Economic Development Department 2017/18 Annual Report; with Minister & Deputy Minister

Economic Development

11 October 2018
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

Annual Reports 2017/18

The EDD briefed the Committee on its 2017/18 annual report. The Minister and Deputy Minister were in attendance.

The EDD received a clean audit, and there as an overall improvement in the control environment as evidenced by less findings compared to the previous financial years.

In terms of revenue, the Competition Commission is the biggest contributor in the portfolio through fines and penalties.

Governance was an issue over the past year with the state capture inquiry unfolding and there was a prominent loss of confidence in state owned enterprises. The effect of corruption in the economy would be about R27 billion in annual GDP and 76 000 jobs foregone. The PEPs initiative is taken very seriously by the IDC, and that information is available on its website. The EDD instructed the IDC to forgo KPMG as its auditor in light of strengthening its governance. Lastly, the IDC also instituted litigation against Oakbay Resources on monies advanced to be recovered.

There was a 165 000 increase in employment (on average the economy has been growing by 300 000 jobs per year over the past five years). However, youth jobs decreased in the period because of job losses in the established sectors due to the last-in-first-out principle. Since the adoption of the NDP (National Development Plan), 1.8 million jobs have been created- net of new jobs; and 2.7 million new jobs created since the adoption of the NGP (new growth path).

The revision of the Competition Act has been one of the major highlights. In addition, the EDD secured R6 billion for investment in infrastructure and R700 million for investment in supplier and small businesses development.

Members asked questions about whether the Department has done any research on the cost of state capture into the economy and infrastructure development, and whether it would be possible to quantify the impact; how state capture affected the job creation set out in the NDP and NGP and how would those job targets be formulated in the near future. They further asked about  the President’s new stimulus plan in relation to infrastructure development and PICC;  the status of the PPS gazette; the export tax and how it would be implemented;  the progress made on finding a successor for the Industrial Development Corporation; insight on whether the department of economic development was expected to exist after the elections; the legal action taken against Oakbay by the IDC; whether the IDC was the sole owner of the Uranium mine; examples of the black industrialists that were supported with the R9.7 billion so that their successes can be tracked; future plans on the fourth industrial revolution; details and comments about a Cape Town based innovation company that was supported by the IDC which came up with instruments with technological instruments that would detect cancer at early stages; whether the Director General was permanent or not; details on the current auditors after the IDC dismissed KPMG as its auditors; whether the incorporation of the NEF into the IDC was still going to happen; whether there was anything that can be reported in the South African Film industry since the Cape Town studios were built; what the department was doing in tourism space in particular with the creation of jobs; whether the continental free trade movement would not affect the trade agreements with the APA and the EU; details on who monitored the Supply Development Fund with various companies;  detail on the Massmart Fund and its Corporate Social Investment and whether there were any tax implications. Lastly, looking at the outcome of the job summit is the Minister confident that what was resolved would be implemented.

Meeting report

Opening remarks

The Chairperson welcomed everyone present, and thanked the Minister and the Deputy for their presence. The economy was not doing well, and she expected the Minister to brief the Committee on the economic outlook locally and internationally. In addition, Members were interested in the African agenda and how far we have come.

Minister’s opening remarks

Mr Ebrahim Patel, Minister of Economic Development, thanked the Members for the opportunity to make the presentation, and stated that the EDD extracted a few areas from the more detailed annual report which covers the comprehensive work that has been done by the Department. In the past 12 months, EDD has been able to provide the quarterly reports and this report will briefly refer to areas that have been covered through the year. In the question and answer session the delegation would go through the report more comprehensively.

Briefing by the EDD on its 2017/18 annual report

The Minister reported that the size of the SA economy is R4.7 trillion. There was a R260 billion infrastructure spending which decreased – the drop was due to challenges in state owned companies like Eskom and Transnet and the former reached its peak on its main power stations. The new renewable energy agreements will bring in some changes. FDI (foreign direct investment) also declined to R19 billion. The upcoming investment conference will focus on the domestic companies and find ways on how FDI could be increased.

Labour market

There was a 165 000 increase in employment (on average the economy has been growing by 300 000 jobs per year over the past five years). However, youth jobs decreased in the period because of job losses in the established sectors due to the last-in-first-out principle. Since the adoption of the NDP (National Development Plan), 1.8 million jobs have been created- net of new jobs; and 2.7 million new jobs created since the adoption of the NGP (new growth path).

The country went into recession when the financial year ended and as for work done on the African region – the most significant new markets in manufacturing continue to be on the continent. We are trying to create an African free trade area as previously discussed in the meeting. Subsequent to that West Africa has come into the discussion and all Members of the Union have agreed to the free trade agreement for the continent. The President has signed and the Treaty will come into effect as well as the ramifications.

Highlights

The Minister reported that the revision of the Competition Act has been one of the major highlights, and the core of the research and technical work was done in this financial year. The EDD secured R6 billion for investment in infrastructure and R700 million for investment in supplier and small businesses development.

[See report for highlights on mergers, market inquiries and infrastructure coordination]

Industrial Funding

Government has not given the IDC any money since the 90s, so the IDC has to ensure that it keeps it afloat and it made commitments amounting to R16.7 billion in funding approvals. It is by far the largest funder of black industrialists, and all the investments made will create or save 29 000 jobs.

Governance

This was an issue over the past year with the state capture inquiry unfolding and there was a prominent loss of confidence in state owned enterprises. The effect of corruption in the economy would be about R27 billion in annual GDP and 76 000 jobs foregone. The Public Employment Programmes (PEPs) initiative is taken very seriously by the IDC, and that information is available on its website. The EDD instructed the IDC to forgo KPMG as its auditor in light of strengthening its governance. Lastly, the IDC also instituted litigation against Oakbay Resources on monies advanced to be recovered.

Audit outcome

The EDD received a clean audit, and there as an overall improvement in the control environment as evidenced by less findings compared to the previous financial years.

Revenue

The Competition Commission is the biggest contributor in the portfolio through fines and penalties.

The Minister appreciated the work of the Committee

Discussion

The Chairperson thanked the Minister for the presentation and stated that the Committee would love to call the Minister more often to account but unfortunately due to structural changes that could not happen. With that being said, she appreciated the Minister for always availing himself when called to Parliament.

Dr M Cardo (DA) wanted to know whether the Department has done any research on the cost of state capture into the economy and infrastructure development, and whether it would be possible to quantify the impact. Secondly, how has it affected the job creation set out in the NDP and NGP and how would those job targets be formulated in the near future. In light of the President’s new stimulus plan for infrastructure development – would that be the envisaged plan going forward, and if so, what would happen to the PICC.  

On Slide 27, in light of the PPS (Price Preference System) he asked about the status of the PPS gazette recommendations. In those recommendations some of them were quite controversial including making Port Elizabeth the single and only port of entry. Thus, is there a final determination on those proposals? He asked the Minister to elaborate on the export tax that would replace the PPS and how it would be implemented.

Dr Cardo asked the Minister on the progress made on finding a successor for the Industrial Development Corporation as the current Chief Executive Officer would be resigning soon, and the term of some of the Members of the Commission would be expiring soon.

Lastly, he wanted to know whether the Minister was able to provide any insight on whether the Department was expected to exist after the elections.

Mr P Atkinson (DA) asked the Minister to provide more information on the legal action taken against Oakbay. Secondly, he asked if the IDC was the sole owner of the Uranium mine, and if so, he asked for more details. Thirdly, he asked whether there were any examples of the black industrialists that were supported with the R9.7 billion so that their successes can be tracked. Lastly, he wanted to know whether there were any future plans on the fourth industrial revolution.

Mr I Pikinini (ANC) welcomed the clean audit that the Department received. He said the worrying factor about the Uranium mine was the R15 million required to keep it going.  An intervention was necessary in that Mine because it is not improving at all. The rescue practitioners are also liquidators and he saw that as a police-judge type of situation and asked the Minister to comment on this.

Mr S Tleane (ANC) commanded the EDD on the relationships that it has established with universities across the country hopefully they will be maintained. He asked the Minister to provide some details and comments about a Cape Town based innovation company that was supported by the IDC that developed technological instruments that would detect cancer at early stages. When the Committee visited the Research Council and the SABS laboratories, Members were impressed with the work undertaken there; so is there anything currently being undertaken in order to ensure that they were being utilised more so that they can add value to the country.

Ms N Hlonyana (EFF) asked the Minister whether the Director General was permanent or not, and to provide some details on the current auditors after the IDC dismissed KPMG as its auditors.  

Mr Pikinini asked whether the incorporation of the NEF into the IDC was still going to happen.  

Mr Atkinson said since the Cape Town Film Studios were built, is there anything that can be reported in the South African Film industry since then or rather any other studios that have been built or supported since? Secondly, with regards to the tourism, is there anything that the Department was doing in that space in particular with the creation of jobs.

The Chairperson asked whether the continental free trade movement would not affect the trade agreements with the APA and the EU. In light of agreements with various companies that lead to the establishment of Supply Development Fund, who was monitoring the implementation of these agreement conditions and is there a way to measure the success of the implementation. Furthermore, she asked the Minister to comment in detail on the Massmart Fund and its Corporate Social Investment and whether there were any tax implications. Lastly, looking at the outcome of the job summit; is the Minister confident that what was resolved would be implemented?

Responses

The Minister said the Department would first need to assess and evaluate the extent of the damage that has been done by corruption; thereafter it would be able to ascertain the quantum of the impact in relation to GDP (Gross Domestic Product). Once all the key role players have put out the information regarding the impact and outcome of corruption, the Department would then be able to monetise its impact in relation to GDP and the economy at large. The Ministry was still waiting for the outcome of the processes.

On stimulus and infrastructure fund, the President announced that the government wishes to create a broader fund which will draw in the private and public fund and it will not be in one department but cross cutting. Government is now working on the modalities of the Fund. He also announced that the presidency will expand the technical expertise within the presidency – for example if we build a power station, all the work is done by Eskom. The PICC’s role is to come in and monitor the implementation of infrastructural projects; to look at whether the feasibility study was done on those particular projects because at the central level we lack the evaluations of the feasible studies for infrastructural projects.

We have concluded that since we do not have the technical skills of the core engineers - which weakens the ability to ensure proper accountability – this would be a step up for the PICC from just playing a coordination and monitoring role. The PICC’s role would be enhanced and strengthened. On the fiscal consolidation path, the Minister of Finance will address some of this in the medium term budget and the budget next year.

The Minister said: ‘we need to shift resources into investment and capital spending and as we raise money in the capital market, that money should be directed towards infrastructure development. The budget needs to be rebalanced and ensure that we do not allow the capital spending and Human Resources expenditure get to a point where they are unsustainable. We borrow money to finance our overall budget and the price we pay for that is determined by the sovereign rating of the state, and rating agencies look at whether you have a sustainable path or whether you are spending too much compared to the income you are getting”.

In response to the PPS (Price Preference System on scrap metal), the previous gazette was based on work that ITAC had done at the time and public comments were received but they were still being considered as we redesign the system to support scrap metal beneficiation. Some years ago we found that exporting companies discovered loopholes to bypass the system, so instead of going for another five years we decided to look at alternatives and one of those was the tight controls that were gazetted. There were also proposals to improve the rules, but there was a proposal to consider a different mechanism which would be an export tax which would require that any export of scrap metal would attract a tax. This would provide an incentive for scrap metals to offer that to the local scrap metal mills and companies. This discussion needs a careful consideration because imposing a tax would have a lot of implications, and the work was not completed before the end of September because it involved many departments, and it has now been extended for another nine months. The President already made an announcement on this at the Jobs Summit as well as a policy direction.  

The Minister published in the government gazette a notice on the PPS, and various stakeholders commented to have the system extended for nine months, it must continue and that it has helped the local companies.

In response to the terms of office of agencies that expire at different points, it’s better if these periods expire further than an end of cycle term. In some cases we are constraints because the legislation outlines the period. On ITAC, cabinet has taken a decision on the replacement of the ITAC Commissioner’s terms of office expiry and soon there will be announcements on the names but the Committee will be briefed on this.

With regards to IDC CEO, the process is advertised by the Board and the deadline for the applications has been closed and in due course we will know what the outcome of that process is.

On the rationalization of the state, this would depend on the party that will win the election. The challenge of many departments is not only cost but cohesion and getting work done in a coherent fashion and he supported the amalgamation of the departments but this is the prerogative of the President.

In response to the legal action on Oakbay, the process is being managed actively by the IDC lawyers and it is an important case for the country because it is one where the IDC is trying to ensure that there will be no financial gain for any party that obtained funding through the IDC illegally.

When the IDC did its financial impact on the Uranium Mine it sought to protect its assets, and effectively the ultimate controlling entity of the Mine. He will get the feedback from IDC about the management of the assets, and report back to the Committee. It all points to the deep damage that state capture did to jobs and the society and we should not be shy about it. He will come in due course with the response from IDC on this matter.

On the examples of black industrialists, he asked the Chairperson if he could come back and make a presentation on this at a later stage because he wanted to outline a much more detailed picture on the black industrialists.

The Chairperson agreed to the suggestion.

On the 4th industrial revolution, the Minister was particularly interested when he met the IDC board to see that in the last financial year the IDC broadened its investments to areas that were connected to the 4th industrial revolution. The CSIR has done some work on the 4th industrial revolution. In addition, other big areas of focus included bringing data costs down to stimulate small companies. A lot of the data is carried in Telkom lines and the mobile phone companies have the cell phone masks but they are often carried through the underground cable up until the next mask. All of the data is now carried through audio and film and no longer through voice but the inquiry unfolding in the industry will assist in answering these questions.

We need to nudge our agencies to work closely with the CSIR because there is important work being done there. The current auditors for IDC are SizweNtsalubaGobodo and Ngubane & Co.

One of the biggest challenges to tourism is crime; if the city is not safe then tourists would be reluctant to come into the country. Government needs to work harder in fighting crime because excessively high crime rates do affect other important aspects of the economy.

On free trade, there may be some implications that we need to think through. The free trade area will give Africa some muscle in negotiating with the developed countries, because most African countries struggle negotiating trade agreements that are favorable to them as they are much smaller compared to their developed counterparts. Our bargaining powers are less as single countries in Africa. Europe has built a common market amongst its different countries. Hence, it was able to negotiate trade deals that are favorable to its countries. We need to take the African approach seriously but not as a solidarity, as intentional muscle building.

The supplier development fund is monitored in a number of ways – for example, the AB InBev fund the EDD has a representative in the Board and we get report on what has been done. Walmart was required to put up R240 million in the Fund and its impact was positive but in incremental small margins and we approached Walmart to work with the Department to identify opportunities. The partnership model achieves good results because it ensures an active engagement, whilst the monitoring model only considers what has been done after the event.

With regards to the job summit, the key is implementation. The President agreed to a presidential committee to lift it up from the NEDLAC levels.

The Minister thanked the Members for the opportunity to present.

The Chairperson thanked the Minister and the Deputy Minister again for their presence, and praised the Department for the excellent work that it did over the years.

The meeting was adjourned.

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