Manufactured goods: National Treasury briefing

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Trade and Industry

10 May 2017
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

National Treasury spoke about the Manufacturing Competitiveness Enhancement Programme (MCEP) consisting of two components. However, they focused on the Production Incentive Programme (PIP) component which was a cost-sharing grant to buy new equipment and upgrade enterprise processes which was managed by the Department of Trade and Industry (DTI). National Treasury and DTI had good expenditure and only underspent in one year (2013/14); primarily because that was the time the MCEP was still starting off.

Challenges arising from the MCEP included managing time to assign and allocate funding, non-compliance with the requirements of the programme, budget that was under pressure causing shifts in funding and approvals of applications, leading to exceeding time allocation. National Treasury advised DTI accordingly to try and improve these disbursements of the MCEP, which included turnaround inspections, providing non-financial support for the beneficiaries and ensuring that claims were correctly submitted. From the Treasury side, the programme was extended by one year until July 2018. Long term view of the programme would depend on the review committee. In total DTI received R5.7 Billion for incentives. National Treasury used incentives to allow motivation of firms to invest more in the economy of South Africa.

Members asked how National Treasury measured the cost-benefit that these incentives had. Why would beneficiaries feel compelled to modernise their factories today if they did not know if the opportunity would be available in five or 10 years, considering that the MCEP did not have a long term plan? Did National Treasury consider Employment Equity when allocating these funds? Was Treasury cognisant of the working conditions when they conducted inspections? What informed the deductions on the various incentives? Was the DTI looking at the issues of the relationship between non-compliance and receiving of funds? What was the total amount of money that the government was spending on incentives for all the departments?  What did issues around empowerment equity add up to? What was this benefit? What were the broader qualitative cost involved in that issue?

The meeting concluded with remarks from the chairperson where she alerted Members that the DTI brought additional books where more information regarding the incentives could be found. However, she further advised that the Department re-look its’ layout and advised them on a broader than a clinical approach when the Department did their incentives and programme reviews with the Department of Planning, Monitoring and Evaluation (DPME).

Meeting report

National Treasury

Mr Owen Willcox, Chief Director: Economic Services, National Treasury, explained that their job as the National Treasury was to monitor budgets, spending, policies and implementation of line departments of government who assisted the departments when it needed to request for funding or assistance with any work regarding the Public Finance Management Act (PFMA). He briefed Members on the Manufacturing Competitiveness Enhancement Programme (MCEP), where he stated that the programme was launched in 2012/13 as part of the Economic Competitiveness Support Package (ECSP) aimed at encouraging firm competitiveness improvement of South African companies and sustaining employment, which was implemented due to the global financial crisis and as a way of improving the state of South Africa.

This cost National Treasury R25 billion over six years, whereby the MCEP was the largest component of the expenditure. MCEP consisted of two components, namely Production Incentive Programme (PIP) which was a cost-sharing grant to buy new equipment and upgrade enterprise processes, which enabled green technology and feasible studies. This first component was managed by the Department of Trade and Industry (DTI). The second component was the Industrial Financing Loan Facility, which was a loan facility for working capital funding for manufacturing business at a preferential interest fixed rate of 4%. This second component was managed by the Industrial Development Corporation.

He then spoke about the allocation’s table of MCEP, which indicated how much funding was allocated to the programme. He said that as per the table, the ‘original allocation’ referred to the amount that was originally allocated in February, whereas the ‘adjustment estimates movements’ referred to the amount when money was moved around in October and ‘ virements/shifting of funds approval’ referred to the shifting funds around the departments that carried out in other times of the year. If money was moved within the division of the vote, the Director-General had the discretion to move the money into different uses of the funding. National Treasury noted that it usually started with R1 billion a year, however, for the past two years it started with R2 billion of the original allocation going towards MCEP and there was also times whereby the funds shifted substantially in and out of the programme.

He stated that the expenditure of the original budget allocation was good based on the percentages. There was under spending in one year (2013/14), primarily because that was the time the programme was still starting off. However, once all systems were up and running, expenditure was managed well; in fact, he stated that recently the demand of the incentive was greater than the available budget. He also indicated that there was substantial funding, however, there was also a demand for these programme and some money was moved in and out by the Department. In 2017/18 MCEP was allocated R1.49 billion and an additional R1.35 billion in 2018/19, however the broader package of the allocation expired in 2017/18, and an extension for the ECSP package allocation was made for 2018/19.

Challenges from the DTI were that of managing time to assign and allocate funding. The Department only had a one year funding window that normally ran out before the end of the year because the demand of the programme was high, thus, the Department ended up assessing high numbers of applications when they could only make a payment in a year or sometime in two years’ time. The other challenge was with regards to non-compliance with the requirements of the programme. The other challenge was related to shifting away of funding because the budget was under pressure and the Department felt that other programmes were a priority thus shifting the money support of the Automotive Investment Scheme (AIS) and Enterprise Investment Programmes (EIP). However, he also stressed that there was also years where the money was shifted back into the MCEP. The last challenge related to current liabilities of the MCEP being at R2.48 billion, based on the available allocation. In this instance the DTI was not allowed to approve when the approvals had not exceeded the remaining allocations.

On the matter of engagements between the DTI and Treasury, Treasury kept constant communication with DTI on the issues concerning the management of its’ incentive programmes (including MCEP) given the tight funding constraints. Issues of the MCEP was mostly based on turnaround inspections, providing non-financial support for the beneficiaries and ensuring that claims were correctly submitted. DTI was advised accordingly by Treasury to try and improve these disbursements of the programme. Moving forward with the plans and sustainability of the programme, he mentioned that the ECSP was a six year programme, as a response to the financial crises in South Africa. This programme ended in 2017/18; however, there was a feeling and a perception that the programme was still necessary for the South African economy, firms and companies. As a result, there was currently a review of all business incentives across government, which would cover most of the DTI incentives, jobs by Treasury, science and technology incentives for research and innovation, tax incentives, public procurement and trending through labour to look at a broad view of incentives. This review would be used to review and inform the budget process in December. The programme was extended by one year until July 2018 from the Treasury side. Long term view would be depended on the review committee.

The Chairperson asked the Director-General of the DTI to first clarify a few questions that arose from the presentation before she allowed Members to ask questions.

Mr Lionel October, Director-General, DTI stated that on the question of inspections and management of the teams, as accounting officers and officials of the departments they had a distribution duty and as a result they needed to ensure that the tax payers money was used to the purpose it was initially intended. Therefore, the Department had to consult with a manufacturer who was producing value for the economy, and ensured this by making pay-outs in two or three tranches. The Department also acknowledged that it could not inspect all firms, but it tried to. The Department also inspected premises to ensure advanced competitiveness and made sure that machines worked, that there were people employed to work with the machines and also insisted on seeing the machines operate. The inspector monitored that the incentive went to right person and for the right purpose. On the point of management of scheme, he state that Ms Malebo Mabitje-Thompson, Deputy Director General, Industrial Development Incentive Administration Division, DTI, would elaborate on that industrial process. He also mentioned that the managing of the budget was ensured through approving persons from year two and not year one.  For the R5.7 billion the DTI received for incentives, it needed to manage its bulky investments whereby movement of incentives took place, depending on the demands of investors which had in return proved to be a complex process. However, the Department managed to do this very well, as it had never over committed or over spent in terms of its budget. This programme managed to save the manufacturing industry from the financial crises and draw massive investments.

The Chairperson mentioned that three to five years ago, successive Ministers of finance and the President stated that incentives were the sharpest instruments to get results but it seemed the emphasis on this reduced money as there was direct cooperation to the reduction of the funds. She then questioned if the Members of Parliament misunderstood what was said. How did Treasury see what incentives could produce?  Why would it even agree to incentives? What did Treasury anticipate to be the result?

Mr Willcox mentioned that he was not sure of the exact amount of reduction per month, as the ESCP had a substantial increase in the amount of money available. Incentives played a role in motivating firms to invest more. Treasury used incentives to allow motivation of firms to invest more and locate themselves in special economic zones. The incentives review scheduled would play a role in determining where the programme went as there was no questions on whether incentives were important or not. 

Discussion

Mr D Macpherson (DA) stated that they could all agree that incentives were important. However, he wanted to know what the cost benefit of incentives was for every R1 distributed; what went back into the economy and how many jobs were developed. Once that was developed, maybe there would be incentives through a different light. He also agreed with why the MCEP was first established with regards to its’ response with the financial crises and agreed that it achieved its objective in that sense. He then felt it was important that the DTI look into what it wanted incentives to look like and did in the next five to 15 years. The DTI was also aware that in order for South Africa to compete globally, it needed to offer incentives just like the developed countries were doing. However, he was concerned that MCEP was coming to an end and there was no five year plan rolled out. Instead there was only a one year plan and as a result those in businesses who were planning to modernise factories had no certainty about their future. If the beneficiaries only got the money in year two or three after they bought the machinery, why would beneficiaries feel compelled to modernise their factories today if they did not know if opportunity would be available in five to ten years? 

He said that his biggest concern was that this was the question he was asking the Minister since 2015, where Mr Lionel October was present, and the answer that continuously came out from them was that they were engaging with National Treasury. He did not know how many times the DTI and Treasury met to communicate, but he wanted to know why there was no plan for the long term for incentives. There was discussion for tailoring and creating new incentives for Small, Medium and Micro-sized Enterprises (SMME), tax incentive and other type of incentives; was there something new? He expressed his disappointment as he was hoping for the cost benefit plan and was hoping that DTI would come back with something more that showed stakeholders who benefited and put something more on the table and partner with the private sector in putting packages together with a sector specific like the Automotive Programme.

Mr A Williams (ANC) referred a question to the National Treasury where he asked whether it had anything that looked at transformation within its review. With the R5.7 billion for incentives that it had, what was its long term review? Did it only look at job creation? Was there nothing about employment equity? There was an employment equity presentation yesterday and he was shocked that there was not any transformation. Has Treasury considered the implications of using these incentives to try and incentivise the private sector to try and comply with legislation, which was not currently happening? In the National Treasury’s long term review, were the incentives just for technical stuff about buying machines meanwhile the company did not comply with legislation? Was there a relationship between non-compliances and receiving of funds? And if not, why not.

Ms P Mantashe (ANC) stated that she needed clarity on slide five, bullet four, regarding the cumulative liabilities/outstanding payments on incentive programme being a challenge at R2.48 billion. She also asked the DTI what specific companies have benefited from the programme and the level of jobs that were saved through the programme, so that Members were able to see if the money that was placed into the programme brought about results. She was also passionate about what Mr Williams (ANC) said with regards to monitoring the incentives

Ms S Van Schalkwyk (ANC) stated that there were often companies that were being revived with a lot of money pumped into them. However, when you looked at the conditions of the workers in those companies, there was often no proper monitoring taking place as there was only focus on the financial side. When there were site visits for monitoring, did the Department also look at working conditions of the employees? Was there sufficient human capacity to enforce these proper inspection functions?

Ms Malebo Mabitje-Thompson, Deputy Director: General-Industrial Development Incentive Administration Division, DTI, replied that working conditions was also a condition for incentives and it was something the Department was obligated to check and it included ensuring that workers who were employed were insured by the Unemployment Insurance Fund (UIF). Moreover, the issue of worker’s salaries was also checked and that the supported companies must adhere to legislation in terms of wages for the applicable sector. The inspectors therefore checked and confirmed that the companies complied.  In terms of Human Resources, the Department would always want more; however, they had sufficient capability and also employed consulting engineers where the Department lacked capacity in technical inspections.

Mr Willcox stated that in terms of the cost-benefit ratio, that was something the DTI could speak about. He understood the frustration of the long terms plans that has not really been looked into. National Treasury was constrained by the budget process and the reduction of the budget review. The one term extension was a review and ideally they were looking into six years. In terms of communication between DTI and Treasury, they communicated at least weekly about processes and improving. For transformation objectives, the BEE certificate was one of the requirements to receive any funding from DTI. With regards to clarity on slide five, bullet four, regarding the cumulative liabilities/outstanding payments on incentive programme being a challenge at R2.48 billion, he stated that the amount was for those approved applications who had not yet received payment of funds, meaning there was commitment to pay with no disbursement of funds.

Mr October spoke on the impact analysis and the level of jobs that were saved through the programme.  There were a number of reviews taking place, one of them from National Treasury, of all the incentives and the review would point out the impacts of these incentives. However, the World Bank already released a report which stated that there was stability in the manufacturing sector due to incentives; for every one manufacturing job, there were four jobs in the economy created. He made an example based on when one made a car; one would need different parts from various manufacturers. In the Automotive industry there was 35 000 people employed, 70 000 in the various components of the Automotive industry and another 100 000 in after care sales, dealerships and service departments. The auto services as a whole had 200 000 people employed, and the incentives were allocated within the sector. This was called the productive derivative trade driven by the various car companies like Toyota and Mercedes-Benz, who determined what happened and the incentives were given to the line of assemblies. Currently the manufacturing sectors employed 1.7 billion people, according to the World Bank. 5 million people were sustained by the manufacturing sector, besides this there were also tax returns paid into the fiscals. However, the DTI could not tie its incentives directly to jobs, because the number of people it employed depended on the cycle; if due to the holidays people were not buying cars this then meant there would be a drop in sales leading to a cut down in the workforce, whereas the company already invested in machinery. DTI then gave incentives because of the machinery that would enable the companies to have the capacity to employ more people depending on demand; therefore they could stipulate how many people must be employed based on a certain amount the DTI gave out.

He said that through the inspection the Department ensured that the requirements of what was needed to be done, like investing in plants and equipment, was followed through, so that when the cycle allowed, the companies would have the capacity to produce and not import. There was no production without capital and having the machinery in the country was a way of ensuring that people were employed based on the cycle. He welcomed all the support given by Mr Macpherson as the DTI was struggling since 2009 due to the GEAR paradigm and as a result it never received money from National Treasury and the DTI budget declined. The advice it received thus far was that incentives did not work. The new incentives caused a massive increase in the budge in the last five years as it introduced the textile scheme in the budget. There was also a need for a generic and central incentive. The tax incentive had to be broadened as it was not a burden on the fiscal factor. It has only stabilised the manufacturing sector but it has not grown. It also needed to branch off to other sectors like poultry that produced a one to an eleven jobs ratio.

Chairperson paused the meeting to alert Members of the new Members and sent out praises to the redeployment of Mr N Koornhof (ANC) who was leaving the Committee. She praised him for being an active, punctual and disciplined Member of the Committee. He acknowledged the praises and gave his gratitude to the Chairperson and all the Members of the Committee.

Mr S Mbuyane (ANC) excused himself for being new to the meeting, and asked the Department as to what informed the deductions on the various incentives as there were many people outside who required this funding?

Ms Mantashe requested clarification on bullet four, slide five. What did the liabilities improve as the incentive matured mean?

Mr Williams stated that his previous question was not answered and that employment equity was not BEE. Employment Equity was about the staff in a company and the control. He reiterated his question and asked if the incentive in any way connected to the government policy of economic transformation? If not, why not? What criteria was used to measure the effectiveness of this transformation because it seemed to him that the DTI and National Treasury were not looking at transformation policies of government when they dished out billions to fundamentally white owned and controlled businesses. Why was employment equity not part of the criteria for incentives, in particular to compliances of labour legislation? Because it seemed that the DTI was handing out incentives to companies that gave jobs, however, at the same time its businesses that were not complying with the laws of the country; why was the DTI not looking at these issues? 

Mr Macpherson mentioned that out of interest, Europe was clear with industries that were big drivers of the economy. It required incentives and government support in order to compete with lower cost countries like Asia and South America. South Africa was slowly moving into that mind-set. He thought that Europe understood that it had the worst forms of projectionist rackets in the world but they did not care because they were looking after their market interests and their jobs, but they also knew for every one euro that went into incentives, what came back into it, hence he stressed  that the sooner the information of the impact of incentives in ratio was gathered into the public domain, the quicker the businesses and government would understand what the incentives did for the economy. Therefore, he stressed that the DTI looked into that.

He also stated that he loved the idea of the general incentive because in as much as it was important to have set incentives, there were applications that did not fall into those sectors and he thought agriculture was one sector that was overlooked in South Africa, whereas there were a million jobs in agriculture yet agriculture was treated like it was going to take care of itself. The Department needed to get involved in the agricultural sector. He also mentioned that in the next week he would be attending NAMPO, the biggest agricultural show in the hemisphere where people from all over the world came to buy machines and this show would take place in Bothaville, Free State. It would be nice to see members from the Department as there were various big opportunities that arose in the show. He made an example of John Deer selling 12 tractors for R7.5 million rand each in one day. There were also small businesses manufacturing their own machinery and the Department had no idea as to what was going on thus, these small businesses were doing their own thing without any government support. This was exactly where DTI had to sit down with these small businesses and ask them how to collaborate in incentivising the specific industry. He asked that Mr October find money and takes a stand as there was still time to have engagements of this nature that would help them focus their incentives.

Mr Willcox mentioned that the R2.4 billion was the amount that was not dispersed whereby the applications were approved, but the money was not paid out. Over time the mount declined because money was dispersed without further approvals. Agriculture was not DTI’s responsibility; the government gave agriculture, forestry and fishing about R6 billion a year, rural development about R10 billion a year meaning there was substantial funding going into agriculture with most of the money going into transformation of agriculture sector. The National Treasury was focusing on land reform and support to those beneficiaries and it was where lot of the funding went.

The Chairperson then asked in response to Mr Willcox that if the DTI was not allocating any funds towards agricultural processing, as she was under the impression that DTI actually did.

Mr Willcox apologised saying he referred to primary agriculture.

Mr October spoke on the industrialisation and transformation where he stated that the Department was working on championing these factors, as it introduced a factor whereby it stated to businesses that by their second and third year, they must be a transformed entity. Across all their incentives the Department also introduced a black empowerment level companies must achieve. The Department still needed to put pressure on companies to transform. It has started processes to ensure there was a link in industrialisation and transformation.

Mr Stephen Hanival, Chief Economist, DTI, briefly touched on the question that Mr D Macpherson (DA) asked earlier regarding the cost-benefit analysis. On a number of the DTI’s incentives, they have done very detailed incentive specific reviews. All the businesses had very detailed reviews where all the required calculations would have been done. The Department would be coming back to the Committee next week to share some of the rapid appraisals it had. The Department has not yet done a detailed review of MCEP yet because it was a relatively new incentive one looked at the time frame to get an incentive to run for results. However, the Department knew that for every one rand that the Department paid out, it got about four rand in private sector investments. The big incentive review would give a bigger picture of the incentives review. The World Bank that the DG was referring to also critically spoke on the incentives in South Africa.

He said that policy certainty was also critical, not only on ensuring that there was a commitment to infrastructure and logistics, but incentives were also a critical part of policy. For example, in the United Kingdom (UK) there were now talks on reducing the tax rate in the context of Brexit. UK was trying to mitigate that impact. In South Africa’s context there was a need of a ten to 15 year view on where the incentives were going if there was an expectation to see structural change and growth of the manufacturing chain. The DTI needed to explore those issues a bit more. He concluded by stating that he has actually attended NAMPO before where he spoke as the head of agricultural processes at DTI and one of the interventions that the Department developed,  stemming from NAMPO, was around the fleet sector, where the soil bean crate was imported from Argentina into South Africa. The Department therefore agreed that it was critical that expos like NAMPO be attended

The Chairperson also asked as to how the DTI would be managing the additional allocation in 2018/19 and the other aspect that it could answer to when it came back next week was on the black incentive industrialist; she would love to see a matrix to see where the incentives were going because she could imagine no general would win a war if he did not know where his troops were going. She did not know where these incentives were.

Mr Williams posed a question to National Treasury where he asked the total amount of money that the government was spending on incentives for all the departments?  

The Chairperson based her knowledge on her Masters course in budgeting where she asserted that the issue around cost-benefit analysis was that it was clinical and as a result it would not entirely be helpful. Therefore, the Department needed to unpack the cost-benefits and bring in what Mr Williams said regarding empowerment and what Mr Mbuyane mentioned as well. These issues around empowerment equity, what did it add up to? What was this benefit? What were the broader qualitative cost involved in that issue?  And she hoped that the study that the Department of Planning, Monitoring and Evaluation (DPME) would undertake would be broader than a clinical approach. The World Bank itself was taking the broader view of things where it included social elements which were critically important now, and she asked that the Department took these into consideration. The Committee would also ask the Department for a date where they could get the Deputy Minister of DPME to come along to brief the Committee broadly on some of the work it was doing as she believed that there was a link in the work they did.

Mr Willcox said that in terms of the industrialised incentives, he assumed it was R10.2 billion over a medium term, however he was happy to provide more detail as there was also a whole range of incentives that he could discuss online.

Ms Mabitje-Thompson mentioned that the 2018/19 allocation included agro-processing incentives which were for a limited period, which allowed the Department to do a pilot project which was sector specific until it got something that would cover for a longer period of time, whereby an extensive set of proposals could be included with generic support across all sectors. The Department started with agro-processing as one of its sector specifics; it would then look at what it needed too in the fabrication sector.

The Chairperson mentioned that Members had to be in awe of the valuable packs of publications they received from the DTI. However, because the publications on the Incentive Monitoring Report 2015/16 had valuable information to them, she assumed that the 2016/17 one would also be done in due course. She mentioned that she has not studied it yet but it was important that when people read a book of this nature that the layout needed to be critical. The DTI made the mistake of typing words on the header and margins of the pages. She stated that it was proven on a psychological study that there was an eye span in reading, hence newspapers had columns. She advised them that given the layout must be important, as they wrote in the margin, they should at least have three centimetre margins.

The meeting was adjourned. 

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