The Minister of Economic Development, Mr Ebrahim Patel, presented the fourth quarter report of the Economic Development Department to the Committee and he was accompanied by his Deputy, Mr Madala Masuku.
The Minister reported that the country’s GDP declined 2.2 percent during the quarter with agriculture taking the biggest hit as the sector declined by 24.2 percent. The number of jobs created in the quarter was 206 000 bringing the total employment rate to 16 378 000. However, the number of unemployed people increased by 100 000 bringing the number of people without jobs in the country to 5 980 000. Overall capital spending dropped by 3.2 percent and the fiscal tightening limited the growth of public investment.
Minister Patel emphasised the importance of South Africa maintaining its investment grading which was affirmed in March this year. Consequently, National Treasury successfully issued government bonds that yielded UD $2 billion of new debt. The Minister reiterated government’s plans to promote and protect youth employment as there are 3.6 unemployed young South Africans. Government has set a five-year target for the Industrial Development Corporation of R5 billion in funding to youth empowered businesses.
The Minister spoke of the need to improve trade relations with neighbouring countries and to particularly expand its exports as this was the only way in which the country’s manufacturing base could develop.
Committee Members asked the Minister why fuel prices were so high in comparison to neighbouring countries as fuel prices impacted on every aspect of the economy. The Minister replied that some of the countries with lower fuel prices actually imported their fuel from South Africa, but the difference was attributed to different tax regimes and to the fact that South Africa re-invested most of the proceeds from tax into its road infrastructure.
Members asked the Minister why there was such a sharp decline in agriculture and he attributed it to the bumper harvest which had been experienced in the previous year stating that the sector did not perform badly except that the figures from the bumper harvest could not be matched. Members suggested relaxing the visa regime to allow people with special skills to come into the country easily to support the local industries as the country was lacking capacity in some critical areas.
The Chairperson, Ms E Coleman, welcomed all those present to the meeting and apologised for having postponed the Committee meeting which was scheduled for the previous week for logistical reasons. She also tendered and apology that she was not going to be available for the afternoon session and for the meeting which was scheduled for the following day because of a family bereavement. The meeting would begin with a presentation from the Department and later the Industrial Development Corporation would make its presentation. If they were able to conclude business with the Department early, they would be able to also engage with the IDC before lunch. She reminded Members and delegates that the briefing would deal with the fourth quarter of the 2017/18 financial year but that they could also consider looking at the annual reports which would be audited, that is the non-financial part, through the monitoring and evaluation process and then they would also have the audited financial statements.
Economic Development Department (EDD) Presentation
Minister Ebrahim Patel greeting all the members and the guests. He said they were going to go through an extensive presentation in as brief a manner as possible. The report covered the period from January to March with seven focus areas in which they would highlight the research work that had been done or give performance indicators in the areas. They would do the standard reporting on the Key Performance Indicators (KPIs) on human resources (HR) and finance.
The quarter to quarter performance of the GDP showed that real GDP declined by 2.2 percent. The nominal GDP for the quarter was R24 billion less than for the last quarter of 2017. This result followed three quarters of stronger growth in real GDP. Six of the main sectors in the economy contracted, with the primary sector taking the most strain: agriculture contracted by 24.2 percent, mining by 9.9 percent and manufacturing by 6.4 percent. There was a considerable decline in exports of 16.5 percent while the capital expenditure declined by an annualised 3.2 percent after the previous quarter’s growth of 7.4 percent.
Main Drivers of Output Decline
While a drop in quarterly growth was expected due to the higher than projected growth in the previous three quarters, the output decline was sharper than expected. Agricultural production declined because the previous year had a bumper harvest. What is uncertain is whether the drought in the Western Cape has had an impact.
Mining production was lower in most sectors, including gold, iron-ore and platinum.
Manufacturing experienced weaker output in the chemical sector, textiles and clothing, as well as base metals, fabricated metal products and machinery, and in the wood and paper sector.
Investment was impacted by the fiscal tightening over the past two years combined with the weaker balance sheets of large state-owned companies like Eskom which limited the growth of public investment. Private sector investment and overall capital spending dropped by 3.2 percent.
The Rand strengthened during the period as a result of the buoyant mood which will impact on the competitiveness of South African exports. Consideration will have to be given on the impact this is having on exports because if the Rand is too strong or too weak it can be damaging for the economy. The best is for the currency to be competitive and not too strong or too weak.
Annual GDP for 2017/18
Real GDP grew by 1.5 percent for the financial year 2017/18, that is, from April 2017 to March 2018. Agriculture recorded the highest annual growth of 19.1 percent, followed by business services at 2.2 percent, transport at 1.8 percent and personal services at 1.3 percent. Mining and construction experienced a decline during the year while household consumption expenditure grew by 2.8 percent. However, capital spend and exports remained low at 0.2 percent.
In the quarter under review, the number of jobs increased by 206 000, taking the jobs total to 16 378 000. The labour force increased by 307 000 to 22 360 000, but the number of unemployed people increased by 100 000 to 5 980 000 thereby keeping the unemployment rate at 26.7 percent.
In the year under review, total employment increased by 165 000 jobs while the labour force contracted by 68 000. The number of unemployed decreased by 234 000 while the unemployment rate decreased from 27.7 percent to 26.7 percent.
Over the past 12 months, the public sector created 216 000 jobs while the private sector lost 51 000 jobs.
Jobs Analysis since the Adoption of the National Growth Path (NGP)
2 730 000 jobs have been created with 62 percent or 1 688 000 being created by the private sector and 38 percent or 1 042 000 jobs were created by the public sector. The unemployment rate was 25.4 percent which has now increased to 26.7 percent. This means there are 1 326 000 more unemployed people.
In the quarter under review, the main job creators were government with 95 000 jobs, manufacturing with 58 000 jobs and construction with 40 000 jobs. Job losses occurred mainly in agriculture, utilities, mining and transport.
In the financial year, the main job creators were government with 216 000 jobs, trade with 69 000 and manufacturing with 59 000. Job losses were incurred in utilities, transport, agriculture, private households, mining and construction. The job losses in transport, however, did not seem to make sense and the sharp decline was difficult to understand.
Jobs by Province
In the quarter, the main job creating provinces were KZN with 104 000 followed by Gauteng with 73 000 and Western Cape with 36 000. The provinces that experienced job losses were Northern Cape, North-West and Mpumalanga.
Over the course of the year, the main job creating provinces were Western Cape with 122 000, followed by Limpopo with 83 000 and KZN with 62 000. The provinces that experienced job losses were Mpumalanga, Eastern Cape and Gauteng.
Jobs by Industry
In absolute terms, the main job creating industries have been government with 980 000, business services with 715 000 and construction with 313 000. The best performers were business services with 4.8 percent, utilities with 4.7 percent and government with 4.1 percent.
Highlights from the Department’s Report
Focus 1 -Chevron Merger
Chevron is the holding company for Caltex. In 2017, Chevron Global agreed to sell its 75 percent shares in the Caltex business to Sinopec and a merger filing was made to the Competition Commission. The current minority shareholder, OTS, subsequently exercised a right of first refusal to acquire the 75 percent stake. EDD engaged with the merger parties, on the one hand, Chevron and Sinopec and the Competition Commission on the other hand. The merger was approved by the Commission Tribunal on 8 March 2018. The merger conditions focused on investment in production, impact on black economic empowerment, localisation and protection of employees. EDD is currently engaging with OTS, and it has been agreed in principle that the same merger conditions will be applied to the OTS merger.
Key Conditions Agreed between Government and the Merger Parties
- The head office for African operations would be established in South Africa.
- There would be no retrenchments for a period of 5 years
- Investment of R6 billion over a period of 5 years and increase in refinery production to 100 000 barrels a day.
- Maintenance of spending levels on local suppliers that obtain goods and services from local producers
- Establishment of a development fund of US $15 million dollars for small black-owned entities in the fuel value chain.
- Increase of BEE from 25 percent to 29 percent, including a worker empowerment component.
- Promotion of locally manufactured products through a service station shops network in China
Focus 2 – Regional Trade with Tanzania
EDD has completed a number of reviews on economic relations between South Africa and other African countries, focused mainly on trade flows and incorporating selected investment data. Past reviews included Zimbabwe, Angola, Mozambique, Kenya and Zambia. The reviews are in support of efforts to deepen the economic integration of the continent. The current review, the sixth in the series, covers Tanzania.
South Africa and Tanzania have similar populations, but South Africa’s economy is nine times bigger. Tanzania experienced growth from around 2002, with real GDP growth rates generally at 6 percent or higher and around 7 percent for the years 2014-2016. By 2016, Tanzania had grown to become the eighth largest sub-Saharan economy. The Tanzanian economy was almost three times larger in 2016 than 2001. Agriculture contribution remains above 30 percent of GDP and manufacturing still has a small share. The economy exhibits a similar degree of trade openness in 2001 and 2016.
Tanzania exported gold worth US $1.7 billion in 2016 which was around 35 percent of the total export basket of US$4.7 billion. The country generally runs a large negative trade balance averaging US $5 billion in recent years. Imports increased from US $1.7 billion in 2001 to US $14.7billion in 2015 before declining to US $7.9 billion in 2016.
China has risen as an important supplier to Tanzania from a share of 11 percent to of total imports in 2010 to 21 percent in 2016.
South Africa’s Exports to Tanzania
South Africa’s share of imports was between 8 percent and 10 percent of total Tanzanian imports for the period 2007 to 2012. Over the four years from 2013 to 2016, this share has decreased to a range of 4 percent to 6 percent.
South Africa is the most significant African exporter to Tanzania with almost half of African exports to Tanzania in 2016 coming from South Africa, followed by 27 percent from Kenya and comparatively small amounts from other African countries. However, the scope of South African exports to Tanzania is limited when compared to the share it typically has in neighbouring countries like Botswana (65 percent) or Namibia (57 percent). Comparatively weaker export performance noted for the manufactured exports such as cars. The IDC has provided funding to one sugar mill in Tanzania amounting to R664 million.
South Africa has not been able to fully exploit trade opportunities with Tanzania as Tanzanian import demand increased rapidly over the years. In nominal USD terms, total imports increased by 84 percent with imports from China increasing by 112 percent over this period while imports from South Africa decreased by 34 percent.
South Africa has a large positive trade balance with Tanzania. In 2017, exports were R6 billion, imports were R450 million and the positive trade balance was R5.6 billion. Exports to Tanzania are dominated by iron and steel product and structures amounting to R900 million in 2017.
South Africa is also a prominent exporter of trucks and other heavy industry semi-manufactured items. South African truck exports to Tanzania have been fairly successful, but South Africa competes closely with Japan for the market share and has done well for an extended period of time. South Africa and Japan account for about 40 percent of total truck imports by Tanzania. China, India and the UK are other significant players. Despite the competitive pressures, this is an important market for South Africa.
Plastics in primary form were South Arica’s fifth largest export to Tanzania by value in 2016 amounting to R155 million.
Uncoated paper was South Africa’s ninth largest export to Tanzania in 2016 valued at R117 million. At its peak in 2008, South Africa’s global paper exports totalled US $340 million with about 40 percent going to the rest of Africa. Tanzania’s demand for uncoated paper has increased substantially with South Africa being unable to meet its demand thereby losing a significant market share. In 2010, South Africa supplied 88 percent of Tanzania’s uncoated paper imports, but by 2016 this had declined to 32 percent.
Tanzania’s demand for imported medicines more than doubled from 2007 to 2014, before decreasing in 2015 and 2016. South Africa ranked 13th as a medicine supplier to Tanzania in 2016, with less than 1 percent of import share in recent years. While South Africa competes fairly strongly with India on medicines in closer neighbouring markets, SA medicine exports are not currently competitive when markets are further away on the continent.
South Africa was consistently one of the top three fertiliser exporters to Tanzania in the years 2001 to 2004 and was in the top ten for the years 2005 to 2008. From 2009 onward SA was a minor player in this market in Tanzania, generally ranked between 15th and 20th. South Africa’s world-wide exports of nitrogen-based fertilisers have not declined in the manner experienced in Tanzania, and in fact have gone through a bit of a boom since 2005.
South African companies exporting to Tanzania in 2017 include Sasol, Mondi, Toyota, Mpact, FAW, Scania, BASF and Sappi.
The significant increase of Chinese and Indian exports to Tanzania suggests growing competition in the future.
Focus 3 – Silicon Smelters Unblocking
A Spanish owned company with plants in Polokwane and Mpumalanga produced silicon metals for the export market, but it had to close down its Polokwane operations due to the high energy costs, resulting in 3 500 jobs lost in the value chain. It approached the EDD and the Department of Trade and Industry (dti) for help. EDD engaged Eskom, Department of Energy and NERSA to consider a discounted tariff in order to keep the business open. Eskom supported the proposal.
Focus 4 – Massmart SDF Top-Up
On 23 October 2017, at an exhibition of products manufactured by the 31 beneficiaries of the Massmart SDF, Minister Patel challenged Massmart to extend the term of the programme after its close date of 31 March 2018. On 20 March 2018, Mr Brian Leroni, the group Corporate Affairs Executive of Massmart confirmed in writing that Massmart will extend the Fund with an estimated budget of R30 million per annum, to support small suppliers to Massmart, many of whom displace imports.
The funding will be used as follows:
- Providing industrial engineering services to improve productivity and output
- Expanding the range of current small suppliers
- Expand capacity of suppliers to meet export demand
By the end of this financial year, Massmart expect to have procured more than R800 million from small and medium businesses; there are currently 31 businesses participating in the programme.
Focus 5 – Rating Agency Engagement
On 23 March 2018, Moody’s Investor Services affirmed their Baa3 rating for South Africa and upgraded their outlook from negative to stable. Minister Patel was part of a delegation of Ministers who met with Moody’s on 5 March 2018 to discuss the economic and fiscal outlook as well as efforts to address governance issues in the State and SOCs.
The engagement was key among the several meetings which government, business and other stake holders conducted over a three-day period with Moody’s to offer insights into improving investment conditions in the country.
In its report, Moody’s wrote: “The confirmation of South Africa’s ratings reflects Moody’s view that the previous weakening of South Africa’s institutions will gradually reverse under a more transparent and predictable policy framework. The recovery of the country’s institutions will, if sustained, gradually support a corresponding recovery in its economy, along with a stabilisation of fiscal strength.”
The rating of Baa3, maintains South Africa’s investment grade rating which remains an important signal to international and local investors.
The announcement by Moody’s to affirm South Africa’s investment grade rating has had a significant positive impact on investment:
- South African government bonds will remain part of the Citi Group World Government Bond Index, an important index for international investors in government bonds. ABSA and Bloomberg estimated that exclusion from the index would have resulted in US $8.8 billion possible outflows
- On 15 May 2018, National Treasury was able to successfully raise US $2 billion of new debt in an issuance which was 1.1 times oversubscribed indicating greater demand for South African government bonds.
The Department had looked at the three main rating agencies, Moody’s, Standard & Poor’s (S&P) and Fitch with Moody’s being the most important. A sample was taken of sixteen countries and ranked it for Moody’s. On the ranking, China has an A1 rating which is a very high rating. That means China does not pay such a high interest on the money that it borrows. The higher the rating, the lower the interest rates. Mexico has an A3, Indonesia has a Baa2 together with India. South Africa has a Baa3 rating and just below with weaker ratings are Russia, Morocco, Brazil, Turkey, Argentina, Egypt and Greece. Nigeria and Ghana are not rated by Moody’s. Ratings are important because they speak about borrowing.
Focus 6 – Update on Youth
In the last 12 months, EDD has conducted significant policy work to bring about empowerment of youth.
The Competition Amendment Bill does not deal with the youth specifically but the measures it will introduce will impact on youth and it is hoped positively.
On the inclusive growth symposium, it looked at how to bring people into employment.
The Fourth industrial Revolution and Market Inquiries are also focused on the youth.
There are more than 6.1 million South Africans between the ages of 15 to 34 years in employment. The biggest number is in Gauteng with 1.7 million youth in employment, followed by KZN with 1 million and then the Western Cape with 977 000 young workers. The majority of young people are employed in shops and hotels. There are young people who do not want to work in a factory but would rather work in Shoprite or Woolworths as a cashier. Retail appears to be the preferred place with 1.5 million youth and there was a need to combat it so that people could see production work and agriculture work as meaningful and something that people should aspire to do. Government is the second biggest sector employing 1.1 million young people.
There are 3.8 million unemployed young South Africans with nearly 65 percent of all unemployed people being between the ages of 15 and 34 years. The youth unemployment rate of 38.2 percent is more than double the rate for South Africans aged between 35 and 64 years old (17.6 percent). In the past five years, youth employment has increased by 297 000 jobs, although in the past 12 months youth employment fell by 134 000 jobs
Industrial Development Corporation Youth Funding
In May 2015, Minister Patel set a five-year target for the IDC of R5 billion in funding to the youth-empowered businesses. In the first three years, the IDC has approved R4.2 billion in funding to youth empowered businesses and is on track to exceed the target. In the past 12 months, the IDC approved R986 million in funding to 43 youth empowered businesses. In the past five years, funding to youth-empowered businesses has created 7 158 jobs. In the next three years, the IDC is targeting a further R3 billion in funding to youth empowered businesses.
Youth Empowerment and Employment Protection
Public interest conditions in mergers have established a non-retrenchment clause for 5 years and also established a R250 million supplier development fund with a focus on you and small business development.
- Job protection for 5 years post-merger
- Commitment to increase employment by 2000 jobs
- Edcon have also committed to increase localisation
- Non-retrenchment and job support for 5 years
- Establishment of R400 million fund to support black and youth farmers and increase localisation
- Non-retrenchment as a result of merger
- Total jobs protection for 5 years
- Establishment of R200 million fund to support black and youth farmers and increase localisation
- Non-retrenchment for 5 years
- Establishment of R500 million supplier development fund
- Relocation of jobs from London to Johannesburg
Non-retrenchment conditions at AB InBEV, Coca Cola and Edcon have protected more than 37 000 youth jobs. Young people are often retrenched first, so when a company is in financial distress or there is a merger and there is pressure to reduce staff they will generally shed young people first if they follow the law. They are the most vulnerable to retrenchments.
Focus 7 – Old Mutual Homecoming
Old Mutual filed a merger in September 2017 that would see the company return to South Africa as its primary location. Following extensive agreements between the Minister and Old Mutual, a significant agreement on public interest commitments was reached to facilitate Old Mutual’s return to South Africa.
Details of public interest conditions were reported to Parliament during the third quarter, however were subject to tribunal and shareholder approval at the time:
- A new R500 million to support small business and job creation
- A commitment to increase BEE shareholding to 25 percent within three years and to best-in-class over time
- A Commitment to no retrenchments as a result of the merger
On 10January 2018, the Competition tribunal approved the merger subject to the public interest conditions
On 25 may 2018, the shareholders of Old Mutual approved the transaction with 97 percent of the votes in favour of the mergers
The re-listing of Old Mutual in the South Africa is expected to be finalised before the end of the year.
Key Performance Indicators
Report on Infrastructure Input Prices
KPI 3– Work was done on Infrastructure Input Prices looking at what price increases were in five areas:
- Non-metallic minerals (Pre-cast concrete, petrol and diesel)
- Ferrous metals (Iron and Steel)
- Non-ferrous metals (Copper)
- Sawmilling and wood
- Utilities (Electricity and Water)
PPI is the Production Price Index which shows how much inflation is in the hands of factories, mines and farms. The Consumer Price Index (CPI) is the inflation in the hands of the consumer, that is, how much more consumers are paying when they go shopping. The PPI shows how much more prices the factories are paying for their inputs. These are important measures for the competitiveness and efficiency in the economy.
A lot more work needs to be done on the report before it can be formulated into policy
KPI 5 – Focus on Renewables
Report on Green Economy
The analysis was done regarding commitment 3 of the Green Economy Accord of 2011 concerning renewable energy commitments
Eastern Cape hosts REIPP projects which currently have a production capacity amounting to 43 percent of South Africa’s total wind energy: 1 440 megawatts of the total national capacity of 3 366 megawatts potential.
A sample of five projects were visited with a view to implement the rollout: Chaba Windfarm 20.6 MW; Cennergi, Amakhala Emoyeni 134.4 MW; Cookhouse Windfarm 135 MW, Cennergi, Tsitsikamma Community Windfarm 94.8 MW and Kouga Windfarm, Oyster Bay 80 MW.
- The visit focused on spending on socio-economic development
- Approximately R100 million was spent by these projects out of a broader 20 year-commitment of R4.5 billion by investors on socio-economic development.
Spending was as follows: Education and skills development got 38 percent, Social welfare 17 percent, healthcare 3 percent, general administration 21 percent and enterprise development got 21 percent. About 45 jobs were created by these projects.
KPI 10 – City of Cape Town Intervention
The following infrastructure projects were evaluated, unblocked, fast tracked or facilitated:
- City of cape Town water intervention
- Eastern Cape Provincial Heritage Resources Authority
- De Hoop Dam project unblocking in Jane Furse
- Butterworth emergency water scheme
At the PICC Council held on 14 November 2017, the City of Cape Town presented a report on the water shortage in the city. The PICC technical team subsequently worked with the city and seconded a senior water specialist to the city to assist with assessment of options to address the water crisis. The work helped to identify viability options, including using Table Mountain aquifers.
KPI 14 – Fast Tracking Investment Initiatives
Rail Capabilities at the Highveld Structural Steel Mill
- After EDD brought AMSA and Highveld Steel together to re-establish the Highveld Structural Steel Mill, the possibility to allow for the main line rails to be produced in South Africa has been unblocked
- All of South Africa’s mainline rail for the past few decades have been imported given the lack of suitable manufacturing capacity.
- With the re-start of Highveld under a contract manufacturing arrangement with AMSA, Highveld is now in a position to manufacture mainline rail in South Africa
- Samples of the rail were submitted to Transnet freight rail and were found to be suitable. Initial 2 150 tonnes were bought by PRASA.
KPI 18 – Improve Performance of the Industrial Development Corporation
At an IDC shareholder meeting on 14 February 2018 there was confirmation of the new auditors.
- The IDC Corporate plan was tabled before Parliament on 12 March 2018 where the short-term and long term-plans were assessed for approval.
- An evaluation of debt to equity ratios at global development finance institutions was done and compared to IDC.
Summary of Expenditure for the Fourth Quarter
As at 31 March 2018 the Department spent R912.1 million out of an adjusted allocation of R914.2 million, that is, 100 percent of the total allocated budget.
The Chairperson thanked the Minister for the briefing. She said the presentation had not dealt with the financials and she consulted with the Committee members whether they were to leave that to the annual audited statement or whether they would have to engage with the financials there and then.
Mr S Tleane (ANC) proposed deferring the matter and he was supported by Mr P Atkinson (DA)
Ms Coleman asked the members to interact with the report presented by the Minister.
Mr I Pikinini (ANC) referring to the decline of jobs in the report, said the decline in Limpopo was not really caused by the closure of the platinum mine in September 2017. He asked the interventions the government was making in addressing the decline. On the Chevron merger, he asked what the policy on local producers was regarding procurement. He requested an update on the vacancy rate and organogram.
Mr P Atkinson (DA) thanked Mr Patel for his comprehensive presentation. His comment related to job creation. The issue of visas for business people, especially those with special skills trying to get into the country. Smart people have a multiplier effect on the creation of jobs. The current visa regime is not beneficial to people with special skills and business people coming into the country. He asked whether it was possible for the Department to take a look at what can be done to improve the situation.
There was going to be an international airlines conference and one of the main speakers was going to be the CEO of Air Rwanda but he cannot get a visa to attend. A suggestion was made that the country should look at the situation, even if it is for African businessmen, to see if they can obtain a visa card that makes it easier to enter the country rather like the airline crews do and some countries have these special cards for people with special skills who can enter the country temporarily. There was a need to open up the visa system to allow into the country people that could have a multiplier effect on job creation.
Mr Tleane asked what could be done to improve the country’s exports to Tanzania. When the President went abroad recently he took a team of what he called investment ambassadors and he encouraged the extension of the idea to other parts of the continent particularly in East and Southern Africa.
On the report that young people were more attracted to retail, he asked whether that was a reflection of the educational system which indirectly encouraged young people to go in that direction. He asked what could be done to encourage them to aspire to go into production.
He noted that a lot of progress was being made regarding renewable energy but that some of the unions had a problem when the agreement was signed. He asked Minister Patel to briefly analyse the concerns of the unions and whether they were legitimate.
On the Barnes Southern Palace Holdings (BSPH) and SCAW South Africa merger, there was no indication that there was a condition of at least five years before any retrenchments could be carried out unlike other agreements that had that clause. There was the likelihood that they could start doing that after a year and cause problems.
Dr J Cardo (DA) On youth unemployment and the Department’s efforts to combat youth unemployment, asked whether the labour centres that were earmarked for use were going to work given that most of them were in a state of dysfunctionality. Regarding the fuel price increase, his understanding was that the price of fuel had gone up by 15 percent over a period of three months and he wondered whether the Department did any modelling around the impact of the fuel price hikes on growth and the broader economic situation. Some of the neighbouring countries have much lower prices for fuel and the increases in those countries is much more consistent. On the competition legislation, he asked for a progress report.
Ms C Matsimbi (ANC) on the Nkangala business expo that took place in her constituency, asked the Deputy Minister where exactly it took place and requested to be informed of future engagements of this nature and requested to be invited because she works with a lot of young people. It would be difficult for her to continue encouraging them and giving them direction of she was not aware of what was happening in her district. On the quarterly provincial job losses, she noted that Mpumalanga was hit hard with 45 000 job losses and she asked whether the Department had analysed the cause of this and whether there were any plans in place to resuscitate those jobs.
Ms A Mfulo (ANC) On the jobs that were lost in the fourth quarter, asked whether these were permanent jobs or temporary jobs. On youth’s preference for retail jobs, she observed that there was a lot of exploitation that took place in the sector where youths were never hired on a permanent basis.
On disability, she asked on which positions the 2 percent was to be found. She asked how many were in management.
On foreign investors, she expressed concern that some of them bring their own workers like the Chinese on the pretext that we do not have skilled workers.
Mr A Cele (ANC) On the Chevron merger, asked how many jobs would be saved; and on the worker empowerment component he asked how it works.
The Chairperson asked whether the reasons behind the decline in performance by various sectors had been analysed in detail. To have meaningful interventions, it was important to have an in-depth understanding of the root causes.
On the agricultural sector, the decline in production and employment showed that something was not right. She asked if this was evidence that the interventions that had been undertaken were ineffective, apart from the external factors like the drought.
She was happy with the analysis, but still felt that they were not getting to the bottom of the problems. The youth were impatient and were susceptible to be taken advantage of by people who wanted to destabilise the country.
The rate of cash in transit heists and instability in various areas were worrying.
There was a request for an institution such as a virtual university for entrepreneurs to equip people with entrepreneurial skills. She wondered whether some of the challenges being experienced were not as a result of lack of capacity.
She also requested that the Committee be furnished with the conditions of the mergers by the Department. She also asked whether if countries like Tanzania became stronger they might not lure the same investors that South Africa is attempting to attract.
Minister Patel thanked the Members for their questions.
On Mr Pikinini’s question on the closure of the mines, he suggested that the DG speak to Mr Pikinini and get his details so that the Department could respond to his question.
On Chevron and the levels of local procurement, if you took oil out of the equation, because oil is an internationally traded commodity, then they are asked to benchmark what they are procuring, and they are bound to continue their current levels. All that is needed is to monitor compliance.
On vacancies in the Department, in the second quarter the Department had employed a total of 118 people, the third quarter 117 and the fourth quarter 120. There is a challenge with the vacancies because the DG will say that he does not have money because of the cut in budgets. Vacancies are there but there is no money to fill them. On the organogram, it would have to be scaled down in the light of the medium-term staff budget reductions. The tight fiscal situation would remain for a number of years as indicated by National Treasury. As the fiscal situation improves, it would be better to channel that money into investment rather than consumption.
Concerning the existing visa regime, in the New Growth Path (NGP) it has already been noted that a visa regime that is more flexible and that targets highly skilled people should be established. The aim would be not only to open the doors to highly skilled people but to attract them. However, a balance also needs to be maintained because new graduates are complaining that they are unable to find jobs. There are also plans to re-evaluate the business visa regime. It was also important to nurture local skills.
On improving trade relations with Tanzania, some of the measures were set out in the report but the key one would be the improvement of infrastructure so as to ease the movement of goods from South Africa to Tanzania. It is easier to move things over water than it is over land and countries in Asia may well find that they are able to transport goods to Tanzania easily or more easily than South Africa can. If infrastructure is weak then it aggravates the problem. Funding partnerships are also necessary because a lot of the Chinses success can be attributed to that fact that they have a consolidated package with a bank that supports exporters, they have a marketing strategy and an extensive support network of embassies. South Africa needs to do something similar where banks back leading manufacturers to penetrate new markets or expand existing ones. Trade support is also important, and this would be facilitated through a free trade area for the African continent. It would be complex to achieve but it would boost trade because goods would be able to enter other African markets at a cheaper rate than non-African goods from Asia and other regions. Growth in the rest of Africa is good for South Africa. If South Africa’s growth is of a thin base because other African countries are growing slowly then the only opportunity foreign investors have is to come to South Africa and, practically speaking, there would not be a market for South Africa’s value-added goods. Other neighbouring countries would not have the money to buy South Africa’s sophisticated goods if they do not develop. So South Africa would be able to produce BMW’s but there would be no one to buy them. That story line that South Africa would be better off with economically weaker neighbours needs to be changed. It is, therefore, important that the continent grows at a much faster rate than the rest of the world. The progress of Tanzania will not be at the expense of South Africa. Investors do not go to a country because they like a country but because they see opportunities. You get your opportunities because people want to buy your goods and services. If Zambia grows then there would be more demand for South African goods which means there is space for investment. If Zambia stagnates, people may want to come to South Africa because they cannot go to Zambia but why should they invest because no one is going to buy the goods. Dynamic economics works on the basis that you try to ensure that your neighbours try to grow as much as possible. Sometimes faster growth in neighbours is even more desirable.
On career choices, there are gaps in education, but it is also the image that is projected by society about jobs. In Germany and the Scandinavian countries, production jobs are valued. Artisans are well respected, but they are looked down upon in our society and perhaps it reflects a more British attitude towards the trades than a German attitude. Political leaders need to speak up in community meetings about the value of jobs in production areas. Sometimes it is not even wages because the wages in the production sector are sometimes higher.
Regarding renewable energy, the union concerns are legitimate because coal is a major resource in the country, but the country also has to honour international obligations to develop a greener economy. The key issue is finding the balance between harnessing the coal resources and developing renewable energy for the future. Government is sensitive to the concerns and is not going to move completely away from coal, but is trying to blend a mix of traditional energy resources and renewable resources. It is important that the environment is not destroyed in the process of saving jobs. When the environment is destroyed you get drought and floods that could be even more damaging to jobs in the long term.
On the Barnes/SCAW retrenchment issue, the five-year clause is not inserted into every agreement as each merger has its own particular circumstances. The Barnes consortium took over an unprofitable company that was essentially losing money and they decided to turn it around. If they are successful then they will actually grow the number of jobs. If they fail, the factory will close and all the jobs will be lost. It is different from Coca Cola where there is an established market with profitable operations and they were just combining to make it even more efficient and profitable. A one-size fit all condition cannot be applied to all mergers. You have to look at the underlying capacity of a business to carry the obligations set for it. This was the reason that mergers took so long because a thorough analysis needs to be carried out. You cannot place a condition on a firm that will destroy the firm.
The labour centres have had significant challenges. The scheme will be principally driven by the private sector and government has incentivised it. Many large companies are going out directly recruiting young people and not necessarily via labour centres. However, young people need to have a place they know to which they can go where they can be registered and where smaller companies can go as they would need intermediary institutions like a labour centre to recruit young talent. The most successful labour market strategies are the ones in Europe where they have as close to full employment as you can get over a consistently lengthy period. They have invested heavily in our equivalent of labour centres. If your skills do not match those required by the market you are immediately re-trained. That cannot be replicated but more can still be done to improve the labour centres to get young people in touch with potential employers.
Concerning the fuel price increase, the impact of fuel prices is modelled in the general projections of future GDP. Many factors are taken into account one of which is all input costs in the economy. There are big differences in the price of fuel across the world with Europe being generally much more expensive than South Africa. The United States is probably cheaper than South Africa. South Africa had a tight control system for many years in the pre-1994 era then in 1992 an agreement was entered into between business, labour and the then government to create a mechanism where the fuel price was automatically adjusted on a regular basis to reflect the international price of fuel. Some neighbouring countries even get their fuel from South Africa. The difference in prices can also be attributed to different tax regimes. South Africa generally has a good road system because the country keeps on investing in it but there are countries that invest very little in the road system. The prices may be low, but the roads are just basically in the capital city and in one or two major cities and beyond that you have very little road networks.
On competition legislation, the Department was very busy in the quarter, with talks having taken place with business and labour with broad consensus being reached on how to make changes to the Competition Act and adjustments to the bill that was published. It was expected to be tabled in Parliament by late July.
Deputy Minister Madala Masuku said the Nkangala business expo was the initiative of the municipality and the Department was just invited so they did not initiate it. The expo links with local programmes in the community but in future they would be advised to give specific invitations to Members of Parliament.
On the 45 000 lost jobs in Mpumalanga, part of the problem was around chemicals and manufacturing. These were experiencing difficulties as well as agriculture and when agriculture experiences a decline then Mpumalanga will always be in the picture. The other jobs that were lost also came from government as a result of fiscal constraints. On disability representation, there are currently two at level 5 and one at level 11 and the two percent of disability representation was not the maximum but the minimum.
On the question whether the jobs lost were permanent or temporary, 70 percent of the jobs in the economy would be regarded as permanent so the bulk of the jobs lost would traditionally be regarded as permanent. In the Sinopec/Chevron agreement, it was specified that the jobs had to be done by South Africans. However, there will always be critical skills that will be done by the Chinese.
The Chairperson suggested that rather than competing, African countries should work on greater collaboration to be able to compete against countries like China. She emphasised the importance of critically analysing the economic events and trends so as to design effective interventions. She echoed the sentiments expressed by Ms Matsimbi on the need to invite members to events in localities to foster greater collaboration.
She thanked the Minister and the Deputy Minister for their willingness to account and declared that the meeting with the Department was over and asked to be excused from the afternoon session as she had a bereavement.
Presentation by IDC Chemicals and textiles Industries Division
Mr Shakeel Meer, Divisional Executive made the presentation, with Ms Dineo Skwambane the Head of Textiles at the IDC.
The sector only accounted for 3 percent of manufacturing, but it was an important sector as it creates tens of thousands of jobs. The sector experienced challenges such as a large amount of imports from China and manufacturing as whole came under pressure in 2009. The clothing and textile sector went through the same pressures but did not have the same recovery. Leather has done relatively better, but clothing and textiles have dropped substantially.
Some challenges experienced in the sector include the pressure on consumers with little disposable income which means the retailers have been selling less clothes or people have shifted to buying cheaper clothes. Imports have generally been a challenge but what is even more challenging are the illegal imports coming into the country. These are goods that are either totally undeclared or under-declared resulting in a loss of revenue for National Treasury as people do not pay the taxes. It also makes it difficult for local industries to compete with them.
Fluctuations in the exchange rate have made the situation more challenging. Consequently, a number of investors have actually lost their equity and it is extremely difficult to attract investors to put in more equity which makes it a fairly risky sector and one of the results of that is that the commercial banks do not have much appetite to fund the sector. The IDC has become a major funder in the absence of capital from the commercial banks. The other source of funding is the DTI funding which government manages on behalf of the DTI.
The fact that the sector has not been doing well, it has also struggled to attract new entrants, especially management skills and entrepreneurs. It is a sector where there are very strong customers in the form of retailers. South Africa is dominated by a few retailers. In recent years, they have been under pressure because of a drop in consumer spending because of international retailers entering the country. They have been passing that pressure to the manufacturers and the manufacturers being fragmented do not have a lot of power to negotiate and their margins have come under a lot of pressure as a result.
There are, however, some opportunities and the IDC is focusing on doing some things. There is a need to make businesses more competitive, more flexible and efficient. One of the key areas is skills development. In some cases, the business processes are outdated and there is excess handling of some of the products so there is need to manage that better within the sector. The right technology, equipment and continuous innovation is required. One of the areas where the sector became lazy was customer service. This creates a major opportunity for South African manufacturers because a local manufacturer is closer to the customer and should be able to understand what the retailers want. Closely linked to that is focus marketing and there are opportunities for export marketing as well. It is challenging but there are companies that are doing that successfully.
The value chain needs to be looked at as it is an area that has struggled for a number of years. Manufacturers have tended to be individualistic and regarding everyone else as a competitor. What has started working well is cooperation among companies in the sector. Companies were being grouped to share learnings so that the sector as a whole can strengthen. If cotton can be grown locally, the spinning is done locally, and the manufacturing done locally then the local industry will become more competitive.
IDC is trying to keep as many jobs as possible, so it is supporting companies in distress so that they return to profitability. IDC has become a shareholder in some of the businesses but applications from new businesses in distress are also taken. What is required of those businesses is a turnaround plan.
The Fourth Industrial Revolution is impacting on a number of sectors and there is an impact internationally on the clothing industry. Retailers are being encouraged to buy locally. The IDC also engages with government on procurement through local tenders and designation of goods.
The IDC cannot address the illegal imports, but it supports measures to curb them.
In terms of funding to the industry, there was a decline in the previous financial year, but there has been substantial growth in this year and more information would be provided when the IDC presents its annual report.
The textiles sector is a relatively capital-intensive sector which takes a lot of investment by value, but by number there is more investment in the clothing sector and that is where the jobs get created.
The IDC continues to play a role with turn-around initiatives and is supporting black industrialists and women in the sector. One of the challenges is attracting new entrants into the sector because it is not seen as particularly attractive but despite that there has been some considerable success scored regarding transformation in the sector.
IDC works closely with the DTI and manages some of their funds so over and above the funding that the IDC invests into the sector, it also manages the clothing and textiles competitiveness programme, at grants scheme. There are two elements to that: production incentive programme and the competitiveness improvement programme. This has been a successful intervention by government. There has been close to R5 billion invested in the sector and it has contributed to close to 5 000 additional jobs. The total assets have increased by more than the funding which came from the clothing and textiles grants because the sector has also been co-investing. Some of the money being invested in the sector is also coming from the IDC as well. Companies often approach the IDC for both debt portion and grant portion. The equipment portion of the IDC funding is now being funded by grants which then allows IDC to focus on the working capital needs and co-invest together with the grants scheme.
Besides providing funding, sector strategies have been strongly developing. The IDC works with the sector to develop value chains. A number of industry sectors have been set up with some being regionally based and others being industry based. There is a textiles cluster, a wool and mohair cluster and the IDC works with these clusters to develop the sector.
One of the long-term opportunities identified are fashion designers that have some very good products and attracted international attention. The IDC would like, over time, to grow them so that they could also source locally regarding their products thereby creating a niche in terms of manufacturing.
The fact that the IDC is supporting a sector which is facing challenges, and because the IDC has deliberately taken a high-risk profile by supporting distressed companies, there have been high levels of impairments in the sector which at some stage went over 50 percent. The IDC has been trying to support companies through turn-arounds and there have been some failures where companies, despite some serious efforts, have gone under. However, the IDC has been successful in managing the impairments down to 33 percent which is still higher than in other sectors. It is a high-risk sector, nevertheless, it is an important sector because of the type of impact it can have and if the sector is lost it will be hard to rebuild. The companies that are funded are supported in a number of ways such as the development of business plans, formulation of turnaround plans and monitoring of the implementation of the plans. The management staff are supported to the extent that sometimes IDC staff spend time at these companies. There are regular engagements with the retailers to make sure that they are supporting the businesses. Consultants are sometimes engaged to support the businesses in maintaining value chains.
The Acting Chairperson, Mr Cele, opened the floor to the Members for comments and deliberations.
Ms Mfulo, on skills development, said there so many talented people with skills and she wondered which skills were needed.
She asked what was being done about illegal imports.
Regarding investors, she said some of them were not supporting the local communities. There were not a lot of retailers in Japan, but only small businesses so she proposed that model for South Africa. She called for support to the disabled just as women and the youth were getting support, as well as supporting and rewarding successful companies. She wondered whether there were policies to force retailers to procure locally.
Mr Tleane said in the presentation there was mention of the Fourth Industrial Revolution and he asked whether there was any collaboration with Technical Vocational and Educational Training (TVET) colleges, for instance, so that new designers are groomed who will come in with fresh ideas. New entrepreneurs needed to be supported. The IDC had a good presence on the African continent and he asked whether the IDC was helping to establish foreign markets for local businesses. He also asked for an explanation of the concept of natural fibres.
Ms Matsimbi asked whether there had been any changes on the case study of Da Gama regarding black empowerment. On supporting management, that did not appear to be the case in 2016.
Mr Cele, commenting on the owner of Da Gama, said he had been charged with collusion and asked whether the IDC was involved in ensuring companies were complying with the law in the country. He compared foreign companies in the sector that were coming into the country and doing well with local companies that were struggling and asked what the difference was.
Ms Skwambane, addressing the question of illegal imports, said they had a forum that meets with SARS as they were the ones that were ultimately responsible for dealing with illegal imports and assessment of imports ensuring that under-invoicing was not done at points of entry. They do meet with DTI, unions and industry but the results had been slow in coming.
On foreign investors, there were some companies including those from China that were training local people although they also brought some people with special skills to come and train the locals as well as deal with areas where there was a lack of capacity locally. One of the conditions of IDC funding is that there is a proper skills transfer and that the foreign managers will hand over to local managers. She cited a Chinese company that was manufacturing blankets and had done this successfully.
Mr Cele asked for the name of the company.
Ms Dineo Skwambane replied that it was Yi Li Da SA Manufacturing (Pty) Ltd.
Mr Shakeel Meer added that the IDC looks to ensure that a company is compliant before it is given funding.
Ms Skwambane, on Da Gama, said there was an issue regarding collusion, a fine was instituted on Da Gama and that the shareholder must find funding to pay the fine as they were not allowed to use IDC funding. At the time of the visit of the Committee Members they were not aware of the difficulties at the company.
On funding for people with disabilities they had one person that they were supporting but there was room to accommodate more. On success stories, she agreed that there was need to acknowledge the good performers.
Mr Meer said they had a conference in October last year at which successful companies were acknowledged and made presentations at the conference but there was need to do more.
Ms Skwambane explained that natural fibres are fibres that are grown like cotton, bamboo, hemp, mohair and Kashmir. There are opportunities in the sub-sector and South Africa is the largest grower and exporter of Mohair in the world. South Africa also has good cotton growing areas which also presents further opportunities.
Mr Meer, on new retailers that had come into the country such as H&M and Zara, admitted that they were doing very well but the problem was that they were importing their products rather than buying locally. It was the established retailers that were buying from the local manufacturers. The entrance of the new retailers had actually put more pressure on the local manufacturers because the local retailers had lost a market share. The new entrants would need to be encouraged to buy locally. However, there was no legislation that requires retailers to buy locally.
On comparisons with countries like Japan, one of the challenges they had in South Africa was that retailers were extremely powerful as they made up a large proportion of the purchases and they were in a position to put a lot of pressure on the manufacturers regarding requirements and prices.
On skills development, two types of skills were needed, management skills and operational skills. Regarding multi-skilling or optimising skills, companies had not invested enough, but that is now changing.
On exports, one of the challenges of exporting into the African continent was because a number of countries were importing used clothing from Europe and the United States.
The IDC has been working with TVET colleges on issues such as curriculum development or with equipment to improve their training of skills. With universities, the issue has been more with technology transfer.
Mr Cele thanked the members and the delegates from the IDC.
The meeting was adjourned.