DTI 2018/9 Annual Performance Plan with Auditor-General input

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Trade and Industry

20 March 2018
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

Auditor General South Africa (AGSA) briefed the Committee on its assessment and findings of the 2018/19 DTI Annual Performance Plan (APP). AGSA flagged certain indicators as misleading and those included:
• Number of companies assisted under Export Marketing and Investment Assistance (EMIA) in supporting value added exports (target: 823);
• Number of enterprises/projects approved for financial support across all incentives (850);
• Number of jobs retained from approved enterprises (20 000) – the baseline was noted as unreliable;
• Number of interventions to support businesses in the IPAP sectors (non-financial and financial) (70 interventions) – the indicator was not well defined;
• Number of implementation reports on the industrial parks submitted to Minister (2 targets) - The method of calculation is incorrect and will result in the performance target not being measurable.

DTI presented its 2018/19 APP, and indicated that improvement was recorded in the manufacturing and agricultural sector. People expected a decline in manufacturing, but for the first time SA was hitting over 50% expectations on positive growth in the sector, although the country was still facing a job crisis. On global trade, the growth in exports has been increasing and slowly but surely the budget deficit was being reduced as well as the trade gap. A new programme was created, Investment South Africa in addition to Trade and Investment South Africa. The objective is to grow the manufacturing sector to promote industrial development, job creation, investment and exports. The industrial development intervention programme is at the core of DTI. Annual plans were set in place to ensure that the industry is dynamic; clear incentive targets were set and the investment target was set at R15 billion. DTI will be releasing its annual Industrial Policy Action Plan (IPAP) within the next two weeks and some analysis was presented. The Automotive industry contributed 33% to manufacturing and 6% to the GDP. 130 000 skilled jobs were produced through the sector. There was R45 billion worth of investment.

With regards to the Clothing and Textile sector, before IPAP was introduced it was declining but now it employed 95 000 jobs due to the implementation of the industry policy. Just over R5 billion is dedicated to incentives and all of them are based on the principle of reciprocity.  The Aquaculture incentive was also launched, this was a success story – it was introduced about 10 years ago and it now supported about 43 000 jobs and developed R24 billion in export revenue. Through this, call centres were also launched and have employed about 2 000 young people.

Members asked questions about the unreliability of information by DTI; what it was doing to address the areas of concerns indicated by AGSA; why its performance indicators were not well defined; if the incentive programme were dismantled would it lead to a loss of 30 000 jobs; list of companies that were supported through the incentive programmes to ascertain their BEE status; DTI’s view on the expropriation of land without compensation and how it would affect industries and provide policy clarity; how DTI was dealing with trading partners when talking about expropriation of land without compensation; what interventions did DTI participate in to ensure that investment treaties and the Investment Protection Act was not contravened; what could be expected about a Companies Act amendment to hold company directors accountable and liable; why the automotive sector received more incentives and support from government; the cost per job where DTI invested in the manufacturing industry and the sustainability of those jobs; the cost per job in the Special Economic Zone (SEZ); challenges in some of the SEZs and how those could be addressed; the impact on localization for SEZs and Broad Based Black Economic Empowerment) the status of the National Gambling Board and who has been charged for corruption; the reason the National Lotteries Commission was meeting with DTI next week; DTI plans to ensure that the post of Chief Information Officer would be filled; the ratio of staff costs as a percentage of operational costs in SEZs; why the South African Farmers Development Association (SAFDA) had to come to Parliament to address their concerns about sugar industry transformation instead of reporting to DTI.

Meeting report

The Chairperson noted changes in the deployment in the Committee: Ms van Schalkwyk has been discharged to the Portfolio Committee on Labour. Mr David Mahlobo had been deployed to this Committee. The Minister and Deputy Minister had submitted apologies as they were on official business abroad.

Auditor-General South Africa (AGSA) on DTI Annual Performance Plan
Mr Tshepo Shabangu, Senior Manager at AGSA, said that AGSA had assessed the Annual Performance Plan and the findings were presented to DTI senior management to address them. He provided the overview of the presentation as well as the criteria used by AGSA.

Mr Sizwe Ncumalo, Project Manager at DTI went through the APP indicators, targets and auditor’s comments (see document). AGSA flagged certain indicators as misleading which included:
• Number of companies assisted under Export Marketing and Investment Assistance (EMIA) in supporting value added exports (target: 823);
• Number of enterprises/projects approved for financial support across all incentives (850);
• Number of jobs retained from approved enterprises (20 000) – the baseline was noted as unreliable;
• Number of interventions to support businesses in the IPAP sectors (non-financial and financial) (70 interventions) – the indicator was not well defined;
• Number of implementation reports on the industrial parks submitted to Minister (2 targets) - The method of calculation is incorrect and will result in the performance target not being measurable.

Discussion
Mr A Williams (ANC) said he would like to engage DTI on the AGSA findings instead of the Auditor-General, because he would like to ask DTI directly about the findings.

The Chairperson said that the Department would be responding after presenting its report.

Mr Williams wanted some clarity on what was meant by the ‘baseline was not reliable’ on the findings for indicator 3. Can the Members rely on the information provided by the Department, if the AG found that reported information was unreliable?

Mr D Macpherson (DA) also wanted to engage the Department specifically on the AGSA findings.

Mr Ncumalo responded that there is no link between the two indicators, the baseline was not reliable because it was based on projected numbers.

Mr Williams was concerned about what the Department was going to say because he was getting the feeling that the Department might be misleading the Committee.

Mr S Mbuyane (ANC) pointed to page 23, which also reported that DTI presented information that was not reliable, so how could Members trust the information submitted by it? He asked the AG to provide some light on this.

Mr Ncumalo said that if these issues came up during the year, by the time quarterly reports were compiled the Department would have addressed them. When the AG was conducting the audit, it was based on the draft Annual Performance Plan.

The Chairperson advised Members that perhaps the Department was better suited to respond to the Member’s questions.

Department of Trade and Industry Annual Performance Plan 2018/19
Mr Lionel October, DTI Director General, reported that DTI received a clean audit as well as ten of its entities. The economic climate has changed significantly since last year, and there is a broad based growth both in the advanced economies and the developing economies. A number of sub-Saharan economies have been experiencing recession but now broad based growth coming to the fore. In the recent quarter, SA growth prospect was improving.

Improvement was recorded in manufacturing as well as agriculture. People had expected a decline in manufacturing, but for the first time SA is hitting over 50% expectations on positive growth in the sector, although the country was still facing a jobs crisis. On global trade, the growth in exports has been increasing and slowly but surely the budget deficit is being reduced as well as the trade gap.

All activities were aimed at one objective which is to create a dynamic and competitive industrial sector, but the sector employs less labour as the new technology comes in. The incentives are aimed at ensuring that SA has a competitive dynamic industrial sector.

A new programme was created, Investment South Africa in addition to Trade and Investment South Africa. The objective is to grow the manufacturing sector to promote industrial development, job creation, investment and exports. The industrial development intervention programme is at the core of DTI. Annual plans were set in place to ensure that the industry is dynamic; clear incentive targets were set and the investment target was set at R15 billion.

The World Bank reported that once new job in manufacturing is created it leads to four new jobs. Manufacturing is key as it is the only sector that creates jobs in the value chain. The number of companies / enterprises that DTI seeks to target is 850. DTI has been running programmes for more than 30 years. It had labour-based and export-based incentives but these were closed down due to exploitation. Labour-based incentives have not worked in the country and across the world. Instead, different and more sophisticated indicators were used.

DTI will be releasing its annual Industrial Policy Action Plan (IPAP) within the next two weeks and some analysis was presented. The Automotive industry contributed 33% to manufacturing and 6% to the GDP. 130 000 skilled jobs were produced through the sector. There was R45 billion worth of investment. This needed to be looked at carefully because it speaks to the number of jobs that could be created. We need to look at job creation at an overall level in the industry and not try to micro-manage each company on how much employment should be created.

With regards to the Clothing and Textile sector, before the programme was introduced it was declining but now it employs 95 000 jobs due to the implementation of the industry policy.

On the incentive programme, with regards to the number of investments – DTI has moved away from measuring labour to measuring investment. When we used to target incentivizing jobs – every year DTI met its target but after the 7th year you would find companies closing down. Labour subsidies do not work. We need to co-invest with the employers, people will get the incentive when they have installed the new technology and the machinery. Hence corruption is no longer taking place at companies with regards to incentives. That is why DTI used investment as the key measure to determine if companies should get incentives or not.

Its budget for incentives included those for manufacturing, infrastructure, services and telecommunications incentives. Just over R5 billion is dedicated to incentives and all of them are based on the principle of reciprocity. Companies need to provide DTI with a baseline and maintain their employment – as a condition, as well black economic empowerment. The Aquaculture Development and Enhancement Programme incentive is a success story – it was introduced about 10 years ago and it now supports about 43 000 jobs and has developed R24 billion in export revenue. Through this, call centres were also launched and have employed about 2 000 young people.

Special Economic Zones formed part of broadening participation, there are now eight SEZs, one more will be submitted for Mpumalanga and North West. DTI is expanding – the target is to have a SEZ in every province.

Industrial Parks is a new programme and so far DTI has assisted about eight industrial parks. DTI brought AGSA on board to ascertain how it can measure its performance indicators for the parks. Some industrial parks plans need to be revised and revived but DTI will be producing a status report on the work completed. On the BEE programme, the BEE Commission was established as well as the business plan – its reports will be submitted at a later stage on the implementation of the BEE industrialists programme.

Atlantis will now be a new SEZ and the application will be brought forward. There are 78 projects that have been supported thus far. 11 industrial parks have already been upgraded.

DTI is currently dealing with four pieces of amendment legislation (Copyright, Gambling, Credit and the Companies Act)

There is a high retention rate in DTI, and it has maintained those targets over the years. There are serious concerns about the employment budget, and all of that has been taken into consideration to ensure that planning is effective and efficient. The budget has been increasing over the years but in recent years, we cannot expect any major increases due to the fiscus consolidations. The main priority is the industrial and incentive divisions which absorb more of DTI’s budget. Now with industrial parks and SEZs, with the potential provision of infrastructure, these are absorbing a significant part of the budget.

Discussion
Mr Williams asked what DTI was doing to address the APP concerns identified by AGSA. It appeared that the Department was moving backwards. A clean audit performance did not necessarily mean that everything was fine but only that everything that DTI reported to the AG was the truth. He asked if DTI’s indicators were not being well defined.

Slide 14 indicated the number of jobs supported and created by DTI’s incentive programme (10 000 new jobs and 20 000 jobs retained through the programme). He asked if the programme were to be dismantled, would that translate to a loss of 30 000 jobs. It was important that the Committee get a list of the companies supported through the incentive programme to ascertain if they were BEE compliant and who owned them. He was concerned about the R6 billion given as incentives but no clear detailed information was submitted by DTI on the enterprises supported. He asked how the figure was measured.

Mr Macpherson referred to AGSA’s findings on the targets that DTI set for itself. He asked the view of the Director General of how expropriation of land without compensation would affect industries and provide policy clarity. Food security and expropriation of land without compensation cannot exist along side each other. He asked the DG to provide some policy clarity on how food security and effective agro-processing would co-exist with expropriation of land without compensation.

He said entities were starting to unravel at a rapid rate because the regulators are not doing their jobs, and he asked about the status of the National Gambling Board. He asked the reason for the National Lotteries Commission’s meeting with the Department the next week.

Adv A Alberts (FF+) asked how DTI dealing with trading partners when talking about expropriation of land without compensation. The Minister dealing with land reform said in the news today that they can proceed with taking back the land because Section 25 as it stands gives the go-ahead to expropriation of land without compensation. This would impact on the bilateral investment treaties as well as the Investment Protection Act. What interventions did DTI participate in to ensure that investment treaties and the Investment Protection Act were not contravened?

He asked what could be expected about the amendments to the Companies Act – people have seen directors acting with no regard to the law, and deliberately ignoring their fiduciary duty towards shareholders. He asked if stricter measures and a shorter path to accountability could be considered in the new amendments to the Companies Act.

Mr J Esterhuizen (IFP) said that government is one of the biggest spenders in the economy and has the capacity to transform the economy more than anyone, but a lot of SMMEs (Small Medium Enterprises) refuse to do business with government because of late payments from government departments. The SMME sector is the most crucial sector to foster economic growth and development, but government is failing those businesses by delaying their payments.

He asked why the automotive sector gets more incentives and support from the government, but the agriculture and poultry industry are falling apart in the country and they are the most crucial sectors in the industry. He also asked for comments on the steel industry.

Mr G Cachalia (DA) said that he was interested to hear about the cost benchmark against the benefit – the cost per job where DTI invested in the manufacturing industry. How did they monitor the sustainability of those jobs created through government support? Secondly, he asked DTI to furnish information on the cost per job for the SEZ. He said he has seen some scary figures on the cost per job at Coega SEZ. Perhaps the Department could comment on that.

Mr Cachalia was interested in the interventions for black industrialists that will create 9 500 new jobs and retain 8 000 jobs, and he asked about the projected contribution into the GDP. DTI was investing R1.6 billion in industrial parks, but returns on those investments were in the millions in relation the GDP and 14 000 jobs. However, he believed this was a good return in comparison to the SEZs.

Mr S Mbuyane (ANC) asked DTI to respond to the AG’s opinion about the consistency of its performance targets. He asked for an indication of the challenges existing in some of the SEZs, and how those challenges could be addressed. He asked about the impact of localization on SEZs and Broad Based Black Economic Empowerment (B-BBEE).

Responses
Mr October, DTI Director General, replied about the AGSA findings. Before DTI developed the APP and set performance targets, those performance targets were sent to AGSA for comment and advice as there is a process of consultations that takes place. When DTI develops its APP, those comments and advice were heeded and taken into consideration. Before DTI concludes the final draft, it sends it to AGSA once more for comment. AGSA’s report was based on the draft APP but the comments were heeded and rectified.

The framework the APP is based on is that when DTI is reporting on performance indicators, those that have remained unchanged are disclosed per programme. The discrepancies between Quarter 1 and 2 are normally highlighted by the internal audit function. When the internal audit function raises an issue, it is resolved so that by the end of Q4, the annual targets are verified and assessed, but some of the nuances that DTI is experiencing were not captured correctly.

Mr Shabeer Khan, Chief Financial Officer at DTI, added that these value-added findings were received on draft versions of the APP. DTI took these findings into account and corrected them in the final draft. Some have to do with specific functions and relate to policies that currently exist, but Members should take cognisance that some policies require a review. With regards to Human Resources management, the AG has been engaged on this and it will be fixed

Mr October said that the APP is an interactive process with the AG, we agree upfront with the AG on the items flagged and what was being measured. For instance, when DTI ran the internship programme, it did not use monies from its own budget but from the Skills Fund. Department officials sat down with the AG, this was noted and it required a revision of the indicators in the APP. The Department meets with the AG at the beginning of every financial year and has a discussion about how to measure its performance indicators.

On the 30 000 jobs, the manufacturing sector employs 1.7 million jobs. DTI is supposed to maintain that figure through its programmes. The biggest factor is demand not supply, no matter how many incentives are granted to a company, it all depends on the demand for the product. It is the totality of our interventions that have created that number of jobs, DTI must be measured based on that – the impact of the programme on the particular sector or industry. If there is no support system, these industries would be dismantled just like in Australia. The incentive is not the decisive factor, we use the incentive to crowd in the private sector, and it is not a subsidy to attract and keep the co-investment going. If we did not have the incentive for the phone industry, for instance, we would not have the industry.

It is important that Members understand that the poultry industry depends on the demand for poultry not shifting incentives from one industry to another. Our biggest indicator is not to micro-manage companies and instruct companies on what they need for employment, and impose conditions. Companies need flexibility, we just need to ensure that when companies invest, government is right next to the companies supporting them i.e. co-investing along with the companies.

On a list of supported companies, we have a complete list of companies that receive DTI incentives and we refuse to provide to companies based on racial divisions. The Department created a separate division to manage incentives. The reason for that was because there are a lot of processes that take place and it is a laborious process – there are rigorous checks and balances required when processing incentives and granting them. When companies claim for incentives, they must send through the road map of the machinery that it bought or invested in, and DTI would inspect that machinery to check whether it is indeed operational and its impact on the company as well as employment.

There is a system that checks every application and ensures that they are assessed. When companies put in their applications they sometimes overstate their investments and spent less than the provided figure and that is expected because companies will always spend less on their direct investments. Two incentive programmes were closed, one of them was the Labour Programme. This programme was dismantled because people were being employed by companies so that they could be eligible for the incentive. After a couple of years, DTI discovered that these companies would close down around the same time the incentives expired. Hence, the measurements used are very important

On the amendment to Section 25 of the Constitution, as a department we provide certainty to investors about the safety of their investment and give full reassurance that their investments will be safe. It would not impact any of the current investments, and in our sector the investments are actually expanding even in light of the constitutional amendment on land expropriation without compensation. DTI with the President’s Office is going to host the biggest investor conference later in the year to address all these questions and the existing uncertainty.

Members needed to note that no country has been able to grow until it fixed its land and agricultural questions. South Korea, the United States of America, Japan, amongst others and even India have done so – by expanding and granting more agricultural land to small black farmers will translate only to growth. If other countries have done it, South Africa could do it as well and those countries have been successful.

The National Gambling Board was found to have engaged in some corrupt activities. As a result an administrator has been appointed. After the Act has been amended, DTI would like to have an administration and do away completely with the Board. DTI was busy with the same system for the South African Bureau of Standards (SABS). DTI implemented the same system for the Companies and Intellectual Property Commission (CIPC) which is now receiving clean audits but that does not mean there are no problems.

On the cost per job measurement for the incentive programme, you cannot measure employment in one as a success story by shifting away incentives from another sector. There is a certain level attached to the fixed costs on SEZs, then over many decades benefits are achieved. Coega is now renowned as a world class facility and with the R12 billion investment, hundreds of thousands of vehicles would be produced.

On SEZs, DTI developed the Special Economic Zones Act in 2014 and brought it to Parliament because the sector was not regulated at all. There is now a Board and any application must prove that the SEZ would be viable and conduct feasibility studies which would be submitted to the Board in support of the application.

On the intervention in the steel industry and the poultry industry, DTI set up a steel committee with the steel industry and jointly came up with solutions for the industry. Tariffs were imposed on different products. Similarly, with the poultry industry, a number of those companies are now actually recovering.

Company directors need to be held personally liable for corruption as is the case in other countries. The new amendments to the Companies Act would ensure that these changes were effected.

On the cost of the auto vehicle industry, throughout the SA economy, prices for vehicles are high and there were proposals about importing second hand cars. However, the reason most Western countries banned importing second hand cars was because it would destroy the local industry. If imported second hand cars were allowed in the country, that would destroy the local automotive industry. With industrial policy, the best way is to work together with the industry and not base the incentive or subsidy on labour or imports.

On industrial parks, the response was that no new company has joined the industrial parks, so the focus is to empower and strengthen the existing companies.

The Chairperson said that some questions may be submitted in writing due to time constraints.

Mr Macpherson said that no one denies that people would benefit from expropriation of land without compensation, but it is the policy uncertainty it creates for investors. He asked who at the National Gambling Board has been charged for corruption and why is the National Lotteries Commission (NLC) being called for a meeting next week.

Mr Williams appealed to DTI to assure the Committee that the APP concerns will be addressed the following year. He asked what DTI was doing to ensure that the post of Chief Information Officer would be filled. He suggested an independent study should be done on the R6 billion incentive programme to ascertain the benefits derived from it and whether it was worth it. DTI would continue telling the Committee the same thing, it was about time the Committee got information about this from an independent service provider.

Mr Esterhuizen said that there was a bit of unfairness when it came to imports, because in other industries this was allowed. Nothing is being done about the companies and SMMEs that get procurement from Eskom but import the products to supply to Eskom.

Mr Cachalia said that it would be useful if the Committee could get some detailed information on the black industrialists programme as well as the SEZs. He asked DTI to provide information on the ratio of staff costs as a percentage of operational and other costs in SEZs. In terms of Coega, in order to break over a 20 year period it would require operational costs to be cut by at least 40% - how much investment would be required for sustainability over that period? Lastly, on BEE commitments, he asked the SAFTA had to come before Parliament to address their concerns about the sugar industry instead of reporting to the Department.

Adv Alberts asked if a report on the black industrialists programme could be provided to the Committee. Secondly, he asked for a brief overview of what was being done at the OR Tambo Airport SEZ.

Mr Mbuyane noted that his question on the SEZ challenges was not responded to.

The Chairperson said that the Committee had run out of time, and she suggested that DTI returns at a later stage or submits written responses to outstanding questions such as the SEZ challenges.

Mr October said currently a study is being done by the Presidency on all the incentives across government and it will provide a cost benefit analysis. All incentives have gone through an assessment and a report can be provided to the Members.

He agreed with Mr Cachalia about Coega’s operational costs. Operational decisions and costs for SEZs are done at the provincial level, DTI at the national level only provided the incentive. The SEZ is required to disclose the investor and furnish detailed information before an incentive is granted. The money used for operations by SEZs is their money and because it is their investor’s money they will always ensure that costs were minimised. DTI incentives are only granted on the basis that the money would be utilised for infrastructure, machinery or equipment.

On South African Farmers Development Association (SAFDA), the BEE Commission was established only last year. DTI sought to strengthen the BEE Act. It was discovered as in the case of SAFDA, there are protected interests who refuse to transform. Strengthening the BEE Act is envisaged to address some of those challenges. The Department has been working jointly with SAFDA and the millers but the sugar cane growers are resistant to transformation.

Due to time constraints, responses were cut short and DTI will respond to outstanding questions in writing.

The Chairperson asked DTI to return on 27 or 29 March 2018.

Mr October indicated that he would not be available, but his office would stay in touch with the Committee Secretary to arrange a suitable day.

The meeting was adjourned.

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