IDC + ITAC on their 2016/17 Annual Report

Economic Development

04 October 2017
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

Annual Reports 2016/17

IDC performance highlights for 2016/17 include:
• 175 transactions approved worth R15.3 billion up by 6% from the previous year;
• Total funding disbursed R11 billion, which was a decline of 3%;
• Jobs expected to be created or saved 20 881 (18 206 new jobs,2 675 jobs saved), up by 37% from the previous year;
• R7.7 billion approved for the manufacturing sector (a 14% decrease);
• Black empowered company approvals increased by 104% with funding of R10.1 billion;
• R4.7 billion approved for black industrialists, up by 63%;
• There were significant increases in the amounts approved for women and youth owned businesses, R3.2 billion and R2.3 billion, respectively.
• Net profit after tax R2.2 billion, up by 887% compared to the previous year;
• Total assets increased by 7%, with a total value of R129.8 billion.

IDC reported that it was very apparent that the IDC subsidiaries, SEFA (Small Enterprise Finance Agency), Foskor, and Scaw Metals, are not performing well. However, they were optimistic about the plans developed to sort out their challenges.

Governance initiatives implemented in 2017 included a conflict of interest policy which prohibits IDC directors from doing business with IDC from 1 April 2017. To increase transparency, from 2017/18 IDC is disclosing information on all companies for which funding has been approved and for which agreements have been signed. This also includes information relating to Politically Exposed Persons.

IDC financial performance showed profits rose to R2.2 billion, up from R223 million. These results were achieved despite a 10.5% decline in revenue to R17.3 billion from R19.4 billion. Impairment as a percentage of loan book declined by 0.2%. Impairments and write-offs make up 16.7% of the loan book which is above the IDC limit of 15.5%.

Members asked questions about BAIC operating within the South African economy; how the IDC plans to respond to its three subsidiaries' losses, and plans to minimise losses going forward; if the IDC is doing well in supporting black industrialists or is it merely "complying"; plans to revitalise Foskor; clarity on the Karoo Catch and Doringbaai Abalone projects; investment decline on the continent; disposal of IDC aircraft; the R1.3 billion written off and the steps taken to ensure that loans are recouped; its efforts in the clothing and textile industry.
 
ITAC reported on import and export permits issued, support for steel industry, BAIC SA update, its unqualified audit with no irregular, fruitless and wasteful expenditure incurred.

Financial performance reported revenue amounting to R92.7 million whilst total expenditure was R104.2 million - the deficit of R11.5 million was largely funded from previously accumulated surplus. The contributors to the deficit included the increase in rental by DTI; salaries of contract employees for scrap metal; and interns. Cost containment measures have been implemented without undermining the quantity and quality of the basic services. International travel and subsistence declined to R162 545 from R1.7 million.

Members asked ITAC about why was issuing more import permits as opposed to export permits; whether there are more advantages or disadvantages to AGOA; if the money previously spent on travelling could be classified as fruitless expenditure and if ITAC’s work is affected by the decreased budget on travelling expenses; ITAC’s plans for office rental; if it has addressed the audit findings; and about chicken imports.

Meeting report

The Chairperson welcomed the IDC team and commended the delegation for its women-driven team and spirit. She handed over to the Chairperson of the Board of Directors for opening remarks.

IDC (Industrial Development Corporation) on its integrated results for 2016/17
Ms Busisiwe Mabuza, IDC board chairperson, said that the World Economic Forum had released its 2016/17 Global Competitiveness Report; its assessment revealed that SA has dropped 14 places in global competitiveness; however it is still in a good place in comparison to other countries with similar economic conditions. The global financial crisis significantly affected the local economy, and it continues to be so as the Corporation’s disbursements remained flat in comparison to the previous year. However, the approval levels have gone up. The IDC continues refine the performance indicators to measure employment creation; and identify areas that need to be improved to foster radical employment creation and there has been some improvement compared to the previous financial year. Its mandate is to ensure that the transformation of industrialization is at the core centre of the institution, and it continues to provide the funding whilst being mindful of sustainability under the current economic conditions. Therefore, the systems need to continually ensure that this occurs.

Ms Ntokozo Radebe, Head of Corporate Strategy: IDC, highlighted that funding in line with the areas prioritized by government, absorbed over 60% of the funding that has been approved. Most of the funding went towards capacity expansion, start ups, and projects. 13% of provided funding went to distressed companies to provide support and assistance. In the distribution of funding, the metals and mining sector absorbed the bigger chunks of funding and number of clients compared to other sectors.

Performance highlights for 2016/17 include:
• 175 transactions approved worth R15.3 billion up by 6% from the previous year;
• Total funding disbursed R11 billion, which was a decline of 3%;
• Jobs expected to be created or saved 20 881 (18 206 new jobs,2 675 jobs saved), up by 37% from the previous year;
• R7.7 billion approved for the manufacturing sector (a 14% decrease);
• Black empowered company approvals increased by 104% with funding of R10.1 billion;
• R4.7 billion approved for black industrialists, up by 63%;
• There were significant increases in the amounts approved for women and youth owned businesses, R3.2 billion and R2.3 billion, respectively.
• Net profit after tax R2.2 billion, up by 887% compared to the previous year;
• Total assets increased by 7%, with a total value of R129.8 billion.

IDC was able to advance transformative industrialisation, whilst remaining financially sustainable. Approvals increased whilst disbursements remained flat, and an additional R922 million (of which 91% are DTI funds) was approved from funds managed on behalf of third parties. The large portions of distressed funding in the Agro-Processing and Agriculture Value Chain category was for the Land Bank for lending to drought stricken farmers and in the High Impact category, it was for a distressed construction company.

Resultant development outcomes reported that mining, basic metals, and industrial infrastructure are contributing large numbers of direct jobs. Their indirect impact is also significant considering the large multipliers these sectors have. The Agro-processing and Agriculture Value Chain delivers jobs at the lowest cost to IDC when considering direct as well as indirect jobs. High Impact, which includes sectors such as construction, and Special High Impact, which includes the clothing industry is also relatively efficient. Costs per job created show that for R1 million provided for funding at least five jobs are created, this is more lucrative or rather yields greater results in the mining and manufacturing due to their labour-intensiveness.

An update was provided on BAIC SA Automobile:
• Production capacity – 50 000 units per annum [target market mix 40% local and 60% export]
• Products – entry-mid-level Sedan, 4 x 4 Sport Utility vehicles and Pick-ups
• Total Investment – R4.2 Billion
• Equity Shareholding: BAIC Group (China) - 65%, IDC 35%
• Anticipated Start of Production - 2nd Quarter 2018
• Construction Period – 12 to 18 months developmental impact:
New Direct jobs created – 784 production jobs
Indirect Construction jobs – 2 500
Increasing local content – above 60% by Year 5 from start-of-production.

Ms Radebe said it was very apparent that the IDC subsidiaries, SEFA (Small Enterprise Finance Agency), Foskor, and Scaw Metals, are not performing well. Scaw is not sustainable in its current form due to the continued weak financial performance. To turnaround the company, IDC is in the process of introducing strategic equity partners (SEPs) who will bring focused operational know-how and capital injection into the three different divisions of Scaw. Scaw incurred a loss of R787 million, Foskor incurred R902 million and Sefa R223 million before the IDC grant – the grant was received through the fiscus to offset the largest portion of the loss. In addition, Foskor had contributed a significant loss to the IDC group, but this has been monitored, and there has been a lot of focus in turning around its performance and its operations - there is definitely improvement from previous years. Its loss was also influenced by the fact that the auditors made a provision for impairments because there was reason to believe that the positive results expected will take a long time to come to fruition, therefore future losses should be expected.

Governance initiatives implemented in 2017 included a conflict of interest policy which prohibits IDC directors from doing business with IDC from 1 April 2017. To increase transparency, from Q1 in 2017 IDC is disclosing information on all companies for which funding has been approved – a report is available on the IDC website. To date, the details all approvals from 1 April 2017 until 31 August 2017 and for which agreements have been signed, have been published on the IDC website. This also includes information relating to Politically Exposed Persons.

Ms Nonkululeko Dlamini, IDC CFO, reported on financial performance, saying IDC financial performance showed profits rose to R2.2 billion, up from R223 million. These results were achieved despite a 10.5% decline in revenue to R17.3 billion from R19.4 billion. Impairment as a percentage of book at costs declined by 0.2%. Impairments and write-offs make up 16.7% of the loan book which is above the IDC limit of 15.5%.

Mr Geoffrey Qhena, IDC CEO, concluded the presentation by stating that in spite of the challenging economic environment the IDC has managed to perform quite well. There are areas that need improvement, one, being in the continent and the agricultural sector. He anticipates that the IDC will be called upon to play its counter-cyclical role - it is at times like these where it needs to step up. The economy has not yet improved at the speed IDC has hoped, and a number of companies have been seeking funding assistance. It was indicated earlier in the year that the environment is still challenging, but IDC will continue to play its mandatory role.

Mr Qhena noted that the Committee can see from the Annual Report that the AFS are signed by both KPMG and SNG (SizweNtsalubaGobodo), the former is the previous auditor of many Oakbay companies and SNG has just resigned. The matter has been discussed at board level together with the shareholder. The board is looking to ensure that IDC has auditors and is alive to what is coming up. In the months to come the audit committee has been tasked to look at what has happened in the environment and what it means for IDC. These auditors have been with the IDC for a while so in the normal course of rotation that is one of the things that will be considered.

Discussion
Mr I Pikinini (ANC) stated that it seems that there is a lot of work done in provinces and now there is reason to believe that the Corporation may branch into the regions. He asked for clarity on BAIC and its current status in the country. He noted that foreign companies come into the country and when they withdraw they leave with the country’s resources, so he wanted a status update on BAIC and if it has withdrawn with the resources granted by IDC.

He said it appears that there are capacity constraints at SEFA. He suggested that IDC assist in the capacity matters so that these matters are not repeated

Ms C Matsimbi (ANC) asked about the Foskor and Scaw losses. How is IDC going to respond to this. What is the plan going forward to ensure that losses are minimised. The Committee had visited an IDC project, a cable manufacturing company. The Committee learnt that the company is running low on funds, it has exhausted its R45 million and it is only left with R5 million. Its monthly rental of R200 000 per month is very expensive. Does IDC think that this company is going to survive, what is IDC doing to assist to ensure it comes out financial distress. It is a new project with a lot of potential for growth. Is there a plan to ensure that the company is assisted to survive.

Mr S Tleane (ANC) requested an assessment on how the IDC leadership feels the institution is currently doing in terms of black industrialists and small businesses against initial strategic expectations. He asked simply if IDC is doing well in supporting black industrialists or is it merely complying. The clothing and textile industry received less funding from IDC, but the industry has been struggling for many years. One would expect that more funding would be provided for the industry. He suggested that IDC do something about this because it is a labour-intensive sector, a lot of jobs can be created in this sector.

He said there is no clear plan about what IDC intends on doing with Foskor, besides finding a strategic equity partner that is willing to be actively involved in the revitalisation of the company. Therefore, the Committee would appreciate a clear tangible plan. He asked for more information on the Blue Karoo Trust (BKT) project "Karoo Catch" and Doringbaai Abalone projects.

He noted IDC has decreased its investment on the continent. What damage has been caused or will be caused from this decline in investment on the continent?
 
Mr M Cele (ANC) pointed to slides 18 and 19 and said that no impact on jobs created are shown. He asked that IDC provide this information.

Mr M Mabika (NFP) asked about what happened to IDC aircraft, and why it was disposed.

The Chairperson stated that there is an expectation that the dividend to the government shareholder be paid because there are a lot of distressed companies relying on IDC to rescue them through funding. R1.3 billion is a lot of money to write off; businesses cannot lend money from IDC and not pay up. There are various structures that can be employed to ensure that the money is recouped where IDC is unable to get the money back. She asked IDC to clarify the R1.3 billion figure, and the steps being taken to ensure that the money is recouped.

The Chairperson referenced a company where IDC gave the company a loan and absorbed 35% shareholding in that company; it is a foreign investor with 65%. This means that IDC does not have a say in that company. Even if IDC seeks to ensure job creation, the majority shareholder of that company holds the powers to steer the ship in the direction it so may wish. This means that if it wants to bring in employment from abroad it can do so. She asked if this is a good method as she believes this is more of a threat than an opportunity, because if that company wishes to redirect its investment elsewhere in the world IDC does not have the powers to prevent that from happening. The company may be receiving grants from IDC but if a thorough assessment is conducted, it may surface that their investment into the country is much less than what IDC is contributing. She asked if IDC has considered bringing local companies on board to invest in that company so that the majority shareholding is spread out.

The Chairperson suggested that when foreign investors come into the country, there should be conditions on IDC grants and investments that will force these companies to develop skills in the country plus have the power to recommend the type of skills they should develop.

The Chairperson said that as for the clothing and textile industry, it is not simply just about the funding but it is also about skills and job creation. The country is capacitated for the skills required in the sector. The machinery used to produce clothes are imported which is problematic. One should look into actually developing the necessary skills to manufacture that machinery. She asked if IDC has considered looking into whether those machines can be produced in the country. The revival of this sector includes all the value-added processes and stages of producing the final product; it is not limited to factory workers. That is something that needs to be considered as well, hence the urgency and the importance of reviving this industry.

Mr Geoffrey Qhena, IDC CEO, responded that IDC will improve in the regions and there is a plan to ensure that this happens not only in Gauteng, KZN and the Western Cape. The CEO together with regional teams is spending two days in each province to engage stakeholders (chambers, businesses, institutions, provincial government and government entities) to increase the level of activity in Mpumalanga, Free State and Limpopo and Eastern Cape. One area put in the forefront is agriculture and agro-processing. IDC has not performed well in this area hence it is now putting it in the forefront. The number of transactions to date has improved compared to the previous year.

As for Sefa, although it reports to DSBD, IDC assists in providing capacity. IDC’s level of activity in Sefa has dropped because IDC was concerned at the increase in impairments and write-offs at that level. IDC then decided to go back and clean its books. Pricing continues to be an issue as highlighted by the Portfolio Committee on Small Business Development. To ensure that Sefa is strengthened, the IDC Chief Financial Officer and Chief Risk Officer are Sefa board members. There is a concern about Sefa's sustainability, hence IDC has visibly reported on the impairments to ensure that it is assisted, even though an IDC grant was provided. The purpose of the grant is a provision of assistance. One of the challenges identified by Sefa was the ability to collect monies due. There has been engagement with different parts of government to ensure that people who have loan contracts with government pay back the loans. Some departments do not allow for cession of accounts with people that have done work for departments and taken the money and not paid back the agency. The IDC has seconded the internal audit function in the agency; it is now under the radar of the IDC.

The specific response about General Motors from IDC is that IDC did not have any relations with GM. The only company that IDC has supported in that sector was Ford, where a R1 billion investment was made five years ago. Ford has repaid all of it and notably out of that investment the Ford Ranger was manufactured which has been very successful in the country. The reason Ford was granted that investment was to ensure that the production of the Ranger remained in the country as Ford wanted to take it elsewhere which would have affected employment in the sector. The automotive companies wanted to come into the country because of the incentives. The approach IDC took with BAIC, was that instead of providing a grant or incentives, IDC would rather be a shareholder. BAIC is the only OEM with a local ownership, the rest of the automobile sector companies have foreign ownership, and that is in fact the trend globally because they go back to their mother countries. IDC is not the sole contributor to its partnership with BAIC - it is also putting in some money although they are bringing in debt into the company. IDC has put in place a lot of conditions about local content and the labour - only 6% of the company’s personnel come from abroad. Those conditions also clearly outline the implementation of local procurement. There has been a recognition from IDC that it cannot do everything and overpay, other parties need to play their part.

There are some industries that cannot come into the country due to the lack of economies of scale. The partnership with BAIC has triggered an interest in VW to increase its utilisation of local content and procurement, particularly on component parts. IDC has been supporting small companies that manufacture components that are actually utilised by VW. IDC has engaged with Mercedes Benz as well and that engagement was very encouraging in including bigger parts as well. With the BAIC project, IDC has ensured that minority protection is at the centre of the agreement with BAIC. Even in the structure IDC played a role in appointing the female CFO of the company, although BAIC will be appointing the CEO.

What cannot be avoided is that when IDC seeks to invite FDI, is that those foreign companies have ownership and control but key decisions on minority protection are secured. The production schedule with BAIC has moved due to procurement and local content challenges. However, IDC wanted to have that delay to ensure that those procurement issues were sorted out. Both IDC and BAIC boards have put this project on its radar to ensure the commitments made are delivered.

On the performance of SCAW, firstly, the process with SCAW is very advanced. In fact the company has been broken into three parts. The first part which includes the local partner has been lodged with the Competition Commission and there has been a first sitting. For the other two parts (grinding media and cast products) IDC could not get any local partners. IDC then had to get foreign partners – the discussions with those partners are much more advanced right now. In all probabilities, grinding media is the next one that will be lodged with the Competition Commission. Therefore, there has been progress and if all the competition issues are resolved by the time the Annual Performance Plan is presented next year, the Committee will be well informed about the details of the partnership and related matters.

On FOSKOR, the board for these two investments decided that the board risk committee for Foskor and investment committee for Scaw do a deep-dive where they went in-depth in understanding the entities, and ask the difficult questions. Then R4 billion was approved for Foskor with a plan to turn it around. Foskor exports phosphoric acid largely to India, but the main problems are the Richards Bay plant. However, that injection of capital that plant is now producing. The next step is to enhance the mining side and it will be looking at other markets. The biggest issue is the price of phosphoric acid, it has been low and the weakening of the exchange rate yielded some positive results but Foskor is not out of the woods yet. However it is receiving the right attention.

The intervention in the clothing and textile industry is two-fold, via IDC and DTI. DTI is bringing in the Manufacturing Competitiveness Enhancement Programme which by its nature will not per company bring in a lot of money because it is not looking at equipment but processes, and how they can be improved. The IDC then brings in money for equipment and this is one sector into which IDC is putting in a lot of money. In comparison with the mining sector, the value will not be obvious but the jobs saved would be interesting. In the Western Cape and KZN there are clothing and textile companies that have been assisted. The IDC team has taken a step further to engage with the retailers because they are the ones that making decisions and importing. For instance, Mr Price has come to the party in IDC’s interventions. Another initiative IDC is working on with National Treasury is the illegal importing, which is one area that contributes to crippling the clothing and textile industry where people under-declare. Money has been put aside to bring this initiative to fruition.

Ms Lael Bethlehem, IDC Board Risk Committee chairperson, replied that the role of IDC is always balanced between financial sustainability and providing more funding and development to industry players. The last time IDC approached the State for funding was in 1956, so the role is to take those government resources and ensure they are disbursed appropriately and that means the organisation is sustained effectively. The situation at Scaw, Sefa and Foskor can be understood in that context. IDC cannot dish out money for the sake of it. Impact is the key driver why these companies and the agency continue being supported. The IDC Board Risk Committee has kept a good eye on these organisations. Hence there has been significant progress in Scaw, and jobs have been saved as well as industrial capacity and over time it will get more strategic partners.

As for Foskor, its position has been difficult because it is producing phosphoric acid that goes into the fertiliser industry which services the agricultural sector. Foskor is naturally speaking at the higher end of the cost curve but it also plays a role in food security and regional development and it employs a lot of people, so the focus is always to sustain Foskor instead of dismantling it. Sufficient capital has been another factor that has affected the growth or efficiency of Foskor over a long period of time. The board adopted a strategy to invest in the plant to ensure that it is more competitive in the global economy. There are still significant cash losses that are being experienced in Foskor, but there is a lot of employment impact fostered by Foskor in the Phalaborwa and Richards Bay regions. To pull the plug would affect those local economies significantly and reflect on overall employment of the country, so pulling the plug is really not an option.

On Sefa, there has been improvement, and the idea of bringing Sefa into IDC was to ensure that the systems that have been utilised in IDC are utilised in Sefa so that conditions are improved. On write-offs and impairments, an impairment is where the Risk Committee has reason to believe that there might be a write off in the future, so this is kept at a very close proximity by the Risk Committee. Once something is in the impairment category, it is kept close to ensure that the risk does not become a write off. When a risk becomes a write off it is not before IDC has tried and exercised its resources to try and recover the monies. Something does not become a write off in IDC prematurely. There are instances where IDC has indeed written off large sums of capital that were lent out.

On providing support to the cable company, Ms Dlamini, IDC CFO, replied that IDC has a unit called Workout and Restructuring. The IDC is a patient partner, and as a result it would not close it down. Where it is with that project is at 95% commissioning. After that the operations will commence, IDC is already working with the company to restructure the loan. The delay was due to waiting for a letter of credit from a bank to enable them to import the capital equipment they would use to manufacture the cables. When IDC takes the decision to write off, one should know that IDC has done everything in its power to recoup the monies and explored the legalities as well.

In 2015/16 IDC wrote off R2 billion and the legalities behind the write-offs are happening behind the scenes. However in 2016/17 IDC wrote off R1.3 billion and all the necessary steps have been taken and applied as far as the legalities are concerned. There are a list of the write offs that are still being pursued even though they have been written off in the books. IDC declared a dividend to the shareholder and in comparison to the previous year, it was quite a large dividend. In the previous year the profits were quite minimal, but as a gesture of good will this year R50 million worth of dividends were declared, whilst last year it was only R20 million. The discussions on declaration of dividends at the board level are much broader than the amount declared, because IDC sets high developmental targets that it had committed to the shareholder, and the target was R100 billion of disbursements as a five-year target, set in 2015. If one looks at the total disbursement in the current year of R11 billion, it indicates that IDC needs to get resources elsewhere to be able to make that target. The IDC decided that even if it ramps up to disbursements of R100 billion or higher, maintaining the financial position is key, so the declaration of dividends would need to be balanced out.

Ms Mabuza added that the contribution to the fiscus should rather be from the profits gained from the capital investments of IDC. The financial sustainability of IDC is recognised, and so the contribution to the fiscus stems from the profitability of the companies IDC invested in.

The Chairperson asked for an annual contribution including the contributions of the companies in tax payments. Secondly, how does IDC classify the different funds that are assigned to IDC to administer. Is the accountability also done like any other business of IDC or it is done separately for government.

Ms Dlamini responded that for the funds administered by IDC, it has an arrangement with DTI. On the IDC balance sheet the portion may well be that it comes from IDC but it is blended with the money that is coming from the DTI in terms of grants which then assist the company to manage the interest payments, and blend money coming from capital markets, grants and the profits of IDC. There is a fully fledged department that looks into the administration process of those transactions and it gets audited.

The Chairperson asked if it forms part of the interest income.

Ms Dlamini responded that it does not form part of IDC money but IDC administers the money to ensure that it does not lose value. There is an arrangement with DTI to ensure that IDC does not utilise the money unless IDC needs to make disbursements on what it needs to disburse to the economy.

Ms Lizeka Matshekga, IDC Divisional Executive: Agro, Infrastructure & New Industries, replied about the Doringbaai Abalone project that it is situated in the West Coast region of the Western Cape and it is a community that is purely dependent on the fishing industry. The project employs the majority of the people in that area. IDC partnered with the Western Cape government and 37% is owned by the community, in fact 615 beneficiaries are the direct beneficiaries as shareholders. It is a project that started very small and abalone is something that is needed in the East (mainly China). However, there is a middle man in the equation called Aquaculture. IDC exposure is about R10.4 million and the plan is to cut the middle man and graduate the project into the mainstream economy. As a result plans for expansion are being geared up which will have an element of skills and technical partners, because the margins will be greater if the project goes into the market. The product is in demand, there are 44 employees in the project, of that 44.36% are female. There is also a BEE shareholder involved who lives in the same area and understands the area quite well.

On the Karoo Catch project, IDC came on board at the very beginning developmental stages so it can understand the project and ensure that if there are any challenges with regulations or frameworks, IDC can approach government. IDC ensured that it contributes to all the stages of the value chain and the feasibility study was concluded in March 2016. IDC has approved R68 million.
Both projects are aligned to government plans and objectives for the ocean economy.

The Karoo Catch project has employed about 68 employees, and these employees were part of the development stages and they now form part of the 210 jobs that will be created. They have gone through skills development and training, and they attend NQF level 1 and possibly will go through the next level. Through IDC support, these projects are then graduated into the mainstream economy. Backward integration is very important; the Land Bank will not be replaced because it plays an important role in the agricultural sector. Since the beginning of the financial year, IDC has approved five projects in this sector; however more attention needs to be directed at Free State province.

Ms Mabuza responded that she is pleased that IDC management is present so that it can account about all the commitments that it has made. The expectation and the need of our people is so great that IDC must continue doing more. On black inclusive growth IDC recognises that there must be consistent improvement, hence it keeps improving the KPIs and ensure that they are specific enough and implementable as well as the measurements to strengthen that mandate.

Mr Qhena responded about the company's aeroplane. The board decided to sell it to an international person in the US as it was actually costing IDC more money to keep it than it was worth, hence the decision to dispose it.

Ms Phiwe Marumo, Manager Office of the CEO: IDC responded that IDC realised last year that trade between SA and the rest of the continent was sitting at about R300 billion worth of capital goods and services, so a team consisting of the CFO and the Research team has been spending time analysing the kind of capital goods that are being proactively exported to the continent so that IDC can provide the support needed on the continent to provide the type of products that are needed to produce those capital goods.

The Chairperson thanked IDC for the impressive work done.

ITAC (International Trade Administration Commission) annual report 2016/17
Mr Siyabulela Tsengiwe, Chief Commissioner: ITAC, said that government is increasingly taking a holistic approach in its policy response to sectors in distress. This has been evident in the case of steel in which government coordinated a package of measures in response to challenges faced by the domestic steel industry due to changed global market conditions. This is also seen in the case of poultry. This really maximises value for the attainment of government’s policy objectives.

Tariff investigations completed were nine in total with the ArcelorMittal South Africa (AMSA) tinplate product terminated and the Hosaf polyethlene terephthalate declined. There is a rise in applications for tariff approvals, but the manufacturing sector continues to struggle and has requested assistance from ITAC. As for rebates, only five applications were approved, the other five were declined. There were seven applications for reductions and five of those were declined.

On the Automotive Production and Development Programme (APDP), as per the policy directive, ITAC amended the administration framework to reduce the minimum annual plant volume threshold for participation in the APDP from 50 000 to 10 000 units from January 2016. The volume assembly allowance to commence at 10% for 10 000 units, increasing by one percentage point for every 5 000 units up to 18% at 50 000 units and the production incentive for catalytic converters remained at 2017 levels of 65% until 2020.

On import control, ITAC exceeded its permit target of 16 000 (issued 18 660). On export control, ITAC exceeded its target of 12 000 (issued 12 828). On support for steel, in 2015 and early 2016 import tariffs were increased from zero to 10% on a wide range of primary steel products, following rigorous investigations by ITAC. The justification for this support to the domestic industry was the change in global market conditions that saw the oversupply of steel, resulting in low prices and increased imports into SA that local producers could not compete with. The difficulties faced by ArcelorMittal South Africa (AMSA) and the closure of Evraz resulting in job losses are well known. As investigations were conducted it became apparent that these increases upstream would put pressure on the competitiveness position of the downstream manufacturers. Therefore, ITAC attached conditions to the tariff support for the primary steel industry in which commitments were made by AMSA on fair pricing that would exclude duties. AMSA also made commitments on production, investment and jobs.

On support for the poultry industry, import tariffs were increased towards the end of 2013. The increases were based on application brought by the SA Poultry Association on behalf of Rainbow Farms; Astral Operations; Sovereign Food Investments; AFGRI Poultry and Supreme Poultry. The justification to increase tariffs included the rising levels of imports and loss of market share by domestic producers; decreasing profitability in the face of low priced imports; price disadvantages; and input cost pressures. There are anti-dumping duties on bone-in chicken meat portions originating from the USA that were imposed in 2000, and these anti-dumping duties have been maintained through sunset reviews in 2006 and 2012.

ITAC obtained an unqualified audit opinion in 2016/17 and no irregular, fruitless and wasteful expenditure was incurred as well. However, ITAC has developed an audit action plan to address the audit findings relating to compliance.

On financial performance, revenue amounted to R92.7 million whilst expenditure is R104.2 million and the deficit per GRAP reporting is R11.5 million. This deficit is largely funded from the previously accumulated surplus. The contributors to the deficit included the increase in lease expenditure; salaries of contract employees for scrap metal; and interns. However, EDD made additional allocation for conditional grants to cover salaries of scrap metal contractors, and the rest of the expenditure is funded from the surplus. Cost containment measures have been implemented without undermining the quantity and quality of its basic services. International travel and subsistence declined to R162 545 from R1.7 million.

It is worth mentioning that ITAC made a request for additional funding to National Treasury through the EDD in May 2017. This is because during the 2014 MTEF allocation, ITAC baseline budget for 2015/16 and 2016/17 was reduced by R4.8 million and R7.3 million respectively. Major cost items where funding is needed includes the rental – in the previous financial year, DTI increased the rental by 56%, as well as the litigation fees.

Discussion
Mr Pikinini stated that SA does not really protect its space in economic development, especially after the liberation. China, for instance benefits more than the SA even when it comes to the local economy. He suggested there is a need to limit the free market, and ensure that the economy is not vulnerable.

Mr Tleane said he understands the strenuous conditions in which ITAC is operating, and imposing more and more tariffs will affect the local economy significantly. However, one is tempted to think that ITAC would prefer issuing more export permits as opposed to import permits, he asked for clarity on this. Secondly, given the economic conundrum at the moment, does ITAC think there are more advantages or disadvantages to the African Growth and Opportunity Act (AGOA)?

IDC spent over R1.7 million on travelling and subsistence the previous year and he commended ITAC for bringing down these expenses. He asked if the money previously spent could be classified as fruitless expenditure. Now that ITAC is not travelling as much, is its work affected? What are ITAC’s plans on its rental because ITAC will continue incurring costs. What should happen to address that problem?

Ms Matsimbi asked where ITAC is in ensuring that it gets a clean audit and if it has addressed the audit findings.

Mr Cele asked about the vacancy rate of 3.8%, and so what are the vacancies that are not yet filled. He asked ITAC to share the weaknesses outlined in the presentation that emanated from the audit report.

The Chairperson asked whether the chicken imports are positively impacting local prices or not. It seems that poultry is becoming more and more expensive and local poultry businesses are seen to be closing down. She commended the work done on the steel industry, and urged that this work continues until stability is entrenched in the industry.

There are audit findings such as non-compliance to legislation as well as performance indicators not using the SMART principle. This makes it difficult to audit, and it affects accountability.

Mr Phillip Semela, General Manager Corporate Services: ITAC responded that for ITAC to get a clean audit there must be no material misstatement on the financial statements, as well as no material findings on key legislation and the annual performance report. There were no material misstatements in the current AFS as well as in terms of compliance. However, what the AG reported as a material misstatement involved only one indicator (out of 28 indicators) being found not to align to the SMART principle.

Secondly, he explained the reported non-compliance, saying most work done by ITAC is normally taken to court by the clients. ITAC does not procure legal services but uses the Department of Justice. According to AGSA the Department of Justice did not follow its own procurement process. AGSA wanted to record this as irregular expenditure under ITAC but there was nothing that ITAC could have done. Those were the reasons ITAC did not get a clean audit.

As for the vacancy rate, out of the total of 31 staff members, 125 positions were filled and so only five positions that were vacant. The Deputy Chief Commissioner position has been vacant for a long time. This is outside the control of ITAC. The PA to the DCC is vacant. When the Chief Commissioner’s PA resigned, the DCC PA was allocated to the Chief Commissioner. Most of the advertised posts are normally absorbed by internal personnel.

On accommodation, this has been going for some time. Two to three years ago the DTI DG issued a letter to ITAC to move out of the campus. Before ITAC could move, it did a study on the financial commitment needed but that move never happened. The pressure is due to DTI increasing the rent enormously. When ITAC complained it was given R3.3 million by the Department but that was once-off. However, the situation is going to recur again until a permanent solution is found.

Ms Lebogang Bogatsu, ITAC Acting CFO, replied that the quality of the work was not compromised since ITAC reduced its travelling and subsistence expense. That money is now used to pay the scrap metal workers. EDD is only funding the salaries of the contract workers so ITAC must fund the salaries of the PPS contractors and the travel and expense of the scrap metal workers because there are many places that they have to travel to.

The Chief Commissioner responded that the automotive industry is the most successful and resilient industry in terms of production and jobs, but local content becomes a challenge because a lot of components are imported from abroad to assemble the vehicles. Industrial policy comes at a cost of the rebates that have to be administered and the higher prices that consumers need to pay because it is a protected industry.

He replied that the recent increases in chicken prices had to do with the drought, the input costs went up so that affected the prices for consumer consumption. Even if tariffs are increased if that is not complemented with supply side measures such as input costs and promoting the demand for local poultry, then it becomes a challenge for the industry to survive or compete with import prices.

Mr Tleane suggested that a discussion needs to be held with DTI, EDD and ITAC, and possibly National Treasury on the exorbitant rental increases imposed by DTI on ITAC.

The Chairperson thanked the Chief Commissioner and his team and declared the meeting adjourned.
 

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