was that investment was repeatedly made in provinces where investment had already taken place. Most of the DTI’s approvals were in provinces already invested in. There was little investment in rural areas. What was being done in rural areas? He asked how Springbokpan was being revitalised. The issue was how to get things right. If the appetite was not there what could be done to create an appetite. 

Mr October emphasised that the idea was to change patterns and to overcome legacies of the past. The “how” was the question. The DTI’s goal was to have Special Economic Zones in the North West and Northern Cape Provinces. In the Northern Cape there was an Industrial Development Zone in the works at Upington. In the North West near Rustenberg work was being done on a Special Economic Zone which would focus on the manufacture of platinum fuel cells.

Mr Hanival on the spread of the DTI’s activity explained that 44 agri-parks were being emphasised in provinces like Mpumalanga. There were lots of agricultural sector activities being undertaken in rural provinces like Limpopo. The DTI could once again run agri-parks and agri-processing in provinces like Limpopo, North West, Mpumalanga and the Northern Cape.

The meeting was adjourned.

 

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