Economic Development Department on its Third Quarter Performance, with Minister & Deputy in attendance

Economic Development

28 February 2017
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Minister reported an unemployment rate of 26.7%, this is 0.6 percentage points lower than the 27.1% of Quarter 2, 2016. The labour force increased by 143 000. 235 000 jobs were created in Q3:127 000 were formal non-agriculture jobs, 53 000 informal non-agriculture, 38 000 in agriculture and 17 000 in private households. The total employed was 16 069 000 which is the highest number of employed to date. Total unemployed was 5 781 000, 92 000 less than the 5 873 000 of Q2. For this quarter, most jobs created were in government (73 000), transport (46 000) and manufacturing (44 000), and job losses occurred in mining (17 000) and construction (9 000). For the year, most jobs were in transport (61 000), agriculture (59 000)and business services (56 000), with job losses in mining (62 000), trade (58 000), government (53 000) and manufacturing (11 000). Job losses in mining were much more than any other sector significant due to the unfavourable economic and commodity climate. Employment is quite tricky in Q3 due to a hike in seasonal employment in December, the Department would be happier if that employment would be sustained.

The Top 3 Job-Creating Provinces by percentage for the past 3 months are North West (6.6%), Limpopo (4.8%) and Western Cape (3.0%). In terms of numbers, the ranking is as follows: Western Cape (70000), Limpopo (64000) and North West (60000).

The Minister shared a case study between SA and Zambia regarding the partnership developed that would contribute towards economic growth. Exports to Zambia in 2016 amounted to R30.5 billion, whilst the imports amounted to R2.7 billion in the same year. Exports to Zambia have always been eight times larger in value than imports from Zambia in the last eight years. The Industrial Development Corporation (IDC) has contributed towards intensifying the Zambian economy, by its approval of USD 50 million for the project which addresses power shortages in Zambia and the region in order to be self-sufficient in power, and most importantly the project utilises products and services from SA.

Another focus that the Department looked at closely was the challenge of food security, food prices and jobs in the agricultural value chain. The Competition Commission, dti and IDC intervened in the sector to circumvent these challenges. The current drought had a serious impact on food prices, on the contribution of agriculture to GDP, and on the country’s agricultural exports. There were sharp increases in Food and especially Bread and Cereals from the middle of 2015 onward. Bread and Cereal prices in January 2017 were 20% more than at the end of 2015. For the poorest 10% of South African households (about 1.6 million households), the cost of a typical basket of goods and services went up by 8.5 % over the last 12 months, as opposed to 6.5% for the richest 10% of households. The contribution of agriculture to GDP shows that in real terms, the value of agricultural output was almost 15% less in July to September 2016 than in the last three months (calendar) of 2014. There has been seven consecutive quarters of decline in agricultural output since the last quarter (calendar) of 2014. Currently (Oct - Dec 2016) there are 919 000 jobs in agriculture, from NGP (New Growth Path) adoption to the end of 2016, 245 000 jobs have been created in agriculture, or a total increase of 36.4%. This is substantially more than the percentage increase in total jobs in the economy, at 17.7%.

The Competition Commission had been successful in its fight against dominance and monopolies. In 2015/16, 133 new cartel cases had been initiated by the Commission. Three major market enquiries are currently under way, including enquiries on gas, private healthcare and the retail grocery sector. On the construction settlement in February 2009 the Competition Commission initiated a complaint into alleged prohibited practices relating to bid-rigging and collusion in construction. The investigation led to penalties of R1,4 billion against, imposed during July 2013. In October 2013, following the settlement of collusion investigations by the competition authorities, SAFCEC, the seven listed construction companies and the State met to find away to make the industry more inclusive:

  • Ensure transformation of the industry
  • Ensure the industry is competitive in the future
  • Secure a further financial commitment for state claims of over payment

With regards to Q3 expenditure, as at 31 December 2016, the Department has spent R509.9 million out of an allocation of R674.7 million i.e. 76% of the total allocated budget. As at 31 December 2016 expenditure excluding transfers amounts to R108.2 million out of an allocated budget of R145.9m i.e. 74% of the baseline allocation. For the quarter the Department spent R168.6 million made up of transfers of R133.9 million to entities and R34.7 million spent directly by the Department. Total expenditure is 99% of the quarterly allocation of R170.5 million.

Members asked questions about employment opportunities in Limpopo whether it was due to agriculture or other industries; updates on renewable energy; who has oversight over the R1.4 billion fund against the construction companies that were fined; any legislative development currently under way and provide some of those changes that will be made in the Competition Act; any settlements currently under way in the year ahead regarding some of the banks that were involved in the price fixing of the exchange rate between the US dollar and the Rand, and to what extent is the Department involved in the discussions of those settlements if there are any;  why has the government in general lost so many jobs and what was the cause of those job losses; what caused the trade partnership between Zambia and North Korea; the food subsidy structure in the country; how much food subsidy is provided by government in the country; the department’s plan of action to uplift small construction companies in order to have access to more opportunities; and the country’s progress around BRICS and how far has the country gone in BRICS and the establishment of the Development Bank. 

Meeting report

Opening remarks

The Chairperson welcomed Members and the delegation from the Department including the Minister and the Deputy Minister, and advised that the Department will be presenting its third quarter report. She handed over to the Minister.

Briefing by Minister on Quarter 3 Performance and Expenditure Report

The Minister reported an unemployment rate of 26.7%, this is 0.6 percentage points lower than the 27.1% of Quarter 2, 2016. The labour force increased by 143 000. 235 000 jobs were created in Q3:127 000 were formal non-agriculture jobs, 53 000 informal non-agriculture, 38 000 in agriculture and 17 000 in private households. The total employed was 16 069 000 which is the highest number of employed to date. Total unemployed was 5 781 000, 92 000 less than the 5 873 000 of Q2. For this quarter, most jobs created were in government (73 000), transport (46 000) and manufacturing (44 000), and job losses occurred in mining (17 000) and construction (9 000). For the year, most jobs were in transport (61 000), agriculture (59 000) and business services (56 000), with job losses in mining (62 000), trade (58 000), government (53 000) and manufacturing (11 000). Job losses in mining were much more than any other sector significant due to the unfavourable economic and commodity climate. Employment is quite tricky in Q3 due to a hike in seasonal employment in December, the Department would be happier if that employment would be sustained.

The rate of job creation has been higher than we have seen for some time. Total jobs increased by 1.9% and then by 1.5% in the last two calendar quarters. 523 000 jobs were created in the six months from end June to end December 2016. However, for the year employment only increased by 51 000.

The Top 3 Job-Creating Provinces by percentage for the past 3 months are North West (6.6%), Limpopo (4.8%) and Western Cape (3.0%). In terms of numbers, the ranking is as follows: Western Cape (70000), Limpopo (64000) and North West (60000).

The economic context and performance in the quarter reflects that in manufacturing the production volume was 1.1% less than Q2 in 2016, or annualised contraction of 4.4%, and manufacturing sales were R1.4 billion less in Q3 than in Q2. Mining reflects a production volume of 2.7% less than in Q2, or an annualised contraction of 10.3%. However, the value of mining sales as opposed to the volume suggests more mining improvement. As for retail, the wholesale trade contracted by 0.6% from Q2 to Q3 or an annualised 2.2% contraction, although retail sales grew in real terms by 1.7%.

Regional development and strong partnerships with other countries in the region are imperative for sustainable growth. Opportunities between South Africa and other countries in the rest of Africa include: trade, infrastructure and improved logistics.

South Africa’s trade as a whole for 2016 was R2.2trillion (imports plus exports), and the country ran a negative trade balance of R2.9billion. Trade with the rest of Africa over the same period was R437billion and the country ran a positive trade balance of R197billion.

The Minister shared a case study between SA and Zambia regarding the partnership developed that would contribute towards economic growth. Exports to Zambia in 2016 amounted to R30.5 billion, whilst the imports amounted to R2.7 billion in the same year. Exports to Zambia have always been eight times larger in value than imports from Zambia in the last eight years. The Industrial Development Corporation (IDC) has contributed towards intensifying the Zambian economy, by its approval of USD 50 million for the project which addresses power shortages in Zambia and the region in order to be self-sufficient in power, and most importantly the project utilises products and services from SA.

Another focus that the Department looked at closely was the challenge of food security, food prices and jobs in the agricultural value chain. The Competition Commission, dti and IDC intervened in the sector to circumvent these challenges. The current drought had a serious impact on food prices, on the contribution of agriculture to GDP, and on the country’s agricultural exports. There were sharp increases in Food and especially Bread and Cereals from the middle of 2015 onward. Bread and Cereal prices in January 2017 were 20% more than at the end of 2015. For the poorest 10% of South African households (about 1.6 million households), the cost of a typical basket of goods and services went up by 8.5 % over the last 12 months, as opposed to 6.5% for the richest 10% of households. The contribution of agriculture to GDP shows that in real terms, the value of agricultural output was almost 15% less in July to September 2016 than in the last three months (calendar) of 2014. There has been seven consecutive quarters of decline in agricultural output since the last quarter (calendar) of 2014. Currently (Oct - Dec 2016) there are 919 000 jobs in agriculture, from NGP (New Growth Path) adoption to the end of 2016, 245 000 jobs have been created in agriculture, or a total increase of 36.4%. This is substantially more than the percentage increase in total jobs in the economy, at 17.7%.

Given the high and increasing food prices, in Q2, the Minister directed ITAC to review the variable tariff on wheat. This review included evaluation of submissions from a range of stakeholders in the industry. Policy and trade administration issues are complex and include:

  • Balancing the sustainability of the industry and jobs with lower food prices
  • Ensuring tariffs provide sufficient protection when required, but do not raise prices when protection is not required
  • Gaining appropriate reciprocal commitment from the industry
  • Establishing transparent, responsive and reliable mechanisms to achieve objectives

ITAC has made recommendations to address the price formula. The ITAC report is current being considered.

The Competition Commission had been successful in its fight against dominance and monopolies. In 2015/16, 133 new cartel cases had been initiated by the Commission. Three major market enquiries are currently under way, including enquiries on gas, private healthcare and the retail grocery sector.

On the construction settlement in February 2009 the Competition Commission initiated a complaint into alleged prohibited practices relating to bid-rigging and collusion in construction. The investigation led to penalties of R1,4 billion against, imposed during July 2013. In October 2013, following the settlement of collusion investigations by the competition authorities, SAFCEC, the seven listed construction companies and the State met to find away to make the industry more inclusive:

  • Ensure transformation of the industry
  • Ensure the industry is competitive in the future
  • Secure a further financial commitment for state claims of over payment

The seven companies include, WBHO, Aveng, Murray & Roberts, Group Five, Basil Read, Raubex and Stefanutti Stocks. On the 11th of October 2016, following three years of negotiations, Government and the seven companies signed an agreement to transform the sector and settle outstanding and potential civil claims between parties relating to a number of infrastructure projects. The civil claims relate to the infrastructure projects in the period to 2010 that were settled as part of the Fast-Track Settlement process with the Competition Commission. During the course of the discussions, consultations were held with a number of other stakeholders, including the Black Business Council in the Build Environment (BBCBE) and regulators. The outcome of the discussion was the Settlement Agreement, also known as the Voluntary Rebuilding Programme (VRP) with four components. The first one is the R1.4 billion fine imposed by the Competition Tribunal against the colluders in the construction industry. Secondly, a reparation package which stipulates that financial contributions by the companies of R1.5 billion for developmental projects (in addition to the R1.4 billion in competition penalties previously imposed by the Competition Tribunal). Thirdly, a transformation package which stipulates that commitments to promote transformation and black South African ownership and participation in the sector, through either equity transactions or by partnering with and developing smaller, black-owned construction companies that will result in black-owned companies with a projected market value of roughly R5 billion in 2024. Lastly, integrity commitment by the company CEOs to take all steps to avoid collusion and corruption in their dealing with the State, their competitors and their customers and to partner with government in exposing all forms of corruption and tender irregularities.

With regards to competition, Clicks proposed acquiring Medicross Pharmacies in Netcare - both the 51 Front shops of Netcare as well as the 36 retail pharmacies of Medicross Pharmacies.  The Clicks and Netcare merger raised concerns around possible job losses, changes in local procurement and staff training. The merger agreement outcomes for public interest concerns and employment commitments provided that:

  • A five-year moratorium on retrenchments in SA
  • All employees employed in the Medicross Pharmacy and the Netcare hospital front shop cashiers to be transferred to Clicks
  • All employees of the in-hospital front shops other the cashiers would be retained by the Netcare
  • Clicks likely to employ an additional 65 to 90 employees

With regards to Q3 expenditure, as at 31 December 2016, the Department has spent R509.9 million out of an allocation of R674.7 million i.e. 76% of the total allocated budget. As at 31 December 2016 expenditure excluding transfers amounts to R108.2 million out of an allocated budget of R145.9m i.e. 74% of the baseline allocation. For the quarter the Department spent R168.6 million made up of transfers of R133.9 million to entities and R34.7 million spent directly by the Department. Total expenditure is 99% of the quarterly allocation of R170.5 million.

Discussion

Mr P Atkinson (DA), referred to the net employment statistics in the provinces, and asked if the employment opportunities in Limpopo were due to the agriculture primarily or something else. Secondly, looking at the tourism and the trade partnerships with African countries, there are a lot of people coming into the country and he wanted to see some data on how the Zambian economy is contributing towards tourism in SA, and vice versa. With regards to renewable energy, he asked for an update in terms of what the country is doing at the moment.

Dr M Cardo (DA) asked about the fund that was set up in conjunction with the construction companies that colluded in the construction of the stadiums – the R1.5 billion fund. Who has oversight over that fund? Who had political oversight in checking where the money is going? Secondly, in his SONA, President Zuma made it clear that the competition authorities will be used as a vehicle for market concentration in the year ahead to address the high levels of market concentration in some sectors of the economy, and he also indicated that there are changes in the Competition Act with regards to the high levels of market concentration. He asked the Minister if there is any legislative development currently under way and to shed light on some of those changes that will be made in the Competition Act. Thirdly, are there any settlements currently under way in the year ahead regarding some of the banks that were involved in the price fixing of the exchange rate between the US dollar and the Rand, and to what extent is the Department involved in the discussions of those settlements if there are any.

Mr I Pikinini (ANC) asked for an update on the progress made in the construction programme to address issues of collusion in the sector.

Mr M Mabika (NFP) noted that there was 53 000 jobs lost within the government sector, and asked what was the cause for this. He further asked the Minister to narrow it down to the departments that were affected.

Mr S Tleane (ANC) said firstly in relation with the trade with Zambia, the fact that North Korea can come to the continent and trade better with our neighbouring countries is worrying. There is no problem with North Korea doing business with African countries but it is indeed worrying. What had caused this trade partnership between Zambia and North Korea, was it the pricing structure or something else? In light of this, the investigation that the Ministry is going to conduct is very important. Secondly, can you tell us what the food subsidy structure is like in the country considering how significant food prices have increased? So how much food subsidy is provided by government in the country given the socio-economic issues facing our people. Thirdly, with regards to Murray & Roberts that sold its construction section to some black owners, do we know how they were funded?

Ms D Rantho (ANC) said that all the developmental work that the Department that is doing within the communities, only remains within those communities and the Department, it does not actually get out there to the public. The EDD is too quiet in raising social awareness about the good activities or developmental programmes that it does within various communities in the country. She suggested that the Minister needs to make his office more accessible to the public by going out to the local radio stations to inform the public on that level about what the Department is doing within various communities, so that awareness can be raised and people can be informed and most importantly have access to the office of the Minister. There are people out there with a lot of potential to do great and lucrative things for their communities, but lacked access to the Department. With regards to small construction companies that may have an interest in selling (part of their construction services or business) to the big construction companies, like Murray & Roberts, what is the Department doing to uplift those small companies in order to have access to more opportunities so that they can also grow into the level of those big companies and at least close enough?

The Chairperson welcomed the presentation. She stated that the trade information with Zambia is also much appreciated as the Committee previously requested that more case studies on trade activities with other African countries needs to be provided. Furthermore, the notes on Angola need to be re-visited, because they contained very important information about the economic progress between SA and Angola. She asked about the country’s progress around BRICS and how far has the country gone in BRICS and the establishment of the Development Bank – how far is it, and is every country committed. Secondly, what was the reason behind Limpopo slacking behind the Western Cape in terms of job creation, because it was said to be growing very well in terms of jobs but when you look at the past three months it did not do very well, so was it because of the mining sector that this happened. With regards to the Noble Plant, the last time the Committee visited, the activity was minimal there but the progress provided today shows that the Department’s intervention has brought in more participants. Concerning the 39 farmers in the Gert Sibande Plant District, are they owners of the land/farms or leasing it, and if it is a lease, who pays for it? Since they (the farmers) are supplying to Noble, how much of the Soya are they supplying to Noble and we need to know if they are making reasonable returns out of that?

The Minister replied that the EDD will be happy to provide some information on the tourism sector. There has been a sharp increase in tourism numbers. Previously, the sector was not doing well due to Ebola scares and the Zika virus in Brazil. There have been few announcements about accommodation expansions and hotel capacity in SA, so this is something that will steer the tourism sector towards a positive direction in the future. 

With regards to Limpopo, it is not actually agriculture that is the main driver of the increase in jobs in Limpopo, the two biggest drivers was construction and mining. More and more mining activities are now moving to Limpopo, there are enormous deposits of coal and other minerals in the Waterberg. The numbers show that construction accounts for 39 000 and mining 33 000 jobs, the increases are actually contributed by mostly the associated businesses that are borne within those sectors. It is important to note that the quarterly trend lines do not represent a permanent trend, but if the short term trend persists then it can be lifted.

Generally speaking we would expect the big job drivers to be WC, Gauteng and KZN, so it is rather unusual to see the job drivers happening mostly in small provinces, and if those provinces perform more than their share of the SA population then it is a great thing, because it means that you are stimulating activities that are parts of your core job drivers. In Limpopo something like Medupi has been the main driver due to what economists call the multiplier effect (activity) which creates a stimulus activity in the province into other sectors. But for something like Medupi which is small, you use that as a driver to get the ball rolling even when you down size it.

With regards to the Renewable Energy, there was a bit of uncertainty as a result of the announcement made by Eskom about the PPA. The Independent Power Producer (IPP) office which effectively falls under the Department of Energy would issue the right of a bidder to construct a plant (solar plant) or wind farm and they need to enter into a power purchase agreement with Eskom, and Eskom has raised its concerns about price. Government acknowledged the price issue but said that it has also made commitments to investors for certainty, we are trying to fund renewable energy and the regulator will ultimately compensate Eskom for the additional costs incurred for renewable energy. So there is bargaining that is taking place in the public space where all parties are trying to advantage their position. This can create investor uncertainty if the state does not clarify upfront terms and appears not to stick to those terms, so we are engaging with the SOEs to get them to be part of the programme of messaging our economic commitments well.

About the fund that was set up in conjunction with the construction companies, the money will be paid over by the companies to the National Revenue Fund, but in this case they would pay it over to the EDD first and the EDD will then pay it over to the National Revenue Fund. From the National Revenue Fund there will be an appropriation that will be brought to Parliament, and Parliament would be asked to agree that the money be transferred. The money would then go to the Fund and it will be managed by an administrator appointed by National Treasury. The selection of projects from the Fund would be done by Trustees, half to be appointed by government and the other half by the industry. The books will be audited and Parliament will ensure that there is excellent governance in the programme. With regards to the claims, we consulted with the City of Cape Town during an early stage of the negotiations regarding the construction companies but at that time the City of Cape Town had already done considerable work and it was ready to launch the claims. A settlement was reached so the process with the City of Cape Town was far more advanced and the EDD agreed that the City of Cape Town is entitled to make a decision whether to proceed or not with the court case.

According to market commentators like the World Bank, IMF, OECD, Rating Agencies, etc. – when they look at the SA economy they remark at the high levels of concentration and the pervasiveness of collusions and cartels in the economy. Some of them have put together some good pieces and a market structure of how much it costs the economy in terms of growth. There are many programmes to transform the SA economy to make it dynamic and inclusive and that will encourage the small players to compete is very useful, because those small players that are trying to break into the industry find it difficult to get into as they are competing with a colluded industry or big players which eventually cuts out the small players. This is bad for economic growth and inclusiveness of the economy, so it needs to change. The challenge is that if we take the Competition Act at the moment, what are the tools in the Act? The first tool deals with the cartels and collusion – market behaviour. A lot of companies thought that government is clumsy and ignorant to this, over the last eight years we have been able to demonstrate capability by the public institutions to find examples of collusions and come up with evidence that is credible and withstand judicial review and to be able to pursue the cases capably and competently, because all these cases ultimately go through a lot of legal loops. The second tool in the Act is looking at the abuse of dominance – price fixing provisions. On the latter, our experience has been less successful because we have not been able to get significant success in dealing with abuse of dominance. The third area is mergers and acquisitions, and the regulators are able to check when a company buys up another company promotes competition however, as indicated the Act does not look at the aggregate concentration in the market but only the effect of the concentration which is to limit competition. If you want an inclusive economy where there is opportunity the Act has that gap in its architecture, so these are the areas we have to come back to as part of looking at economic transformation. When there are specific modalities in terms of the proposed changes in the Act, unavoidably the issue of market concentration will have to be dealt with in an appropriate way, it is interesting that we have introduced a new provision in our law which is the market enquiries which was part of the package of amendments in 2008 and it was switched on a number of years later when there was a requisite capacity in the Competition Commission and the report on the LPG is about to come to the Minister and he will have to consider it and submit it to Parliament. He suspects market structure problems will be covered in the report. A change in the market structure is necessary to create an inclusive economy, so finding the right balance in all of that will be main focus going forward.

The Chairperson asked if the administrator is going to be paid from the R1.5 billion, because sometimes the money is there meant for goodwill ends up being consumed mostly by administration costs and are we not going to appoint institutions like IDC and DBSA to be administrators of the fund. In addition to that, how are the enterprises going to be identified?

The Minister replied that the agreement with the construction companies provides that the administrator would be appointed by National Treasury and it can be a public entity but it would still need some of its costs to be defrayed - someone has to pay for them and it will be coming from the fund. The agreement stipulates that the administrator will only get paid or recover the real costs not the market related costs (in percentage form) in terms of the turnover of the fund, the actual costs that were incurred to administer the fund. The trust will find a way to ensure that the public has access to the information, the first money will be coming in the financial year and there are sums that have been paid already to the fund amounting to R170 million.

With regards to the price fixing, the Competition Commission has concluded its investigation and the matter is now with the Tribunal where all the parties will be heard, and did not want comment on the details of the discussion. On the construction settlements, two of the companies have made announcements on shareholding, Murray & Roberts and Aveng, and three of the companies have selected their black construction company partners. The partnership will begin and every year the Department will get reports and there will be auditors to check the data and there is a process about fronting and the regulator will make a determination on that to avoid fronting. The payment is through vendor funding but the IDC is not currently involved but he is not aware if any application has come before the IDC yet.

In the Murray & Roberts model, a black SA consortium has taken over ownership, and hopefully they will inherit and retain all the technicality of the Murray & Roberts’s construction business. The new owners will be able in time to ensure that it is used more widely. The other part is to ensure that the construction companies themselves work with their partners of choice. The government has created pressure on them to mentor and support the emergence of black owned companies and they will be monitored year by year if they meet the targets.

On the government job losses, there hasn’t been a significant shift, and generally speaking over the last five years employment in the public sector has actually been rising. From the New Growth Path period, broadly speaking we think public employment has been robust. If public employment had not grown we would be sitting with a major employment issue. In some parts of the private sector there are significant challenges. With regards to the North Korea trade data with Zambia, the EDD will monitor whether it was a once of trade transaction or it is the start of trade partnership and if the latter is true, then there will be problems. On the food subsidy structure, there is a national policy on food and nutrition. Community nutrition development centres, which are managed by the Department of Social Development, reported that 400 000 households access food through that programme. The state has subsidised food prices in the retail sector.

With regards to Soya, in slide 25, the 39 farmers are divided as follows 23 of them farm on land they own and the remainder farm on the land that is leased, but the EDD is uncertain to whom the land is leased to and the details of the lease.  The Department will provide more information to the Committee at a later stage. 

The meeting was adjourned.

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