Sugar Regulations; DTI 2017/18 Annual Report & Quarter 1 performance with AGSA input

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Trade and Industry

13 September 2018
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Portfolio Committee was briefed by Auditor-General South Africa on the audit findings of the Department of Trade and Industry and its entities. AGSA informed the Committee that the report did not include findings on the South African Bureau of Standards and the National Lotteries Commission because neither entity had finalized its Annual Financial Statement. There had been an improvement in clean audits, which amounted to seven across the portfolio, including the Department of Trade and Industry. Across all entities, there were no material findings. There had also been a reduction in irregular expenditure.

The overall status of internal control was good. Leadership had improved, as had financial performance and management. The Auditor-General was comfortable that there were good governance controls. The status of the Supply Chain Management had improved and there were no findings. Consequence management showed that those entities that had had irregular expenditure in 2016/17 had all been investigated. However, there had been a low response to key controls and addressing key risk areas. The National Regulator for Compulsory Specifications was a key risk area.

Members asked why the South African Bureau of Standards and the National Lotteries Commission had not been included in the report by the Attorney-General. Members noted that a supplier had submitted a false declaration of interest and asked for the name of that supplier. They also requested clarification on three allegations related to SCM. A Member asked for the name of the entity where material uncertainty existed.

The Director-General of the Department of Trade and Industry informed the Committee that the Department had achieved a financially unqualified opinion with no findings, commonly known as a ‘clean audit’ opinion. That meant that the Department’s 2017/18 financial statements were free from material misstatements and there were no material findings reported on performance objectives or non-compliance with legislation. During the 2017/18 financial year, the Department had spent 99.0% of its allocated budget of R9.3 billion. The budget had declined from almost R10 billion and that had especially impacted on the incentive programmes.

The Director-General noted that the global economy had been on a strong recovery in 2017 but protectionist policies and the domestic situation, as well as situations such as the listeriosis which closed down three Tiger Brands factories, had changed the picture for South Africa. Agriculture emerged as the largest contributor to GDP growth mainly due to the end of the severe drought experienced over the past few years in some parts of the country.

The unemployment rate had increased by 0.5 of a percentage point to 27.2 % in Quarter 2 of 2018 compared to 26.7% in Quarter 1 of 2018. The industries that contributed to job losses were manufacturing (105 000), community and social services (93 000), trade (57 000). In line with the decline in manufacturing production, the manufacturing sector lost 105 000 jobs as a result of a lack of demand in the sector.
The Department’s First Quarter Report for 2018/19 showed that the financial situation and the lack of economic growth were very worrying. There had been a decline in agriculture and mining. The African Growth and Opportunity Act (AGOA) of the United States was a concern as the surplus tariffs on aluminium and steel could be extended to automobiles. South Africa had to develop a strategy to mitigate the US pull-out from Iran.

A Member requested a formal reporting, alongside the reporting of activities, of the ‘bang for the buck’ in terms of return investments, jobs, sustainability, financial and otherwise, and cost so that the Committee could fully investigate the effectiveness of the efforts of the Department. Members wanted to know wanted to know at what point foundries would be established in South Africa so that the export of raw minerals would stop? Could the Director-General diagnose three or four urgent interventions that could assist to roll back the recession?

Members asked about the manufacturing decline from Tiger Brands, the drought in the Western Cape and sugar, given the South African Sugar Association situation. Referring to the mandate for industrial development, Members wanted information on the facilitation of transformation in the building sector and the locomotive sector. Was there any localisation? How many black industrialists were involved? Were previously advantaged people benefitting from the incentives programme and, if so, in which sector? The Committee needed more clarification on the 25% tariff on steel which impacted negatively on the country. In relation to the poultry, where was the country in relation to steel and the raw material side versus poultry and the value chain and loss of jobs?

The Department of Trade and Industry provided a briefing on the sugar regulations and the current status of the situation in the industry. The Director-General stated that a proposal had been put forward that SASA make use of one basket of levies and split it. The sugar industry was concerned about internal arrangements such as voting, etc. However, the real issue was to grow the industry and consider biofuels and bio-energy as consumers were cutting down on sugar. Agriculture was a real challenge to transformation but the best performer was sugar. Black participation was less than 10% but the Department had targeted 50% black participation.

Members noted that both industry and government had to pay for transformation. How much was government prepared to pay for transformation? Could the Department not come up with a strategy so that when the sugar industry came up with a transformation strategy, the two could be balanced? Blacks did not have mills, so how could they process the sugar? Where the long-term solution would be catered for in the legislation? Black farmers needed to share in the value chain but the sector was not fully transformed. What was the reason for the delay?

The Committee considered the Report on the Study Visit to Germany to scrutinize the Fourth Industrial Revolution. The Chairperson indicated that the report was in draft form and that it was necessary for Members to confirm that it reflected the Committee’s position. The report detailed the visit to Germany to meet various role players in the Fourth Industrial Revolution. It was noted that, in principle, the Fourth Industrial Revolution consisted of the development of cyber-physical systems where physical objects were embedded with software, microcomputers and sensors to allow them to become intelligent and to interact with each other. Germany was building on the platform of Industria 4.0. The concept of co-bots, robots working together with humans, was introduced to the study group. However, it was noted that the Fourth Industrial Revolution would create new types of jobs and would not result in job loss.

The Committee did not discuss recommendations. That aspect of the report was to be considered the following day.
 

Meeting report

DTI audit outcomes 2017/18: briefing by Auditor-General South Africa (AGSA)
Mr Tshepo Shabangu, Senior Manager, AGSA and Mr Sizwe Nxumalo, Audit Manager, AGSA, took the Committee through the briefing on the DTI for the financial year 2017/18.

Acting Chairperson, Mr S Mbuyane (ANC), took over the Chair.
 
Mr Shabangu noted that the status of DTI action plans had improved since 2016/17 and the follow-up in addressing audit findings of 2017/18 were well followed-up. Overall internal control, basic management, ICT and vacancies in CEO positions had improved.

Mr Nxumalo stated that the South African Bureau of Standards (SABS) and the National Lotteries Commission (NLC) were not included in the presentation, nor were they included in the statistics as their financial statements had not been finalized. There had been an improvement in clean audits, which amounted to seven across the portfolio. Across all entities, there were no material findings.

Ms C Theko (ANC) asked why SABS and NLC were not included in the report.

Mr Shabangu explained that the finalised results had not been submitted at that stage.

The Chairperson returned.

The Auditor-General’s report showed an improvement in that there was a reduction in irregular expenditure. The Export Credit Insurance Corporation (ECIC) had regressed to an unqualified audit report with had a material non-compliance finding. The National Consumer Commission (NCC) and the National Credit Regulator (NCR) had improved. The previous year the audit opinions had been unqualified with finding but in the year under review, both entities had received unqualified opinions with no findings. DTI, the Companies and Intellectual Properties Commission (CIPC), National Consumer Tribunal (NCT), the National Gambling Board (NGB), and the Companies Tribunal (CT) were unchanged with unqualified reports with no findings. The National Regulator for Compulsory Specifications (NRCS) had a qualified audit with one finding. There were no issues on performance reports.

The overall status of internal control was good. Leadership had improved, as had financial performance and management. AGSA was comfortable that there were good governance controls. The status of the Supply Chain Management (SCM) had improved. There were no findings on SCM. Consequence management showed that those entities that had had irregular expenditure in 2016/17 had all been investigated. However, there had been a low response to key controls and addressing key risk areas. AGSA had checked the GRAP accounting against accrual accounting to determine the situation in certain entities.

A key risk area was the NRCS.

The Chairperson informed Members that they should ask any questions of clarification that they had before she moved onto the DTI report.

Discussion
Mr A Williams (ANC) noted that the Annual Report referred to emphasis of matter and material impairment of R32 million that had been incurred as a result of unrecoverable receivables. What did that mean and was it bad expenditure, or what did it mean?

Ms E Ntlangwini (EFF) noted that a supplier had submitted a false declaration of interest. What was the name of that supplier? There were three allegations related to SCM. Could that be clarified?

Ms P Mantashe (ANC) had noted that there was regression on the quality of financial statements. Could AGSA unpack that point?

Mr G Cachalia (DA) asked about the material uncertainty that existed. Which entity was that?

Mr Mbuyane welcomed the report but was not sure about the irregular expenditure. Was it in terms of the goods supplied? And which entities exactly had been responsible for the irregularities? There was a comment on the Portfolio Committee. He asked where the Portfolio Committee had not done well.

AGSA response
Mr Shabangu did not have the name of the supplier who had made the false declaration. Perhaps DTI could assist. On the regression of the quality of the Annual Financial Statement (AFS), he noted that there had been six adjustments in the previous year but seven adjustments in the final statements in 2017/18.

It was DTI that was not a going concern in terms of the AGSA indicators, but AGSA was not raising the alarm bells because, of the three indicators, the big contributor was around the accruals. It was about the DIRCO accruals but was not a crisis as there was a valid explanation, although it had to be recorded. The other was about the conversion from GRAP so there was no crisis. He had not understood the question about the Portfolio Committee.

Mr Mbuyane had seen something in the report about on internal control and provision of assurance by the Portfolio Committee which had remained unchanged

Mr Nxumalo explained that both in the previous year and in the current year, the Portfolio Committee had provided assurance. The assurance had remained unchanged from the previous year.

Mr Mbuyane explained that he had not known if the reference about being unchanged referred to the Trade and Industry Portfolio Committee but he understood that it was the assurance given by the Portfolio Committee, and not the Committee itself that had remained unchanged.

Mr Nxumalo explained that the comment was only in regard to what was in the scope of the AGSA and so he had looked at the Committee’s oversight role in respect of tracking AGSA reports etc.

The Chairperson confirmed that he was referring to the Trade and Industry Portfolio Committee. The Auditor-General had tracked the reports and minutes of the Portfolio Committee to ensure that oversight was being maintained.

The Chairperson noted that AGSA was having a look at the Committee and she supposed that it was right for them to do so. It was simply that the Portfolio Committee had provided assurance. It was the first time that the Portfolio Committee had encountered that form of checking.

Mr D Mahlobo (ANC) said it was always a problem that, for example, the Portfolio Committee, had obtained 100% for oversight and likewise with the Minister got 100% but then the DG gets 75% and the internal audit only got 75%. The higher structure could not get a good performance rating if the internal audit was not doing well. The higher structure could not do better than the lower structure. The DTI had done well. The AGSA should note that leadership meant in totality and therefore included structures at the bottom. The Department had done well. The Committee had remained unchanged because it could not do better, so the report should say that the Committee had maintained its position, but at an acceptable level. The report should reflect that the assurance was unchanged at a high level, although there was always room for improvement.

Mr Nxumalo stated that the audit report looked at the percentage of potential irrecoverable debts and that was flagged. That was not cause for concern.

Mr Shabangu responded to Mr Mahlobo, saying that the Auditor General had the same challenge. When something was ticked off, it did not mean that there was no room for improvement, even at 100%. Red and orange arrows showed concern versus no need for concern. When AGSA did the audit report, officials identified the potential non-recoverable debt. That was not a crisis, but highlighted the issue of recoverable debt.

Ms Ntlangwini asked about the irregular expenditure of R40 million. She required clarity.

Mr Cachalia in terms of the false declaration and the name of the supplier, the Committee would like to have the name, in due course. He requested an explanation about the DIRCO accruals and what that meant. Thirdly, he requested a detailed report on irregular and fruitless expenditure.

Mr Williams said that the Committee should commend the Department on the unqualified audit reports and the steady improvement.

The Chairperson informed Ms Ntlangwini stated that DTI would provide a document on irregular expenditure.

Mr Nxumalo explained that the R40 million was irregular expenditure over five years. In 2014/15, there was R40 million irregular expenditure but it had reduced to R17 million, R16 million and R11 million but in the current year, irregular expenditure stood at R7.6 million.

The Chairperson thanked the AGSA. She suggested that there could be extra marks (or colours) for those that went beyond 100% on compliance.

DTI Annual Report 2017/18
Mr Lionel October, Director-General at the DTI presented the Annual Report. He had been informed that brevity was the soul of wit, so he would be brief. It was the last report for the fifth administration. The Annual Report was very thick so he would just summarise it.

The DTI had achieved a financially unqualified opinion with no findings, commonly known as a ‘clean audit’ opinion. That meant that the Department’s 2017/18 financial statements were free from material misstatements and there were no material findings reported on performance objectives or non-compliance with legislation.

Financial Results Overview 2017/18
During the 2017/18 financial year, the Department had spent 99.0% of its allocated budget of R9.3 billion. The budget had declined from almost R10 billion and that had especially impacted on the incentive programmes. Expenditure on Transformation was at 87.8%, and 94.7% on Investment South Africa.

The Departmental cost drivers comprised R5.4 billion transferred to beneficiaries across the various incentive scheme programmes, and R2.2 billion to other transfer payments comprising departmental agencies, foreign governments, international organisations and others. The remaining 17.48% was utilised for operational expenditure.

Challenges
Mr October noted that the global economy had been on a strong recovery in 2017 but protectionist policies and the domestic situation, as well as situations such as the listeriosis which closed down three Tiger Brands factories, had changed the picture for the country. Agriculture had emerged as the largest contributor to GDP growth mainly due to the end of severe drought experienced over the past few years in some parts of the country.

According to Stats SA’s latest QLFS, the unemployment rate had increased by 0.5 % to 27.2 % in Quarter 2 of 2018 compared to 26.7% in Quarter 1 of 2018. The industries that contributed to job losses were in manufacturing (105 000), community and social services (93 000), trade (57 000). In line with the decline in manufacturing production, the manufacturing sector had lost 105 000 jobs as a result of lack of demand in the sector which led some companies to shut down or ration employment. Input costs (including fuel and energy costs) had been increasing, negatively affecting profitability in the sector and Tiger Brands had closed down three of its production sites due to the listeriosis outbreak around February/March 2018. Drought in the Western Cape affected some of the wine production while sugar products faced competition from imports as local production costs rose due to the recently imposed tax on sugar.

DTI First Quarter Report 2018/19
The financial situation and the lack of economic growth was very worrying. There had been a decline in agriculture and mining. It had to be noted that growth in the Fourth Quarter was unusual because of the sales phenomenon which stretched from Black Friday sales to the traditional spike at Christmas in December. The export data showed a jump in oil exports and there had been bumper agricultural harvests. That had led to a comparative decline in the First Quarter.

The African Growth and Opportunity Act (AGOA) of the United States was a concern as the surplus tariffs on aluminium and steel could be extended to automobiles. South Africa had to develop a strategy to mitigate the US pull-out from Iran.

Financial Performance to 30 June 2018
The allocated budget for the 2018/19 year was R9.4 billion, of which R2.1 billion was the year-to-date budget, of which R1.7 billion or 81.4% had been spent in the year to date. Of the R1.7 billion spent, transfers to incentives accounted for 25%, and transfers to entities accounted for 55%. Compensation of employees stood at 12% and Goods and Services stood at 8%. Outstanding compliance documents were responsible for underspending in the area of incentives. The distribution included, amongst others, the Manufacturing Development Incentives, which contributed to the reduction in expenditure.

The DG was confident that expenditure would catch up in the Second Quarter. He also noted that the budget of the Department had been reduced.

The Chairperson thanked the DG for his succinct but highly informative presentation. She reminded Members that they were not dealing with sugar at that point in the agenda, and noted that the DG had avoided discussing the issues related to sugar.

Discussion
Mr Cachalia thanked the DG for the presentation. It was an impressive list of what the Department had done. He noted that the First Quarterly figures were significantly down, although he realised that other factors were to blame. The plus factor was meagre. In order for the Committee to be more effective and cogent in its insight, he formally requested a formal reporting, alongside the reporting of activities, of the ‘bang for the buck’ in terms of return investments, jobs, sustainability, financial and otherwise, and cost so that the Committee could investigate the parameters and take a real view of the effectiveness of DTI policies and activities. It would be necessary to look at the beneficiaries over time and to see whether they had succeeded or failed, and if so, why. He asked for similar information in respect of the meta interventions that the Department had made. If Members could have that, the Committee could really cook.

Ms Mantashe appreciated the report and applauded the DTI for the clean audit because it meant that the Committee had done good oversight, but since it was the last report for the term, she wanted to know at what point foundries would be established in South Africa so that the status quo could be changed. At what point was the export of raw minerals going to stop? The DTI had to take that forward to the next term. 24 years down the line, raw minerals were still being exported. But she did appreciate all the work down over time, especially the Special Economic Zones (SEZ’s). As the Eastern Cape was an agricultural province, there used to be many factories where farmers sold their wool, but there was now only one. Was the country putting all its hopes on minerals? What about the agricultural provinces? DTI had to work towards changing that.

Mr Macpherson said that the big question that each department needed to ask itself was what role the department had played in rolling back the recession, and also in contributing to the recession. DTI played a big role in driving exports, driving export promotion and making it easy for companies to invest in South Africa. The country had gone backwards in ease of opening a business. It was easier to open a business in war torn Afghanistan than in South Africa. That could not be right. There was a tendency to blame everyone and everything else. There was uncertainty in an uncertain time.

Red tape contributed massively and he had come from a meeting with the United States (US) Assistant Secretary who had indicated that one of the big concerns for the US was the National Regulator for Compulsory Specifications (NRCS). That situation kept going on, year after year. There was no long-term plan for incentives. There was no five-year or ten-year plan, despite requests from the Committee. The diagnosis of AGOA was misplaced as the biggest threat to South Africa’s continued participation in AGOA was the case before the courts regarding chicken quotas. If the court agreed with the applicants, it would be an automatic exclusion from AGOA. There were a lot of problems on the horizon. One way to beat the recession, although it appeared that some politicians did not believe that the country was in a recession, was to make it easier to invest in the country.

The Chairperson acknowledged Mr Mahlobo, although she did not like interrupting people on the floor.

Mr Mahlobo stated that if Mr Macpherson wanted to discuss recession, everyone had views. But was that the topic under discussion? He wanted guidance. If the discussion was opening up about the broader issues around DTI, then the Committee could have that discussion, but he believed that the questions should relate to the report.

The Chairperson responded that the DG himself had raised the issue of recession.

Mr Macpherson suggested that perhaps discussion in Cabinet had not been so detailed or in such depth.

The Chairperson asked Mr Macpherson to refrain from such comments.

Mr Macpherson suggested that DTI needed to look at how to drive investment into the country, and especially into the SEZ’s. DTI knew what the problems were to investment. He asked the DG to diagnose three or four urgent interventions that could assist to roll back the recession. The Committee could then assist his Department to make those changes.

Mr Mbuyane welcomed the report and asked about the manufacturing decline from Tiger Brands, the drought in the Western Cape and sugar, given the SASA (South African Sugar Association) situation. Did the DG have a plan to resuscitate the situation following the drought in the Western Cape and also the sugar production? Secondly, he referred to the mandate for industrial development. He wanted to check the facilitation of transformation in the building sector and the locomotive sector. Was there any localisation? How many black industrialists were involved? There were no figures showing where DTI was in terms of transformation. The ANC was representing the masses and he needed to know whether blacks were part of the industry. Thirdly, he raised the matter of incentives. Were previously advantaged people benefitting and, if so, in which sector?

The Chairperson stated that the point made about supply and demand was highly relevant. There were production sites but the demand was not there. How did one increase the demand? If it was not increased, the private sector would close down. That was the case in some instances. She was concerned about Tiger Brand Foods that had closed down three factories. She had thought that it was a temporary closure to clean up the operation. She would be interested to hear about the reasons for the closure.

She was concerned about the BRICS issue. The DG had said that the BRICS summit had provided hope for both South Africa and Russia for re-balancing trade. It would be constructive to hear more about that. Everyone was concerned about AGOA. The Committee needed more clarification on the 25% tariff on steel which impacted negatively on the country. In relation to the poultry, where was the country in relation to steel and the raw material side versus poultry and the value chain and loss of jobs?

DTI response
The DG began by mentioning that, in relation to the AGOA issue, the US Commerce Department was in the country and it was important to build an alliance because of the actions of the White House.

When the listeriosis outbreak had occurred, it had been traced to Tiger Brands and Rainbow Chicken and the authorities had acted within four hours of the findings and products were withdrawn and plants closed. RCL (Rainbow Chickens Ltd) had immediately cleaned up and its factory was open again. The situation was worse at Tiger Brands. That was the problem with de-regulation. Tiger brands was one of the companies that had been fighting against compulsory standards for foods. There had been a pushback from industry and therefore there were no regulations, which was why they had the problem. The Minister of Health had, the previous week, reported that the problem of listeriosis in the food chain had been completely solved. There were now clear regulations and increased inspectors. Tiger Brand had not yet regulated according to industry standards. Once Tiger Brand had regulated, they would come back onstream. DTI was working with Tiger Brands but the Quarterly Report, naturally, referred to the first quarter of the financial year.

The poultry industry wanted to set aside the entire AGOA agreement and had gone to court on the issue. That would have dire consequences. The strategy had been to extend AGOA to ten years but the compromise had been to allow in 60 tons of poultry. The argument of the Poultry Association was that the US had reneged on the agreement by putting in place the tariffs. The issue of the tariffs had been raised with the US and had been told that SA was absolutely no threat to the US. There was a principle in international trade called the de minimis rule which meant that if a country’s exports were less than 5%, the country would be excluded from the anti-dumping tariffs. SA’s exports were so miniscule that they could have no effect on the US economy. For that reason, DTI could not understand why the US was punishing South Africa but allowing Brazil and South Korea to export to the US. South Africa had to make its case, but could not get involved in a confrontation. DTI would explain to court the importance of AGOA and that the balance was still in SA’s favour.

Mr Macpherson was encouraged by the DG’s response and asked whether DTI was applying to be a friend of the court, or just submitting statements. Or was DTI a respondent in the case?

The DG stated that DTI was an amicus curiae or friend of the court and therefore could provide all facts. DTI would abide by the decision of the court but hoped to show that AGOA was still balanced in the favour of SA.

In response to Mr Cachalia’s request, the DG agreed with the need to consider impact. An impact assessment had been published and would be provided. That was the nub of the problem. DTI had to show what it had achieved and it needed a five-year plan to present to the next administration so that it could get a five-year commitment that incentives would be fixed and not be subject to reduction, as had recently happened.

He agreed with Ms Mantashe that the critical issue of beneficiation and lack of diversification was a real problem because of the low levels of demand in the country. Since the markets on the continent were so small as one billion people had been divided into 50 countries, Africa had small economies. Sweden was small but highly industrialised because of the wealthy EU market. One could not drive demand by production. Income levels drove demands. Because of the problems in the country such as the droughts, etc. and the low income levels in SA, there was no demand. Contrary to what people believed, the country needed to raise wage levels because that drove demand.

The DG informed Mr Macpherson that he had responded to the US’s concerns about the NRCS. The backlog was being addressed and the NRCS was moving towards a risk-based system which would mean that where countries had strong regulatory systems and could give an assurance that the products would be of a high quality, those products would be fast-tracked. The US had a risk-based system which meant that customs only focussed on high-risk areas. Unfortunately, the biggest problem that the NRCS had faced was the Kuga vehicle which was a US product. Also, the worst poultry, with the lowest standards, came from the US. However, there were high standards in relation to electronic goods. The DG assured the Committee that the NRCS issue would be solved very shortly.
 
DTI would create a long-term plan for incentives. An Auto Programme to 2035 was 99% finalized, which would lead to a massive increase in jobs. The intention was to move to an output of one million vehicles.
Transformation had been a problem because there were few black businesses in the incentive programmes but DTI had recently introduced BEE levels as a requirement. The issue relating to sugar would be dealt with later in the agenda.

Local incentive had worked in respect of the buses but the corruption in Transnet had led to closed factories and job losses. Local incentives had worked in the clothing and textile industries and 95 000 jobs had been saved. Police, army and other departments were buying clothing locally.

DDG Mabelo Mabitje-Thompson of the Incentive Development and Administration Division (IDAD) at DTI reminded the Committee that DTI produced an Annual Incentive Performance Report. It had been tabled in Parliament. It gave full details of what had been done in terms of job creation and black economic empowerment. Of all the years, the current year had seen a record high of Level 4 BBBEE and above incentive recipients. Up to 70% of the incentive approvals were Level 4 BBBEE and above, while 25% were at Level 1 BBBEE. New programmes in agro-processing, the black industrialists and BEE requirements had increased black participation in incentives. The black industrialists programme was having an impact and would improve figures to around 90% at Level 4 BBBEE and above in the coming year. DTI was tracking women in the manufacturing sector and making them export-ready. 50% of those women had been assisted to access the export market following export market research.

In response to Mr Cachalia’s question, leverage was tracked and for every R1 that DTI contributed, R5 was reached. There was a minimum investment of a R3 investment for every R1 that DTI spent. Looking at direct jobs, that equalled 70 000 jobs but indirect and induced jobs would double that as could be seen in the selling around the factories that were supported, and those sellers would be procuring from somewhere. The provincial spread was slightly changing. Limpopo had seen more companies supported, and similarly in Mpumalanga and Free State, there was had been a growth in industry. She noted that the report had been tabled and would be happy to present the report to the Committee.

The DG responded to Mr Macpherson’s concerns about ease of business by stating that DTI was working with the World Bank and with municipalities, and with all levels of government. The Companies and Intellectual Property Commission (CIPC) took 15 minutes to open a company in SA. There were five million companies in SA, 90% of which were owned by black South Africans but they had not been able to enter the market or supply chains because of the lack of demand. In Germany, big companies bought from small businesses but in South Africa, the big companies only bought from big businesses. For example, Shoprite Checkers only bought from Unilever and Tiger Brands. It was not the ease of starting a business that was a problem but the ease of trading and the lack of demand for trading with small traders. DTI needed to stimulate demand. Retailers had to buy local too, not only government, and DTI needed to take a more aggressive stance. President Trump had forced America to buy locally and maybe there was a lesson to be learned there.

The Chairperson noted that the allocated time was almost up but because there were more questions and the matter dealt with the Committee’s key oversight function, she would allow more time to the engagement with DTI.

Further discussion
Mr Mbuyane noted that the report said the NRC, the NCC and NCRS were in serious trouble. There was irregular expenditure in those entities. The DG had to pay close attention to those entities and had to indicate how the Committee could help. He welcomed the fact that there were 52% women in the Senior Management Structure. The question on DIRCO accruals not been responded to.

Mr Williams referred to the DG’s response on industrialisation and that there was no demand. The last time that the Committee had raised the issue of forcing companies to buy local, the Committee had been told by DTI that South Africa could not go that way because of the World Trade Organisation (WTO). Was it realistic? Did the US not care about the WTO, and, if so, could South Africa also not care about the WTO and put its best interests first? What was the situation? How far could the country go before it got to the Donald Trump situation?

The Chairperson warned Mr Williams that South Africa did not want to go that way.

Ms Ntlangwini wanted to know who the owners of Thandi wine were. She did not want them exploiting black names when the whole company was white. How did DTI track imports of products to ensure that they followed SA regulations to the t?

Mr Cachalia referred to the AGOA treaty and pointed out that Section 104 of the treaty required sub-Saharan countries to ensure protection of private property. In view of what was happening in the political domain, how was DTI giving assurances? The DG had said that NRCS was making progress but the previous day he had brought to their attention, as he was then bringing to the DG’s attention, that letters of authority had taken 118 days to deal with in 2014 and in 2018, the letters took 120 days to deal with. He did not see any progress at all.

In the incentive report, Mr Cachalia was less interested in provincial spread, BEE, women, etc. because he was sure that that was done. He was interested in profitability and sustainability. DTI reported on jobs but DTI needed to report on sustainability in terms of businesses and jobs. The Committee needed such reports on a regular basis. He issued a warning on the Trump approach: making people buy locally would entrench non-competitiveness.

Ms Mantashe asked about the agreement with China to sign a bi-lateral investment treaty. What could one expect from the new treaty? In what way did DTI believe that SA benefitted, to a maximum, from the BRICS arrangement, especially with Russia? Was it a political arrangement or did it assist with investments? Her lecturer had said that there was nothing for South Africa in BRICS and it should be written as BRICs as South Africa did not benefit.

Mr Macpherson focussed on the state’s ability to drive demand. The state was biggest procurer in the country but the state found any and every reason not to support local businesses. The state continued to buy imports from China, especially the municipalities, which bought things like imported tracksuits when they were available in the country. He asked how one told the private sector to support local business but government did not do so. Again, that week, he had found that a municipality had bought aerial platforms, i.e. the platforms that were used to raise workers to electricity poles, and so on, from an agent who would be having them manufactured in Italy. Aerial platforms were made and available in South Africa.

The Chairperson requested the name of the municipality but he refused to give it to her saying that he would deal with it as it had been given in confidence. The Chairperson had a problem with that as he had raised the matter of that municipality in Committee and the Committee had a policy on dealing with municipalities and issues of localisation. It was a Committee issue.

Mr Macpherson told the DG that he would give the name directly to him.

Ms Mantashe felt uncomfortable when a Member undermined the authority of the Chairperson.

The Chairperson requested the name of the municipality but Mr Macpherson said that she could not force him to give her the name. She asked him to turn off his microphone so that Mr Mahlobo could speak. A dialogue ensued. The discussion continued ‘off mic’ about the Member’s refusal to adhere to the request of the Chairperson.

Mr Mahlobo said that Members should respect the authority of the Chairperson. If a Member was not happy with her ruling, there was a mechanism for how to deal with it without becoming disruptive.

The Chairperson ruled that Mr Macpherson could not continue that line of questioning until she got the name of the municipality.

Mr Macpherson asked the DG how the continued non-compliance was being dealt with. Secondly, driving demand through the private sector was important and he thought that people should be offered incentives for supporting local manufacturers. He had read a scary statistic that over 50% of self-employed businesses had closed over the past five years. In the BEE scorecard, there was less focus being paid to allocating points for supply development, which was what would lead to the development of black small businesses. That was where the focus should be. How was DTI trying to address the matter?

Ms Ntlangwini announced that Advocate Dali had sent a message saying that the court case in Nelson Mandela was going very well.

Mr Mahlobo said that fundamental issues were being raised and they were important issues but the Committee needed quality time. The issue of benefits of trade agreements had been raised. Why did the Committee not request a full briefing on trade agreements? For example, the AGOA agreement had changed once the protectionism had become a factor.  SA knew that less than 1% of steel imported in USA was South African but there were no exemptions for the country. There were other trade relations, such as with the European Union which was coming to Africa as it was a growth point. Africa’s interest, as a bloc, had to be protected. Committee Members were using statistics but they were not disclosing where the statistics came from, e.g. Mr Macpherson had spoken about 50% of businesses closing. The question was whether the incentives were going to the right sector of the economy. The Committee had to make time for critical issues and to be able to give valuable input.
 
The Chairperson stated that the Incentive Report would be presented to the Committee. Issues that would be dealt with in that meeting did not need to be responded to in the current meeting.

DTI response
The CFO, Shabeer Khan, responded to some of the issues raised in the AGSA Report. He provided an explanation of the issue of the Department of International Relations and Co-operation (DIRCO) accruals. DTI had a footprint in 40 or so international offices and had appointed a foreign economic representative to deal with investment matters in each of those offices. The accruals were called DIRCO accruals because DTI did not duplicate functions in the foreign offices and so DIRCO provided administration support and made payments for goods and support in those countries. The accrual occurred because the invoices or vouchers came via DIRCO and then became part of an inter-departmental settlement.

The Auditor General reported a finding of a false declaration of interest. The finding arose because a state official could not do business with the state. There was an official in broader government that had done business with the state. The company declaration had said that no state officials were involved with the company. However, the Auditor General had found an official from another government entity working with that company. DTI had taken the finding onboard and had written to that entity. The official was subject to an investigation with a possible view to dismissal.

The DG stated that DTI was paying particular attention to the entities experiencing problems. DTI had 12 or 13 entities which reported to it. There had been problems such as corruption and maladministration in the agencies and DTI had been in the process of cleaning up. DTI was in the final stages of cleaning up. There had been a qualified audit for the NCRS was changing accounting systems and, as Members knew from the problems CIPC had experienced when changing accounting systems the previous year, there were many problems to be resolved. SABS was under administration and the lottery was being worked on.

The DG explained to Mr Williams that demand came from the concentrated three or four retailers. There was no legal instrument to force legal retailers to buy locally but the currency exchange rate had had a big impact and it was an appropriate time to get an accord with retailers. Mr Price got into trouble when the Rand depreciated. Retailers were facing competition with international companies that had moved into the SA retail space, such as H & M, Zara and Cotton On. Retailers had always said that they appreciated globalisation but now that international companies were eating their lunch, they wanted DTI support for localisation. DTI was working towards an industry decision to support local business. There would be a launch of the project by the Minister shortly.

He assured Ms Ntlangwini that Thandi wines was black-owned and black managed. But it was important question. How did one monitor compliance? One wanted to give incentives quickly because DTI only gave money for machinery which ensured jobs and not for consultants, surveys etc. It lowered the cost of investment for companies. However, before incentives could be paid the companies had to comply with all the laws of the country. DTI officials ensured that the Labour Regulations Act was adhered to, procurement regulations were adhered to and companies were retaining jobs. SARS compliance was also checked.

The DDG assured Mr Cachalia that the US understood South Africa’s commitment. Industrial investments were taking place as investors had been assured of a 100% commitment to the protection of property rights. The issue in the country was trying to extend property rights to black farmers. That was how he understood the purpose of land reform. Property rights were not an extension of land reform. He did not think land reform was an attack on property rights.

Regarding Trump and BRICS, a narrative was gaining traction as to whether the free trade agreements were important. One always had to remember that there was no demand within the country as the population was poor. South Africa had to export. BRICS had opened up a very closed market. For example, SA was the biggest exporter of citrus fruit and much of that went to Russia. The biggest investments in the country were all from BRICS. The only new investors were BRICS partners. Chinese and Indian investment was huge and together with the Russian market for agricultural goods, BRICS could only be in South Africa’s best interests. South Korea Taiwan and Japan had grown only because of their open trade with the US. Only if a country had a market like that, could the country grow. One could not grow with a market of 50 million poor people. The international trade agreements were good for SA. It had to be remembered that there was a 30% tariff on goods traded with Angola and Nigeria. He was of the opinion that incentives were essential for all sectors. The incentives in film, clothing, and vehicles had been remarkably successful and had to be extended. In other countries when a sector got into trouble, those sectors were bailed out by the government. That did not happen in South Africa.

Mr Trump had broken with orthodox economics with had said that all countries had to open their markets. South Africa had done that in the nineties and had lost its manufacturers. Orthodox economics had not taught SA to protect its own market and to look at exports.

The DG stated that there had been state compliance in respect of local procurement in some instances, such as clothing. DTI believed that the CEOs and CFOs had to be held accountable for procurement regulations within departments and that they should suffer consequences for non-compliance. Finally, he added that because of the active role of the trade unions, there was full compliance with all regulations when it came to imports.

The Chairperson thanked AGSA and the DG for the presentations that morning. The Committee would take a briefing on the sugar regulations.

Sugar Regulations by DTI
The Chairperson welcomed Mr Siyabonga Madlala, the South African Farmers Development Association (SAFDA) Chairperson and other representatives of the sugar industry.

The DG reported to the Committee that he had met with representatives of the industry the previous week. made progress on working on a plan for transformation and growth of the industry and some ideas for resolving the voting issues.

Ms Ncumi Mcata-Mhlauli, Chief Director: Agro-processing, at DTI presented a review of the sugar industry. She explained that the South African Sugar Association was an autonomous organisation and operated free of government control in terms of the Sugar Act and Sugar Industry Agreement. The SA Sugar Association Council consisted of 50/50 Representation by Millers and Growers, i.e. six Milling Companies and 14 Local Grower Councils.

SASA had concluded the process for the amendments to the Sugar Industry Regulation in April 2018. Subsequently, DTI and SASA had received a letter from SAFDA requesting DTI to delay the gazetting of the regulations and the transitional arrangements to allow SAFDA to re-negotiate the levy sharing mechanism.
SASA enlisted the services of a mediator to facilitate in the negotiations held on the 1 - 3 August 2018. The negotiations had collapsed as the industry could not reach an amicable solution. A subsequent meeting was led by the DG on 7 September 2018 to inform SASA members of the new transitional arrangements which were to be extended to either 31 March 2019 or 31 March 2020.

The DTI and SASA members agreed that the gazetting of the Amended Sugar Regulations, including the recognition of SAFDA, the transitional arrangements and long term strategic planning processes for industry transformation were of paramount importance and therefore should proceed as a matter of urgency.
Challenges brought up by SASA included the levy-sharing situation.

The DG added that a proposal had been put forward that SASA had to make use of one basket of levies and to split it after all budgets had been presented. SASA was concerned about internal arrangements such as voting, etc. However, the real issue was to grow the industry and consider biofuels, etc. as consumers were cutting down on sugar. Agriculture was a real challenge to transformation but the best performer was, in fact, sugar. Black participation was less than 10% and needed to grow to 50%.

The Chairperson stated that sugar was an important industry and the Committee had asked DTI for an update on the situation in preparation for the Committee’s engagement with the sugar industry in October 2018. Transformation of the industry was a key issue but the DG had raised the challenge of the reduction of the demand for sugar in food products and that the industry had to move into biofuels to improve the demand for the product.

Discussion
Mr Mahlobo believed that it was a good intervention but DTI needed to fix the car while it was moving. The opportunity to look at the tariffs was good. Government was creating an enabling environment but the industry had to be genuine. The industry had to be inclusive. He was happy that the transformational period had been extended but he took a dim view of the collapse of the negotiations. DTI could go ahead with the extension but could not allow self-regulation. The issues of legislation had to be worked on because the legislation had been overtaken by time and the spirit of the Constitution empowered DTI to improve transformation. He was happy that DTI was coming back in October but the DTI had to have its own view of transformation. He was happy about the probe into the industry.

He addressed the value chain. Firstly, there needed to be more land and the necessary irrigation, etc. Then there was production and by-products that meant that secondary industries could be created. What was the impact of tariffs and the sugar tax? He recommended that the Committee should support the transitional arrangements. There should be no fronting or use of socio-economic status for voting. How much was government prepared to pay for transformation? Both industry and government had to pay for transformation.

Mr Mbuyane had a question on the facilitation and collapse of negotiations. The government had to lead the negotiations. It could not allow a collapse. It was a democratic state requirement. He needed clarity in respect of the various negotiations. The presentation said the transitional period was until 2019, but the constitution had a different date. Which was the correct date?

He noted that transformation was broad. Could the DG not come up with a strategy so that when the sugar industry came up with a transformation strategy, the two could be balanced? He understood that blacks were not part of the industry. Transformation would be the number of hectares available to blacks. Blacks did not have mills, so how could they process the sugar? DTI should not take the voting process for granted. They could not vote in terms of hectarage.

Ms Ntlangwini commended the Department for work put into the sugar industry. DTI and the sugar industry had come a long way. In terms of the levy-sharing mechanism, she required more information and the reasons why the negotiations had collapsed. The sugar industry had to take the Committee into its confidence. Where would the long-term solution be catered for in the legislation? Thirdly, black farmers needed to share in the value chain but the sector was not fully transformed and she did not know the reason for the delay.

Mr Macpherson said that a process such as that taking place in the sugar industry did not happen overnight so everyone had to be commended. It was not perfect but everyone should have their eyes on the end goal. Had the transition period been extended to March 2019 or 2020? What if no agreement could be reached? One needed to know the best-case and worse-case scenario and to work as far away as possible from the worst-case scenario. With respect to the levies, it was a complicated issue but what was wanted was a growing industry and if everyone was making a profit, the levies would be irrelevant as there would be enough money to go around. A focus on growing the industry would make payment of tariffs easier. The focus should be equally on growth.

Tariffs were linked to the current issues in the sugar industry. If the industry had got the dollar-based price, everyone would be making money and the situation would not be so intense. There should be a re-look at tariffs.

The Chairperson did not want SASA and SAFDA to discuss the issues in that meeting as the intention was for the Committee Members to prepare themselves.

Response
The DG accepted that government had to take a more active role in the transformation of the sugar industry. He, the DDG and the chief director had spent a day in discussions with the sugar industry. Government was criticised for getting too involved in industry, but in sugar there was inertia by government. India had had a bumper crop of sugar of 40 million tons and so there was over-supply and prices had dropped to below production prices. Brazil had gone into biofuel following a year of over-production. Even countries like Zimbabwe had a minimum requirement of 10% of biofuel. DTI had been calling for legislation to include biofuel in the South African energy mix but government had not yet instituted a requirement for biofuel.

Increasing tariffs would make the situation worse. If prices of sugar were increased too much, Tiger Brands, Coca Cola etc would find substitutes for sugar. When the oil price went so high, people found substitutes for oil. In the short-term, coping with the Indian harvest could be done but, in the long term, sugar consumption and demand would fall. There had to be diversification. The two new sources of demands would be biofuel and bio-energy and those products would use any quality of sugar, which would certainly benefit the black farmers.

The DG believed that negotiations had broken down because of the luxury of an automatic levy increase for each member through a state regulation. That was why there was a fight for membership. The grain associations had to ask members to pay the fees for membership but cane growers had a guaranteed levy of R50 million each year. But the money was not for transformation. Because SAFDA had joined SASA, SASA members no longer wanted one farmer, one vote. Now they wanted voting per tonnage. But around the world, the principle of one farmer one vote was a strong principle because whether one was a small farmer or big, the biggest farmers should never dominate the sector. The principle applied even in KWV, which had been a co-operative but which had privatised following government deregulation in the 1990s. Afrikaans farmers had insisted on the principle of one farmer, one vote. The DG had told SASA to forget about voting per tonnage. The final solution was to give clear guidelines. Those terms of reference would require SASA to grow the industry and to diversify, and to commit to proper transformation targets of 50% production by black farmers. Sugar farmers had, in actual fact, proved to be the best in terms of transformation, growth and levies.

Agriculture had been deregulated in 1994 and cooperatives were privatised. That had been a huge mistake. Sugar was the only industry that was not deregulated and DTI wanted to see it as a model sector in agriculture.

The Chairperson thanked representatives of the sugar industry for listening in on the meeting. At the Committee’s engagement with the sugar industry in October, Members would focus on how to ensure the democratisation of the sugar industry, the issue of one-farmer-one-vote, tariffs, and transformation of the political and social dynamics of the sugar industry.

Committee Report on Study Visit to Germany: Fourth Industrial Revolution
The Chairperson indicated that it was necessary for Members to confirm that the draft Committee Report  reflected the Committee’s position.

The Members of the study tour had met the German Federal Minister of Trade and Industry, the Associations of the German Chamber of Commerce, the trade unions, BMW and a number of relevant and important persons and organisations.

The large number of small- and medium-sized businesses, which Germany hoped would increase and sustain employment, had impressed the Members on the tour. Germany considered it very important to fund German agencies abroad.

In principle, the Fourth Industrial Revolution consists of the development of cyber-physical systems where physical objects are embedded with software, microcomputers and sensors to allow them to become intelligent and to interact with each other. Germany was building on the platform of Industria 4.0.

The Committee had addressed the impact of the Fourth Industrial Revolution on labour and skills. Germany had spoken about its developmental path in respect of the Fourth Industrial Revolution. Germany had an integral working relationship with the unions to ensure that all factors and stakeholders were factored in and were part of the decision-making. There was no understanding yet of the impact on educational requirements, training requirements and skill requirements. However, the Fourth Industrial Revolution would create new types of jobs and would not result in job loss. The environmental perspective, and how to harness natural energy, was important. The concept of co-bots, robots working together with humans, was introduced to the study group.

The local Chambers of Commerce were responsible for organising training in partnership with government. Vocational training and apprenticeships were vitally important to Germany. The legislative framework was important. There was an emphasis on dynamic communication between government and the private sector.
Notwithstanding the Fourth Industrial Revolution, the industrial sector would remain a driver. Emerging economies had the opportunity to adopt and to lead Industrial 4.0.

Recommendations would be considered the following day when all members had read the report.

The meeting was adjourned

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