Economic Development Department on Quarter 2 performance, with Minister and Deputy Minister

Meeting report

Department of Economic Development: Second Quarter Performance

Mr Ebrahim Patel, Minister of Economic Development, provided an employment overview for the quarter, and said the unemployment rate had remained steady at 27.7% for the past three quarters.  Jobs had increased by 92 000, to 16 192 000, while unemployment had increased by 33 000 to 6 210 000. He reported that 358 000 jobs had been created over the past year against a labour force increase of 696 000, meaning the number of unemployed had increased by 338 000. There were many people completing school and entering the labour market, although there was also a significant number exiting the market.

In the quarter, the best job creators in absolute terms were business services, government and transport, while significant job losses occurred in agriculture (25 000), construction (30 000) and manufacturing (50 000). Since the adoption of the New Growth Path (NGP), 2 544 000 jobs had been created, but the labour force had grown by 22% over the same period. Notably, manufacturing had lost a total of 66 000 jobs. Of the 6.2 million South Africans who were unemployed, 2.4 million were discouraged, half were women, and four million were young people.

The unemployment rate among those with tertiary qualification was 13% -- roughly one in eight graduates was looking for work but could not find any. For those with an incomplete secondary education, the rate was 35%, meaning one in three people was looking for work but could not find any. Slightly more than 20% of the total employed had a tertiary qualification.

Measures taken by the government to address unemployment and economic conditions were:

• The training layoff scheme, which had affected 17 800 workers;
• Support for companies in distress -- 41 000 jobs had been saved by the Industrial Development Corporation (IDC) through R6.9 billion in support for distressed companies;
• The IDC’s focus on employment-creation and saving jobs;
• Trade support to save jobs;
• Special funds created in the steel and agro-processing sectors; and
• Competitiveness programmes for sectors.

Some of the work that had been done at the request of the Committee was assessing the African continent’s share of world foreign direct investment (FDI). From 1990 to 2016, the percentage of FDI in Africa had increased from 1.4 %, to 4.5%. Greenfield FDI into Africa had increased from US $67 billion in 2015, to US $94 billion in 2016. Manufacturing accounted for around 20% of greenfield FDI, but services had dominated in both years. Outward investment by firms that had an African home economy had increased significantly in dollar terms in the globalisation era, from around US $660 million in 1990, to US $18 billion in 2015. However, the continent remained a comparatively small player in the global economy.

With regard to NGP job drivers, the Economic Development Department (EDD) had done work on the sugar value chain through:

• Trade-related interventions (review of tariffs);
• IDC funding of the value chain;
• Unblocking the previously reported Broadway Sweets case study;
• The Competition Commission -- Coca-Cola merger;
• Signed a memorandum of understanding (MOU) with RCL Sugar & Milling to put 65 students through a work exposure programme and train them in skills such as agricultural production, civil and electrical trades;
• The EDD had engaged in social dialogue, as part of the government team to help develop the jobs mitigation and creation plan to address the potentially negative socio-economic consequences of implementing the National Treasury’s tax on sugary beverages; and
• It had responded to a request to convene the first ‘sugar task team’ meeting.

As for the Green Economy, the Minister reported that by August 2017, the IDC had invested R21.8 billion in the green energy sector, with funding amounting to R14.8 billion in renewable energy, R500 million in energy efficiency, R2 billion in fuel-based energy, and R1.4 billion in bio fuels.

The IDC had also invested R1.45 billion through the Green Energy Efficiency Fund (GEEF) and the Sustainable Use of Natural Resources and Energy Finance (SUNREF). As at August 2017, R1.45 billion had been made available to 45 companies from the GEEF and SUNREF through the IDC.

The Presidential Infrastructure Coordinating Council (PICC) team had attended the launch of the Sunrise Energy’s liquefied petroleum gas (LPG) import terminal facility. The length of the pipe in the sea was 3.2km, and the total pipe length overland was 2.1km. There were five large storage ‘bullet’ tanks, each with a capacity of 1 100 metric tonnes. Phase 1 included 5 500 metric tonnes of storage and would allow for imports of up to 17 500 metric tonnes of LPG per month.

With regard to the waste economy, last year 114 million tonnes of waste was produced, and 75% had ended up in waste landfills. The waste economy was estimated to contribute 0.6% to gross domestic product (GDP), with 35 000 people employed in formal jobs and 62 000 informal jobs for waste pickers. The IDC had contributed R787 million in funding for the sector, and had supported 10 000 jobs.

As for township enterprises, the Small Enterprise Finance Agency (Sefa) had decreased its approvals for direct lending, as impairment rates in 2016/17 were standing at 66%. The agency had poor debt collection, but it was made difficult by many government contractors that defaulted. 

Discussion

The Chairperson said she felt that the Committee needed to be more “hands on” with the finances of Sefa despite the mandate being under the Department of Small Business Development, because Sefa still received money from the EDD through the IDC.

Mr S Tleane (ANC) said the Committee was proud of the investments that the IDC had made in the continent, which had resulted in great returns. However, what kind of dent was the decline in these investments going to pose for the country? What would the impact of AB InBev’s introduction of non-alcoholic beer be on law enforcement, as there was a time when the law enforcement had been very stringent in this area? Regarding the KPMG issue, he wanted to know the latest developments regarding the loans provided to Oakbay by the IDC. What could the improvement in business confidence of investors be attributable to domestically?

Ms C Matsimbi (ANC) asked whether there was any plan to reclaim the job losses in the agricultural sector in response to the drought. Did the Department have any plans to increase its percentage of people with disabilities in the Department? How many people were still in acting positions in the Department?

Mr M Mabika (NFP) said the Minister had taken some time to explain the level of unemployment against the increase in employment, but the fact was that unemployment remained very high. It looked like the country was not progressing but actually regressing, although significant employment was being created. If one looked at the number of unemployed people, the high percentage referred to those who did not have formal qualifications, and with this being the case, did it mean the country would continue facing the challenge of unemployment, because this was not something that could be dealt with overnight? What was the role of the national government to ensure that there was a level of monitoring – what enabled the Western Cape and Limpopo to reduce unemployment more than the other provinces? What were some of the reasons those provinces were unable to reduce unemployment?

Ms A Mfulo (ANC) wanted to know why the interest rates in government financial institutions were so high -- as if they were commercial banks. What was the effectiveness of the recognition of prior learning (RPL) as it related to employment and education - was there any relationship or any discussions with other departments on how they could work together in order to recognise those who had experiential learning and prior learning? These people seemed to fall through the cracks, because there was no clear justification of their status as far as formal education was concerned.

The Chairperson asked about job creation in mining and the mines’ rehabilitation areas. In the Mineral Resources Committee, it had been reported that there was about R60 billion sitting in banks for rehabilitation, and the reason it was not being used was because old mines were not officially closed, so the Department did not have access to that money. She asked the Minister if he knew why those mines had not yet closed so that those funds could be utilised and create employment.  The same was the case in Mpumalanga, where R16 billion was also sitting in banks. The province had numerous mines, but there was still much poverty and unemployment.

She asked about the IDC loan facility amounting to R1.3 billion in the African Development Bank. What was that money exactly meant for -- was it merely for the IDC, or was there another plan for it?

The Committee had visited the Da Gama factory in the Eastern Cape, and it was unfortunate that it could not get a high ranking official from the IDC to be there concurrently. From observations, Members felt that people did not care as much as they used to anymore, particularly the owners or shareholders of certain factories. This was confirmed by the union representative that had been brought in, as the man pretty much had no clue of what he was talking about. The company itself did not want to get the business going, although one of the managers who took the Members through the tour was very passionate about the work, but it appeared that the shareholders were no longer interested in the company. Those very same workers could be groomed to take over that company. Perhaps there was a need to look more deeply into Da Gama, because it had the potential to create more employment. The quality of the textiles it produced was very good.

Lastly, she sought clarity on the 30% increase in the stake or shareholding in Coca Cola, and what it actually meant for the country.

Department’s response

The Minister responded that with regards to IDC investment in the continent, it was more of a balancing act. Political uncertainty in a country or continent played a significant role in steering or bringing in investors from outside the country. Fortunately, the continent had been in a much better position than it previously was as far as political risk was concerned. However, there were warning signs in Kenya and Zimbabwe which would impact on decisions of investors, and if everybody pulled out of the continent, it would become a self-fulfilling prophecy.

The Minister said that as far as he knew, the laws on alcohol consumption in public had become stricter. Generally, law enforcement agencies did not act as firmly on small transgressions. However, the small transgressions led to the bigger ones, so perhaps the Committee should invite the South African Police Service (SAPS) to see the extent to which it was factoring economic development into its plans.

On KPMG, there was information in the public domain that alleged that there had been share price manipulation at the time Oakbay was listed. The IDC was taking legal advice on the matter, and as soon as that process had been concluded, the IDC or the EDD would report the outcome to the Committee.

As for the drought and the agricultural sector, in some core areas it seemed the drought was breaking, but the effect of the drought in the Western Cape would have a significant impact on food prices. The EDD was planning to support the work of other government departments in relation to agriculture. The implementation of dams and water management structures was on the table. By the time recovery kicked in, unemployment levels would have been significantly impacted, and this was something that would be taken into consideration in the implementation of the remedial actions and plans.

Business confidence was very important. The EDD had an operating budget of only R144 million, so there was only so much the EDD could do. However, through the IDC and other agencies, the EDD could push the envelope to try and restore business confidence. There was a real reluctance by the private sector to invest due to the political uncertainty currently hovering over the country, and those issues were much bigger than the EDD. Once business leaders were clear on government’s plans to revitalise the steel industry, only then would business leaders start gaining confidence and invest.

Regarding people with disability, this was an area the Department of Labour (DoL) had engineered. The DoL had specific areas for promoting opportunities, so it was not a matter of charity - having people with disabilities in the Department just for compliance. The emphasis was on providing opportunities where their potentials could be realised. The Department fulfilled the expectations set out by the DoL, but it was mindful of not employing people with disabilities just for the sake of.

There were currently four acting positions in the Department. An offer had already been made for the chief financial officer (CFO) position, and the rest were going through formal screening. The EDD would report back to the Committee on the outcome.

South Africa had actually created more jobs as a percentage compared to China, but there were many more people coming into the labour market, and there was a need to get the overall economy going. Getting investors in the steel, engineering, clothing and textile industries was part of changing the job story. Next year, the Department would have a much bigger programme to increase the rate of growth. When global commodity prices declined, it had affected countries like Nigeria and Brazil, but SA had avoided that impact through maintaining its public spending and investment. Construction and infrastructure spending had contributed towards employment creation in the overall economy.

Infrastructure investment was softening, but agriculture was recovering, so these two could cancel each other out. Transnet had said the global market for iron ore was lower, so one had to take into account the global market conditions. There was a need to find out whether Transnet could spend more on the ports and keep its balance sheet active. There should be a special jobs pact to address the issue of the lack of formal education -- sectors who could deal with unemployment emanating from a lack of formal education qualifications were the steel industry, agriculture, clothing and textiles, construction, etc. These were the best industries to absorb more people for employment without a formal education qualification. .

SA had become a compliance state instead of having “hands on” involvement. The bureaucracy protected itself with rules and red tape.

As for the high interest rates, the IDC had not received funding from government in a long time, so it had to use its profits from investments to re-invest in businesses, to develop businesses and industries, and so on. So when the IDC charged interest, it charged at a rate that was reasonable enough to ensure that it was able to re-invest its proceeds in order to continue fulfilling its mandate.

Sefa had lost a lot of money last year. It had lent about R1 billion, and most of the loans had gone sour. It often gave loans to businesses that lacked the ability of a going concern. He suggested that perhaps there should be a joint session between the two portfolio committees (Small Business Development and Economic Development). One could not fault Sefa for taking risks when issuing loans, because it was mandated to provide small businesses with funding. However, there was a need to become slightly more strict now.

The role of national government was to help provinces with job creation. The two provinces that had the lowest unemployment rates were the Western Cape and Limpopo. The Western Cape had never had a homeland, which had always been an advantage. It had always had the lowest levels of unemployment through different administrations, and it also sets up its investment packages very well. When KZN became a province, it had inherited a lot of problems and unemployment had shot up. Most provinces with homelands were actually facing high unemployment rates. The low unemployment rate in Limpopo was attributable to the Waterberg Region, as the area had received massive injections with new coal mines opening up there, as well as agricultural growth, and it was inevitable that employment creation would take place.

As for the African Development Bank (ADB) facility, it was a US $200 million facility, half of it of which would be used in South Africa and the rest outside the country. This was not money that the ADB would make available to the IDC when it needed it - it was a facility that the IDC could utilise when it did not have sufficient liquidity to fund a specific project. When it used the facility, it had to pay it back.

As for the Coca Cola deal, there were three transactions. The first one took place last year, the second took place this year, and the third would take place in the near future. As for the second transaction, Coca Cola was an American company that owned the trademark and the recipe for its products. It tried not to get involved in the bottling of its products, but only in developing the content of what was in the products and choose partners who could do the bottling for it. After last year, the owner became SAB Miller, but AB InBev had come and bought it from SAB Miller. However, Coca Cola had not been happy with this and had exercised its rights to buy the shares back from AB InBev. Therefore, the third transaction was to sell the shares to someone else or another company -- but it did not want to do the bottling. The change that had come this year did not have a direct impact on SA, but where the shares were subsequently sold might have a direct impact. The more shares SA keeps, the more profit stays in the country. Coca Cola has been convinced to increase its BEE percentage from 11% to 25%, and by the time the next transaction takes place it would have increased to 30%, even if it does do not eventually sell the shares. This directly impacted on employment and ensured that profits stay in the country. Currently, Coca Cola was on a road show to speak to different investors and potential investors on the continent, but the EDD had insisted that Coke gives South African investors and companies a chance. 30% of all future earnings of Coca Cola would come back to black South Africans, and the company had agreed to extend the employment guarantee in its next deal.

The meeting was adjourned.