Minister of Economic Development on Quarter 2 Performance

Meeting report

Minister of Economic Development on Quarter 2 Performance
Minister Ebrahim Patel stated that, with regards to SA’s trade activities on the continent, since 2000, growth rates on the African continent have been faster than global average, driven by expanding demand for commodities, rising urbanisation and growing investment levels. SA focussed on strengthening economic links with the rest of the continent: trade, outward investment and infrastructure links are being upgraded, but African growth is now slowing sharply. Major economies are faced with lower commodity prices and demand, impacting on economic performance. It raises the issue of the African growth path dependency on mineral exports and the need to speed up economic diversification. South African growth will be affected by weaker continental growth. Total trade between SA and the rest of the continent grew from 19% in 2010 to 22% in the 2015, and the continent has grown to be SA’s largest export market with export trade amounting to R276 billion (31%), followed by Asia at R258 billion (29%) as at 2015. Therefore, this means Africa is the biggest contributor to jobs from SA’s exports (240 000 jobs created). Over the last 15 years, Africa grew faster than the world economy, but now it has slowed sharply, below global average. The IDC (Industrial Development Corporation) has invested R15.482 billion in Africa as at 2015, Mozambique being the leading country as a recipient of the largest portion this investment figure with a staggering R4.540 billion followed by Ghana at R1.569 billion. The most recent forecast has revised Sub-Saharan growth downward for 2016 to 1.4%, significantly lower than the global 2016 rate of 3.1%. For 2017 and 2018, growth forecasts are also lowered, at 2.9% and 3.6% respectively. The 2016 result will in all likelihood be the lowest growth in two decades. It is important to note that the growth rate has not only been stagnant in SA alone, some of the biggest economies on the continent are also struggling, for instance Nigeria is projected to be in recession in 2016, followed by slow growth (0.7%) next year, Angola was expected to be zero this year, and grow by 1.5% next year; and Egypt, the currency was devalued on 4 November and is now roughly 50% of its previous level. Egypt went to the IMF for a $12bn loan. The continent needs to break from its reliance on oil, mineral and agricultural exports. The New Growth Path is based on deepening manufacturing, more processing of raw materials (mining and agriculture), stronger domestic and regional markets and larger, more productive services sectors.

Angola is a potential market for increased SA manufacturing exports, SA generally has a large negative trade balance with Angola: exports are limited, whilst we import large amounts of crude oil from Angola. Angola continues to have a stronger trade relationship with Portugal than with South Africa, particularly on the import side, with a larger value of Portuguese-made products finding their way into Angolan markets. This represents an opportunity for South African exporters, given our location advantage.

In infrastructure, SA is constructing one of the largest gas terminals facilities in Africa in the Western Cape at Saldanha and it is funded by the IDC. Government support has re-established SA’s cylinder manufacturing, with R170 million in IDC funding approved in 2015, and174 permanent jobs will be created. The plant will at peak produce 500 000 to 1.5 million cylinders per year, and the project partnered with a Turkish cylinder manufacturer for access to best technology. Of interest, is that this project is initiated by a black woman industrialist.

With regards to the SA film industry, the industry contributed R3.5 billion to GDP and created the equivalent of more than 25 000 full time jobs. The IDC has provided funding for producing feature films, television shows, animation and documentaries as well as a focus on emerging black film-makers and studios. The Department of Trade and Industry (DTI) has provided a number of incentives in this field to contribute towards its success and job creation. In October 2016, the Minister officially launched a new film studio in Joburg – Sky Rink Studios. It is located at the top of the Carlton Centre. The development helps to advance a number of goals, including 150 permanent new jobs and 450 part-time jobs; and expand the film infrastructure for local film-makers.

The Minister stated that there has been a fast tracking and unblocking of investment in the auto sector. China’s 2015 state visit to SA resulted in 26 agreements with a signed valued of R94 billion. An agreement was signed by the BAIC president and IDC, and was to produce 2 500 jobs by 2023. The construction of the plant in the Coega IDZ attracted a total investment of R11 billion: first phase of R4.3 billion will be invested and 2 500 jobs will be created in the construction of the plant as well as 784 permanent jobs will be created. R6.7 billion will be invested in the second phase, with 2 500 jobs will be created by 2023. At full capacity the plant will produce 100 000 vehicles per year. 40% of these will be for the domestic market and the rest will be exported. Coega IDZ promotes SMME development in the promotion of the auto sector, as a result, instead of one large contractor, the project was split into six contracts worth R3 million in total. Construction may start as early as mid-January 2017 if no delays occur.

With regards to urban farming (KPI 4), following a ministerial visit to a Saturday Produce Market, the Philippi Horticultural Area approached EDD to address the rezoning of the land and the loss of agriculture and jobs as a result. The area has become contested as developers try to gain access to the land for housing while community groups and farmers try to retain the land for agriculture. EDD investigated and became aware of a letter/directive sent by the delegated authority of the Minister of Agriculture Forestry and Fisheries to the City of Cape Town, rejecting permission for the City to change the land use in Philippi from agricultural use to urban development. Some background to this area is that half of the 3 000 hectares of this rural area on the Cape Flats, called the Philippi Horticultural Area, is owned by farmers and leased to small farmers, and nearly 4 000 workers are employed on the land. Emerging farmers are working approximately 100 hectares and growing vegetables, and the Philippi farm area produces approximately 150 000 tons of vegetables and flowers a year. It supplies the majority of Cape Town’s vegetables. Therefore, it is perfectly understandable why the Minister of Agriculture rejected permission for the City to change the land use from agricultural use to urban development.

In the clothing industry, government incentives have played a huge role in stabilising employment through production incentives. At the beginning of 1996, the sector employed 266 000 clothing, textile, footwear and leather workers. By 2011 there were 100 000 formal sector workers. The support included R4.1bn committed by the Competitiveness Fund is in the last five years, 500 factories were supported by this programme, with R3.5 billion as loans or working capital or shareholding by the IDC in the last 5 years. The IDC funding created or saved 24 000 jobs.

With regards to the green economy initiative (KPI 5), the Minister stated key successes of the Renewable Energy roll out included 6 379 MW of Renewable Energy procured, and R196 billion of private investment was attracted which created 26 246 full time jobs. By October 2016 the IDC had invested R18.7 billion in the green energy sectors with a total investment in these projects amounting to R37 billion, and 102 790 permanent jobs created. The Greening of Colleges Initiative led to 16 TVET Colleges taking part in developing green profiles and integrating green issues into training programmes, college policies and strategic plans.

On interventions to empower youth and enhance their access to the labour market or employment opportunities (KPI 6), the Minister said, given the skills development challenges and shortages of skills, the Deputy Minister has led a new initiative in Mpumalanga called Adopt-a-TVET. The Deputy Minister has worked with the TVET colleges, SETAs and captains of industry in the province to find common ground, develop linkages, and improve responsiveness and quality of training. As a result of the engagements, the parties signed an MOU aiming to: produce high quality skills needed by the industry, facilitate the absorption of TVET college graduates into industry through formalised apprenticeships and learnerships, and provide exposure programmes aimed at lecturers. The significance of the work is to produce learners that are ready for employment and provide young people with skills, work exposure and learnerships.

On interventions to develop township economies (KPI 16), EDD held a pre-launch workshop and site visit with 42 private sector wholesalers in the retail industry in Gauteng in July 2016 to introduce wholesalers to the 28 operators of the MySpaza Township Enterprise Development Project. Through this workshop, wholesalers were requested to partner with a township spaza shop and provide funding for structural or infrastructure upgrades of the spaza shop.

In 2016/17 to date (Q1 and Q2), IDC approved R4 billion in funding, and disbursements totalled R5 billion as a result 5 449 jobs were created or saved. EDD’s continued active role in oversight of Massmart’s Supplier Development Fund has helped ensure the development and expansion of new productive capacity. This quarter the Massmart SDF provided a pump filter company funding of R560 000. The company needed funding to expand as a result of increased orders for pumps. It also wanted to do development to improve its sand pool sand filter extractor pump. The funding from Massmart SDF enabled the company to get into full production and the products will be available in Builders Warehouse stores from September 2016.

With regards to the ArcelorMittal South Africa (AMSA) competition settlement, the Minister stated that the EDD coordinated actions to address cartels in the steel industry which entailed meeting the company, downstream players, industry experts and conducting research. The Ministers of Economic Development and Trade and Industry convened meetings with the companies, industry associations and unions. They provided strategic guidance to the team working on the pricing model, in a number of meetings. AMSA admitted to certain contraventions of the Competition Act and agreed to a remedy for flat steel products including: limits of the EBIT margin to 10% for a period of 5 years, investment of R4.6 billion in AMSA’s plant to enhance its competitiveness, continue to provide rebate to value added exporters of AMSA products, participate in a Steel Panel convened by ITAC to monitor AMSA pricing, and pay a fine of R1.5 billion over five years. The significance of the work is to ensure that there is competitive steel pricing for downstream users in the economy.

As at 30 September 2016, EDD has spent R341.3m out of an allocation of R674.7m (51% of the total allocated budget). EDD expenditure, excluding transfers, amounted to R73.5m (50%) of an allocated budget of R145.9m. For the quarter the Department spent R177.4m made up of transfers of R133.9m to entities and R43.5m spent directly by the Department. Total expenditure is 106% of the quarterly allocation of R167.8m.

Discussion
Mr P Atkinson (DA) asked how the meeting with Moody’s rating agency went, and what was discussed and to provide any useful information with the Committee. Secondly, as part of the Department’s KPI regarding the development of water infrastructure in the Eastern Cape, he asked for an update on the Mvubu River and the construction of the dam. Lastly, with regards to tourism infrastructure development in the Eastern Cape, he asked for an update on any new developments to develop the infrastructure.

Ms D Rantho (ANC) said she visited a rural town in the Eastern Cape called Jansenville, located between Graaff-Reinet and Uitenhage, a very dry area but with a lot of potential in farming activity and production. She discovered that there are farms in that area that were bought by DAFF (Department of Agriculture, Forestry and Fisheries) for up and coming farmers, and in those farms and some of the machinery has now been lost and are not operating, the fencing around the areas is being stolen. So in your inter-governmental relations, what discussions are held to intervene in this situation. The owner has been farming all his life but does not have any education, because this is something he has been doing all his life, but he does not have access to funding to improve the standard of the farm. The point is that there is a need for the Department of Economic Development to intervene to uplift those small farmers and the standard, because the farms are now idle, and are being rented out to people in the townships to keep their livestock but the people in the rural areas are not able to exploit the farms for their benefit. She asked what the Department’s involvement is in uplifting the standard of rural towns. She asked if they can be visited and see how much development can take place in those areas.

Mr I Pikinini (ANC) welcomed the informative report. He commented that we need to broaden the scope of operations and make use of R&D, because if utilised, we will be able to investigate and explore more economic opportunities in the country. The export of raw materials for processing into value added goods is a perpetual challenge for the economy. Therefore, strengthening localisation by processing our raw materials will benefit the economy significantly. He suggested that the establishment of manufacturing companies is critical. Lastly, there is an area in the Eastern Cape called Dimbaza that has a lot of factories that previously employed many people. The factories are now closed and the former premier, Ms Nosimo Balindlela, made a lot of promises to intervene and turn around the conditions but nothing has happened as yet. Some of those factories were producing textile material that was supported by the Chinese during that time. In terms of the report, he said it is quite intense and is taking the Committee forward.

Mr S Tleane (ANC) thanked the Minister for the information he provided on Angola, and the constructive presentation. The Guidelines for good business practice for SA companies doing business on the continent is a good idea, taking into account the controversy about MTN in Nigeria recently. He asked the Minister if he knows of any South African companies that are facing controversy on the continent or in other countries, and related to this, what is the range of corruption if one looks at tax evasion and so on. What is the comparison with US and UK companies and other advanced economies?

He said that it is quite saddening that SA imports more from Angola than it exports to them – the reason is clear that the colonial ties between Angola and Portugal play an important role, and this is something that is happening with other countries as well. So the question is, when last did a SA business delegation visit Angola with an economic agenda.

On the investment made by IDC in the film industry, the initiatives are appreciated, but on the continent, Nigeria is popular in this field too – is there any partnership between SA film makers and Nigeria as new studios are being built in the country, and how can SA utilise the experience of the Nigerian film makers to develop our own in this country.

On the work that the Deputy Minister is doing with Adopt-a-TVET, is there a possibility that this idea could be taken to other poor provinces like the Northern Cape. He is very impressed with KPI 15, the IFSRR solar plant project supported by the IDC. Are there additional investments that the IDC is doing in the Northern Cape, there is a lot of poverty there and the towns are far apart from each other? He asked the Minister if it would be possible for the Department to visit Platfontein in Northern Cape, which is an area mainly occupied by the Bushmen – a short distance out of Kimberley; the conditions in that area are very dire for the people.

Dr M Cardo (DA) asked about the countries that will be targeted for exports from the BAIC plant; there was talk that it was going to supply South America. Secondly, he asked what role can the Department play in putting city-led growth at the forefront of the government policy agenda and ensure that regulatory measures are not too stringent to obliterate small businesses from thriving.
 
The Minister responded that the essential issue was around the economic growth story. Moody’s said they understand that many countries are going through a lot of economic challenges and what they call the noise, meaning the public debate, is essential, but the most important was the growth story. They then requested an unpacking of growth strategies regarding infrastructure, agriculture and where the country sees export opportunities. The cross cutting issue that came up was the questions of market concentration, collusion and cartels. They saw that the country is doing more in terms of reducing monopolies and tackling cartel behaviour.

On water infrastructure, the Minister requested to come back to this question next year, because the Minister of Water and Sanitation is currently engaging in some discussion about this matter.

On tourism infrastructure the Minister said that he started the conversation with Tourism Minister Hanekom and briefly with the Minister of Arts and Culture to see how they can bring a new revenue stream in building tourism infrastructure. Currently in the budgets, there is no scale of resources available. If we want a coordinated tourism infrastructure, then our resources are restricted. Part of the work that the IDC is doing is to bring in capital or investment that will yield returns, and to bring in private investors who will be able to invest in hotels and other essential infrastructure. The question is: how do we encourage tourism infrastructure investment in the Eastern Cape, because the fiscus is very limited to push the envelope in this regard. As the engagements with the Ministers come to fruition, and now we have the ear of the Minister of Finance in this regard, we hope that some consensus will be reached.

With regards to Jansenville, the Department can send a team to do some oversight in that area and take note of the issues raised by Ms Rantho. One of the challenges is it takes quite a bit of effort at the national level to intervene at the local town level. We hope we can contribute in principle by some of the work that is being done within the inter-governmental level.

Deputy Minister Madala Masuku stated that EDD partners with the Department of Rural Development and Land Reform as well as most departments within the economic cluster, and some of the areas in which the departments are focusing on is the concept of Agri-Parks, and to uncover the blockages that persist. There are 44 Agri-Parks and only six are operational at the moment. He had discussed with the team to look into the six that are working to see what sort of challenges are being uncovered. What needs to be done in this case, the Department will go to the area and do a quick glance and interact with people there to ascertain what the department can do to assist. The EDD is working with DAFF around pineapple development in the Eastern Cape, and this is just to illustrate that, the EDD partners with other departments to try and resolve matters at the local level.

With regards to R&D, the Deputy Minister said that the EDD ensures that it does an extensive amount of research in dealing with economic matters such as agriculture. With the TVET colleges, when you look at the presentation it seems very narrow. However, with the Human Sciences Resource Council, after an intensive discussion the question came up what is needed as a skill to advance the economy. A pilot was done, and as a result, areas were identified in terms of skills needed to advance the economy, to feed the projections of the NDP and so on. This was also tested on the TVET concept, of having that proof of an ideal scenario. One time when we were addressing a meeting of business people and other stakeholders in the economy, the Mpumalanga TVET council asked to work with EDD to pilot a project that will create the ideal TVET to partner with businesses.

Minister Patel agreed about manufacturing that the biggest challenge is it is very competitive because it is on a global scale. So the challenge is to change the overall mindset in the country to deepen the competitiveness. The country’s competitiveness cannot match the lowest wages (minimum) of other countries in the world that manufacture products that can be manufactured in this country with lower input costs. This can be offset through better technology, infrastructure and lower input costs.

The Minister said Dimbaza was an area that before 1994 benefited from decentralisation benefits, where the old government provided regional incentives to try to reduce people coming to the main cities. With all the other pressures on the budget, the regional incentive programme was discontinued. However, government has now brought back a version of this in the more thoughtful regional development programmes like the IDZ and Special Economic Zones. However, because they all use finance and there is limited finance stemming from tax revenue forgone, one needs to select which areas qualify. This is left entirely to the provinces to determine the special economic zones, so in the Eastern Cape, Dimbaza was not recognised as a SEZ, although there is this huge infrastructure there that has already been paid for and is not utilised at the moment. There is a project currently taken up by the Eastern Cape Development Corporation (ECDC) aimed at revitalising Dimbaza. It has put up some ideas to focus on an industrial eco-park including hydroponics and eco-ponics and essentially it is to turn this into a production base that is different to where it started, which is clothing and textiles where the return was very limited. The ECDC believes that there is a market for the hydro products that will be manufactured.

Minister Patel remained convinced that more work needs to be done to try and draw more job intensive industries to SA, so we are in discussion with the Eastern Cape on the revitalisation of Dimbaza but it has not been an anchor project that has been followed. The challenge of Dimbaza is evident in other parts of the country. When we created the constitutional government spheres, we did not foresee potential challenges with this. And this model is not working so well. It looks great on paper, but we should have inter-governmental coordination and we are not getting the level of integration that we need. The Ministry tries to go out and meet up with stakeholders to try and resolve some of these issues. The Minister said that he will come back to the Committee in the near future to inform them about the ECDC project.

Corruption in government is certainly one that is endemic within business and on the continent, there have been so many examples in the European markets where multi-national companies are trying to buy politicians, and this is diverting resources. A written document will be provided, that details the corruption in the USA and UK.

Minister Patel replied that a small business delegation went to Angola earlier this year. It is important that we do more detailed research so that we can select the companies in the sectors that we want to break into in the global market. If we do not do that and people are selected based on self-interest there might not be a market opportunity there, then it will be a waste of time. We want to bring the analysis of markets into the discussions in order to acquire a great deal of information so that government can make informed decisions on taking local companies into the global market. It is important to note that whilst we run a trade deficit with Angola, one cannot run your trade relations on the basis that with each country you must have a mutual trade balance. There are always some that you run a deficit and others a surplus; the key thing is to always try and ensure that there are balanced trade transactions. In international affairs, one needs to protect oneself, as opposed to falling in love with a continent or country and believing that they will be our saviour.

The Minister said he has been advised that there has been a discussion with the film commission in Durban and Nigerian film makers, what they call Nollywood. On the Platfontein story, the Department will look into it and ascertain what is really going on there. The IDC is very active in the Northern Cape, and is involved extensively in minerals in the Northern Cape, as well as solar energy in Upington, and there are already a couple of plants and some farming activities such as dates. We hope that the IDC will expand its footprint in the Free State and North West, because there has not been new industrial products and opportunities that the IDC can partner on. On the whole the IDC is quite actively involved in the Northern Cape.

With regards to the BAIC export markets, from the briefing that the Minister received, the principal markets will be on the African continent. The new market opportunities may be in Latin America. Remember that the car making sectors in Latin America are quite strong. Brazil has a strong car manufacturing industry. It would be beneficial for SA to export that market. So we would have to break into that market based on price and competitiveness, but for now the biggest focus is exploring opportunities on the African continent.

Finally, city-led growth is an area that more and more economic analysts point to globally but there are enormous opportunities in SA, and when one talks about city-led growth is not at the expense of rural development. Although, cities are the economic engines of the future as they provide large numbers of people at a time and one can cooperate and collaborate in producing goods and services in a modern economy. We are focusing on identifying opportunities in urban areas and a lot of the work is in fact geared towards achieving that.

On the challenge of the regulatory environment, the State of South African Cities Report identifies some of the challenges that the cities face, and the regulatory environment is one of those. Company registration has now been simplified extensively, and there is now one place that one can solve all of the problems. The Department established something that looks at regulation at the municipal level, and we worked with two municipalities and will come to the Committee to report on that in the most simplified manner. In conclusion the Ministry will come to the Committee to report on the state of regulation in cities and the progress in reducing the red tape nightmare that companies face, along with this, CIPC information will also be provided.

Mr Tleane said the IDC is one of our most important entities and is doing beautiful work in producing new business people in SA, and all the time IDC tries to improve its governance. On 8 November, Business Day said the IDC will release a list of politically exposed people that it has assisted. He noted that there is not much information about what this is all about - so people do not play a guessing game about this.

Ms C Matsimbi (ANC) asked if KPI 16 on an improved township economy, is not a clash of mandate between EDD and Department of Small Business Development (DSBD). Township economy improvement has not been really moving forward, because the presentation highlighted that EDD assisted some spaza shops. The township economic development is stagnant. Spaza shops in the townships are still owned by “our African brothers”. Secondly, on KPI 23 which seeks to improve efficiency, how far are we in terms of filling the ITAC and IDC vacancies to ensure that we improve efficiency?

Mr M Cele (ANC) referred to slide 7 and asked if there are any SA black owned businesses that are thriving on the continent.

The Minister replied that his question will need a bit of research; only after that research has been concluded can the information be provided. With regards to the IDC, the IDC has had in place since 2009 a policy on politically exposed people. The policy states if you are a politically exposed person, the IDC must ensure through enhanced oversight that no strings are pulled in one getting a loan. The IDC board has looked at how to improve the process and the board decided to strengthen the integrity framework of the IDC, like any system that one keeps updating. It said that it will publish the level of loans that have PEP (politically exposed people) on them, and it is a good thing in terms of transparency so society knows that public institutions are not being used as public piggy banks. This is fundamental. The IDC board will manage and monitor this and will put out a statement at the end of the year on this.

Minister Patel replied that the EDD is coordinating with the Department of Small Business Development (DSBD) on the township economy programme. When Minister Zulu and I speak about this, we understand that the challenges are big and she sees her role as getting all the ministers in the economic infrastructure spaces to support small businesses in the township. We all need to climb into that space, because this is to ensure that we are leveraging partnerships and expanding the horizon to help and boost small businesses.

A year ago we had the protest in the township and there was a big public discussion about xenophobia and what makes it difficult for South Africans to prosper in the spaza shop space. The Department put this question to a market enquiry, to look at the retail structures in townships, and small business entry in shopping malls. It has been said very often that foreign residents are able to use networks to source goods cheaply and that they purchase stock as a collective to get enormous discounts. The programme that the Minister was referring to is a small scale attempt to deal with all of that. The market enquiry will ask the relevant questions as to how difficult it is for small businesses to enter the markets, for small entrepreneurs to be better positioned to negotiate discounts, and marketing strategies for these businesses, and creating collective buying power.

Mr Cele, the Acting Chairperson, thanked the Minister and his delegation, for the comprehensive report.

Meeting adjourned.