Industrial Policy Action Plan (IPAP) 2017/18 to 2019/20 briefing

NCOP Trade and International Relations

02 August 2017
Chairperson: Mr E Makue (ANC, Gauteng)
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Meeting Summary

The Committee received a briefing from the Department of Trade and Industry on the new iteration of the Industrial Policy Action Plan (IPAP) 2017/18 – 2019/20.

IPAP supported radical economic transformation by an ongoing effort to fundamentally change the structure of the economy. The manufacturing sector was considered key. There were very few if any cases at any time in economic history where a country had achieved sustained economic development that had not been led by manufacturing. That being said one of the core objectives of the IPAP was to diversify the economy and to provide strong support for value added manufacturing. The briefing continued with an overview of the IPAP transversal focus areas and IPAP sectoral focus areas. The IPAP transversal areas were public procurement, industrial financing incentive schemes, innovation & technology, Special Economic Zones (SEZs), developmental trade policy and lastly African industrial development. The IPAP sectoral focus areas were divided into sectoral focus areas 1 and 2. Sectoral focus areas 1 were automotives; clothing, textiles, leather & footwear; metal fabrication, capital & rail transport equipment; agro-processing; forestry, timber, paper, pulp and furniture; plastics and lastly chemicals, pharmaceuticals & cosmetics. Sectoral focus areas 2 were primary minerals beneficiation; green industries; business process services; water and sanitation; marine manufacturing & associated services; aerospace and defence and lastly electro-technical & white goods industries.

Some key challenges that SA faced was deindustrialisation which saw manufacturing shrinking from a peak of 28% of Gross Domestic Product (GDP) to just over 13% over the past two decades. Since 2008 manufacturing investment as a share of GDP had remained below the 25% needed for sustained economic growth. Deep seated skills shortages and mismatches had also acted as barriers to growth. Domestic economic constraints included escalating electricity prices, high port and rail costs and road transport externalities. Another challenge was policy uncertainty & programme misalignment. Examples would be weak compliance with legal procurement requirements by government departments, mining localisation, beneficiation and misalignment between State Owned Companies’ (SOCs’) mandates and industrial policy.

The DTI was asked what the progress on the establishment of shipbuilding at Saldanha on the West Coast in the Western Cape was. Members also asked where the metal for the manufacture of locomotives in SA came from. Was the steel used for the manufacture of locomotives South African? Members were pleased that the steel producing Evras Plant had been reopened. Members observed the importance and greater impact that the services sector was having on economies. Concerns were raised about SA lagging behind on attracting overseas visitors to SA. Members observed that there was a total of 150m Chinese that travelled abroad. SA’s share of this market was small. Chinese nationals not only travelled for leisure but for business purposes as well. They were always on the lookout for business opportunities. A further observation made was that Chinese, Russians and Indians often travelled to countries like the USA and the UK for education purposes. Members once again felt that this was a missed opportunity for SA. In as much as members appreciated that the automotive sector was doing well the downside was that the sector was very technologically based and that the human labour element was being minimised. Members had during their international visit to Singapore and Malaysia observed that industry was not huge in those countries but rather that their services sectors were. It seemed that the key to their success was education. The logical conclusion that could be drawn was that South Africans needed to be educated in order to bolster its services sector. The reality for SA was that its mineral resources were becoming depleted and it had to start looking at alternatives like growing its services sector. Even the local steel industry in SA was experiencing difficulties as it was cheaper to import steel from China. The problem was that local steel producers had not reinvested in their businesses when things had gone well. Given the difficulties that SA’s steel industry was going through the DTI was asked what it was doing to prevent job losses in the industry. Poland was another example mentioned by members to have a booming services sector. Once again education was key to success. The DTI was asked whether the automotive and the rail sectors were doing well. Members were concerned that SA had wasted funds on the purchase of trains that could not even run on SA’s rail tracks. Given that the IPAP mentioned water and sanitation members asked the DTI how it assisted municipalities when it came to water scarcity. Members felt that on the structural challenges in the South African economy government needed to come up with policy to address it. Policy uncertainty also needed to be addressed. Programme misalignment had to be resolved. It was additionally felt that government needed to take stronger action against entities which sourced components from abroad instead of sourcing them locally. Localisation was of utmost importance. Members pointed out that there seemed to be a lack of exports from SA to Africa. Members felt that SA should be having its foot in the door when it came to exports to Africa. Africa had huge potential. The DTI was asked what efforts it had in place to ensure exponential growth in exports to African countries. Increases in exports could help with job creation in SA. Members did raise concern about the veracity of challenges that SA faced on exports to Africa. The reality was that agriculture was huge in Africa and SA had to grab hold of the opportunity to export agricultural products like tractors and seed etc to Africa. Members asked what the DTI’s plan was on the recycling of plastics. Not only would recycling save the planet but it would also have financial spinoffs.

The Committee also adopted outstanding reports.    

Meeting report

Briefing by the Department of Trade and Industry (DTI) on the new iteration of its Industrial Policy Action Plan (IPAP) 2017/18 – 2019/20
The delegation from the DTI comprised of Mr Garth Strachan, Deputy Director General: Industrial Development Policy Development Division, and Ms Zukiswa Kinani, Chief Director: Industrial Policy.

Mr Strachan undertook the briefing. The policy context of the IPAP was elaborated upon. It was a key component of President Jacob Zuma’s Nine Point Plan. IPAP supported radical economic transformation by an ongoing effort to fundamentally change the structure of the economy. On employment, job creation was key and there was an ever stronger focus on labour intensity in key sectors of the productive economy. The manufacturing sector was integral. There were very few if any cases at any time in economic history where a country had achieved sustained economic development that had not been led by manufacturing. That being said one of the core objectives of the IPAP was to diversify the economy and to provide strong support for value added manufacturing.

The briefing continued with an overview of the IPAP transversal focus areas and IPAP sectoral focus areas.
IPAP 2017 – 2018 Transversal Focus Areas:
Public Procurement
- the emphasis was on designations and local content. Two important initiatives were the National Industrial Participation Programme and the Competitive Supplier Development Programme.
Industrial Financing Incentive Schemes - Initiatives included the Black Industrialists Programme, the Automotive Investment Scheme, the Industrial Parks Revitalisation Programme and the Cluster Development Programme.
Innovation and Technology - Technology transfer and diffusion would be ensured. Locally developed technologies would be adopted and commercialised. There would also be large research and development programmes.
Special Economic Zones (SEZs) - It included the designation of new SEZs, institutional and capacity development, rapid infrastructure development and the on-streaming of secured investments ie foreign direct investment
Developmental Trade Policy - Technical infrastructure realignment would take place ie IPAP and 9 Point Plan. The plan was to do developmental tariff reform and to have a clamp down on customs fraud and the illegal economy etc.
African Industrial Development - The intention was to build regional investment, trade and industrial development integration. To have an industrial knowledge repository, undertake value chain research and do capacity building. There would also be cross-border industrial projects. 

IPAP 2017/18 Sectoral Focus Areas 1:
Automotives
- An Autos Master Plan was envisaged and improvement in competitiveness would be strived for.
Clothing, Textiles, Leather and Footwear - Monitoring the impact of the Clothing and Textiles Competitiveness Programme would be done. The clothing and textile incentive would be revised.
Metal fabrication, Capital and Rail Transport Equipment - Designation and localisation would take place. Company level competitiveness enhancement would take place and there would be a jewellery industry support programme.
Agro-processing - An Agro-processing framework would be put in place. In the past the focus had been mainly of sugar, wheat and maize. The focus should be on high value items like fruits and nuts. There would also be a niche opportunity programme.
Forestry, Timber, Paper, Pulp and Furniture - Programmes planned was a furniture competitiveness programme, a regional development programme in the forestry value chain and a SA paper recycling programme.  Furniture market access development would also take place.
Plastics - Designation and localisation would take place. The plastics market was distorted as SASOL had a monopoly. Efforts would be made to encourage plastics recycling.
Chemicals, Pharmaceuticals & Cosmetics - A chemicals and bio-chemicals development plan and a medical devices supplier development programme were to be developed. Preferential measures would be put in place for locally manufactured medicines. SA essentially at present did not have a chemical sector but rather had a chemical processing sector.

IPAP 2017/18 Sectoral Focus Areas 2:
Primary Minerals Beneficiation
- Maximisation of the industrial potential of Southern African gas reserves would be ensured. Energy storage development and fuel cell industry development would take place. In addition steel sector supply-side interventions would be put in place.
Green Industries - A policy roadmap for climate -compatible industrial development and a Strategic National Smart Grid Vision for the South African Electricity Industry was on the books. 
Business Process Services (BPS) - Implementation of the new BPS incentive would take place. Talent development for the BPS sector was also planned.
Water and Sanitation - A Water Industrialisation Development Plan was to be developed. Desalination in manufacturing and advanced wastewater technologies in manufacturing was being looked at. SA had to look at local solutions for its water problems.
Marine manufacturing and associated services - A designation and localisation programme was intended. Other programmes covered components supplier development and skills development. Additionally there would be tariff measures to encourage domestic component manufacturing.
Aerospace and Defence - Technology enhancement for high value manufacturing in the aerospace industry would be done. South African companies Denel and Aerosud were providing components for aerospace giants Boeing and Airbus.
Electro-technical & White Goods Industries – Local procurement of vaccine refrigerators would be encouraged. There would be a supplier development programme for white goods industries. In addition there would be a localisation of products largely procured by the National Department of Public Works.

Challenges 2017 - 2020
Some key challenges that SA faced was de-industrialisation which saw manufacturing shrinking from a peak of 28% of Gross Domestic Product (GDP) to just over 13% over the past two decades. Since 2008 manufacturing investment as a share of GDP had remained below the 25% needed for sustained economic growth. Deep seated skills shortages and mismatches had also acted as barriers to growth. Domestic economic constraints included escalating electricity prices, high port and rail costs and road transport externalities. Another challenge was policy uncertainty & programme misalignment. Examples would be weak compliance with legal procurement requirements by government departments, mining localisation, beneficiation and misalignment between State Owned Companies’ (SOCs’) mandates and industrial policy.

Discussion
The Chairperson pointed out that on the transversal component the National Department of Tourism and the Department of International Relations and Cooperation worked on aspects of the IPAP. There were however some aspects of the IPAP that was beyond the ambit of the Committee. He asked what progress was being made on the establishment of shipbuilding at Saldanha on the West Coast of the Western Cape. The Committee would be going on oversight to Saldanha in the near future. He also asked where the metal for the manufacture of locomotives in SA came from. He added that members had read that the South African Bureau of Standards (SABS) could not be given instructions by the DTI on the localisation of the manufacture of locomotives at Koedoespoort. Was the steel used for the manufacture of locomotives South African? The good news was that the steel producing Evras Plant had been reopened. The Committee needed to engage more on issues. Issues around Eskom also needed discussion. The issue was how best the Committee could engage with the DTI on the efforts that it was engaged in. He noted that there was a Brazil, Russia, India, China and SA (BRICS) Bloc meeting taking place that the Minister of Trade and Industry, Dr Rob Davies was attending. One of the major discussion points over the Gauteng economy was the services sector. The Committee was in possession of report which spoke to SA’s role in BRICS. SA was lagging behind on attracting visitors from abroad to SA. There was a total of 150m Chinese that were travelling. SA’s share was small. Chinese nationals also travelled for business purposes. They often looked out for business opportunities. On the transversal element education was also important. Chinese, Russians and Indians often travelled to countries like the UK and the USA for education purposes. They did not travel to SA. The Committee needed to do oversight on education especially on higher education. It was all good and well that the automotive sector was doing well but the downside was that it was very technologically based and the human labour element was being minimised. 

Mr Strachan, on shipbuilding, stated that SA could not compete with countries like China and Korea. There was a global glut on ships. Even countries like Scotland who used to be big in shipbuilding no longer did it. SA focused on niche markets in the building of tug boats and ship to shore boats etc. SA however needed to build on what it was currently doing. The idea was for Saldanha to act as a hub to service the West Coast in relation to oil and gas requirements in the provision of pipes and transformers etc. He pointed out that Denel even had a subsidiary called Denel Marine which worked out of Simonstown. He explained that Evras fell under the Industrial Development Corporation (IDC). Part of Evras had been reopened. He pointed out that not all foreign direct investment was about milk and honey. Evras for instance had sweated their assets. The lesson learnt was that when there was foreign direct investment to take over a South African manufacturing plant careful consideration should be given to what the intention of the investor was.

Ms Kinani noted that Operation Phakisa had identified Saldanha as a hub. It was a purpose built oil and gas structure.

Mr W Faber (DA, Northern Cape) remarked that the Committee had learnt a great deal from its international visit to Singapore and Malaysia. It seemed as if industry was not too big in those countries but rather that they had a boom in their services sector. The apparent key to their success was education. People in SA needed to be educated. Mineral resources like gold and steel in SA was becoming depleted. SA needed to consider alternatives. The local steel industry was going through a difficult time. The completed imported steel product was much cheaper than the local product. Steel industries in other countries often were subsidised by their governments. SA did however impose tariffs on the import of steel to try to protect the local steel industry. Even power plants being constructed in SA were using steel imported from China. The problem with local steel producers like Highveld Steel was that when things were going well they did not reinvest profits that were being made. He had recently visited Poland and had observed that its services sector was doing well. Poland even had deflation for the last five years. Key to their success was education.

Mr Strachan begged to differ with Mr Faber and believed Singapore to be a highly industrialised country. He explained that services were often labour intensive. Services provided inputs for mining and agriculture. Sustainable development could not be based on services. For the services sector to be sustainable a foundation on manufacturing and production was needed. Singapore was a huge manufacturer and was a highly industrialised state. On steel, dumping was taking place. The DTI had raised tariffs on steel imports to discourage importation. It was a concern that SA should not lose its primary steel production capability. Steel giants like ArcelorMittal had huge influence in the market. If SA lost its steel manufacturing capability then it would become a price taker. The issue was about how SA could maintain its steel producing capability. The DTI was trying to assist. He noted that the DTI had provided incentives to industries like the clothing industry. This had allowed the industry to reinvest funds in their businesses. The result was that many businesses had raised their games.   

Mr M Chabangu (EFF, Free State) asked whether the automotive industry in SA was doing well albeit under difficult circumstances. Was rail also doing well? Trains that could not run on South African tracks had been purchased. The steel producer Iskor was doing well even though circumstances were difficult. China could however produce steel at a much lower cost than SA. This meant that factories in SA closed down. What were the DTI’s plans to prevent job losses? Given the scarcity of water in SA what was the DTI doing to assist municipalities given that the IPAP spoke to water and sanitation. In the Free State locals near the Sterkfontein Dam were not supplied with water from the Dam but Gauteng Province were.

Mr Strachan said that SA’s automotive industry was doing well even though circumstances were difficult. However opportunities for export were difficult. African countries had policy problems. African countries imported second hand vehicles from Europe and the USA etc. It was a problematic state of affairs. SA was working closely with countries like Nigeria and Kenya to establish an African automotive industry. This was a long term effort. The DTI had a master plan for the automotive industry. The intention was to secure conditionalities to ensure high levels of job security, black economic empowerment and localisation. He felt that no policy instrument should remain static. He explained that the DTI had no responsibility towards municipalities. Where municipalities were responsible for electricity supply there had been triple digit increases in prices. Water was another major problem of municipalities. On rail the Portfolio Committee on Trade and Industry was dealing with it. Levels of localisation by Transnet and the Public Rail Agency of SA (PRASA) were sub optimal. The same could be said about Eskom. Local procurement was sub optimal.

Mr M Rayi (ANC, Eastern Cape) referred to the themes mentioned in the briefing and noted that they should have been broken down for members. It would have given members insight into what the DTI was doing. He stated that previous IPAPs had listed one of its objectives being “supporting labour absorption in industry” but with the current IPAP it was not mentioned. On the structural challenges in the economy he felt that government needed to come up with a policy in this regard. Government should also address policy uncertainty. If programmes were misaligned then the issue needed to be addressed. There was after all a Department of Monitoring and Evaluation. Government needed in addition to take stronger action against entities which sourced components from abroad. Localisation was important and entities should buy local.

Mr Strachan responded that additional detail was to be found in the additional documents that were handed out to members. The briefing did mention that labour interventions were important. On localisation he stated that if government entities, government departments and provinces etc wished to break the law then they would. The law said that localisation should take place. It was up to them to procure locally. It was not the DTI’s responsibility to ensure that there was compliance. Perpetrators however had to be brought to book. The lack of localisation in energy, rail, oil and gas sectors was a major problem. Local procurement was a must. If there was non-compliance then outcomes would be sub optimal.  The Preferential Procurement Policy Framework Act (PPPFA) was not the responsibility of the DTI. It was the responsibility of National Treasury. The SABS had stated that there were no funds for verification. He noted that verification should be considered as a public instrument. There was a huge problem on verification at present. There was wilful non-compliance with local procurement.

Ms Kinani, on non compliance with localisation, explained that the PPPFA regulations gave procuring entities the power to take action. The DTI could not take action. However the Auditor General of SA could take action where there was non-compliance. Procuring entities and departments should do localisation. 

Mr J Londt (DA, Western Cape) observed that there was a lack of exports from SA to Africa.SA should be having its foot in the door when it came to Africa as there was huge potential. There seemed to be growth in exports to Botswana and Namibia. What efforts were being put in place to exponentially grow exports to African countries? Increases in exports could help with job creation in SA.  

Mr Strachan, on exports to Africa, stated that exports to the Southern African Development Community (SADC) were doing well. Some of the items exported were agri processing, explosives for mines and household chemicals etc. Mining equipment was also exported to Zambia. On the rest of Africa SA’s exports was not doing well. However he did caution about over estimating the demand in Africa. The middle class in Africa was small and hence the demand was low. There were also massive constraints to exporting to Africa. For example it was cheaper to export mining equipment from Brazil to some African countries than from SA. Lack of rail infrastructure was a huge problem. It was only partially true that SA had a geographic advantage into Africa. Non tariff bases in Africa were also a significant constraint especially in the African East Coast. The African story was a complex story. The potential in SADC was however huge. There was key potential in rail, oil and gas. The issue was whether South African companies were geared up to supply. The other challenge was that SA had many competitors. SA needed to focus on niche export areas. This being said the DTI needed to lift its game to position SA as an export hub. The IPAP and the industrial effort should be an effort of government and not only the DTI.

The Chairperson was concerned about the veracity of the challenges that SA faced. He noted that agriculture was huge in Africa and was hence a massive opportunity. Africa needed tractors and seed etc.

Mr L Magwebu (DA, Eastern Cape) observed that one of the sectoral focus areas was plastics. What was the plan on the recycling of plastics? Not only would recycling save the planet but it could also have financial spinoffs.

Mr Strachan stated that steel recycling in SA was working well. Paper and glass recycling was also a mature sector. The DTI together with Plastics SA was working on the issue of plastics recycling. Plastics’ recycling was completely informal. There was a need to formalise it. The DTI was working on a proposal. Municipalities had to get involved. Unfortunately many municipalities were under fiscal pressure. Waste recycling was a sector for the future.   

The Chairperson noted that the discussion on issues needed to be ongoing. Engagement with the DTI needed to continue. He proposed that the management committee of the Committee look into the matter and come up with a proposal in the Committee’s next meeting.
 
Committee Planned Oversight Programme for its visit to Saldanha
The Chairperson presented the oversight programme to members.

Committee Study Tour Report on its visit to Malaysia and Singapore
The Committee adopted the Report unamended.

Committee Minutes
The Committee adopted minutes dated 21 June 2017 unamended.

The meeting was adjourned.

 

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