DTI 2018/19 Annual Report; SACUM/UK Trade Agreement

NCOP Trade & Industry, Economic Development, Small Business, Tourism, Employment & Labour

29 October 2019
Chairperson: Mr M Rayi (ANC, Eastern Cape)
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Meeting Summary

Annual Reports 2018/2019 

The Department of Trade and Industry provided a summary of South Africa's economic performance when presenting its Annual Report. The SA economy performed worse than expected in the first quarter of 2019 with a 3.2% contraction in GDP and was adjudged the worst quarterly performance since 2009. However, that was reversed when the economy avoided a recession and grew by 3.1% in the second quarter.

The Committee was informed that South Africa has signed the African Continental Free Trade Area Agreement (CFTA) with the African Union. DTI in partnership with the Chinese Government trained 50 South African government officials on Special Economic Zone (SEZ) planning and development. The training took place in Tianjing, China, in May 2018.

DTI spent 99.6% of its allocated budget of R9.5 billion and retained a financially unqualified opinion with no findings, commonly known as a “clean audit”. This means that the Department's 2018/19 financial statements were free from material misstatements and there were no material findings reported on performance objectives or non-compliance with legislation.

Members were concerned about the publicised loss of jobs in the financial services sector where technology deployed by the banks is leading to a shrinkage of physical bank branches and layoff of workers. They asked if DTI has engaged with that industry to re-deploy and retrain banking staff since they possess the skills that the economy still needs. Members noted that despite the clean audit, there were references to irregular expenditure and under-spending. Others were not happy that some senior managers had not submitted performance management agreements. Questions were asked about the SEZs, industrial parks, the Youth Employment Service initiative, the sugar industry, the impact of the polluted Vaal River and the WTO.

The Economic Partnership Agreement of the Southern African Customs Union plus Mozambique (SACUM) with the United Kingdom was presented by DTI but not discussed due to lack of quorum.

Meeting report

The Chairperson said that the Committee is flexible with DTI whenever they give briefings but it is concerned that neither the Director General, Deputy Minister nor Minister accompanied this delegation. The Committee’s displeasure will be made known to the Minister in writing. What is more concerning is that today’s date was scheduled way ahead of time. This gives the impression that the NCOP is not taken seriously and undermined. The National Assembly is given preference by Departments because they have 400 members unlike the NCOP with 90 members. This is a general trend by all Departments and even citizens tend to think that a resolution adopted by the National Assembly has been concluded by Parliament even when the NCOP has yet to adopt it. Departments are following this trend too as NA briefings have a full delegation unlike the NCOP. The NCOP chamber does not call in Departments often and so deserves some respect.

Department of Trade and Industry Annual Report 2018/19
Ms Malebo Mabitje-Thompson, DTI Deputy Director General: Industrial Development, stated that the weakness of the South African economy in the opening quarter of the year was much worse than anticipated. The sharp 3.2% (revised to 3.1%) contraction in real GDP, on a quarter-on-quarter (q-o-q), seasonally adjusted and annualised (saar) basis was the worst quarterly performance since the 2009 recession. However, that was reversed when the economy avoided a recession and grew by 3.1% in the second quarter.The major drivers behind the rebound in growth include the Mining sector (14.4%); Finance (4.1%); Trade (3.9%) and Manufacturing (2.1%). Sectors that recorded declines include Agriculture (-4.2%); Construction (-1.6%) and Transport (-0.3%). The number of employed persons in South Africa increased by 21 000, from 16.29 to 16.31 million (q-on-q) in Q2 2019 but the rate of unemployment worsened to reach 29%. SA recorded a trade deficit with the rest of the world in Q1 of 2019, moving from R14.6 billion surplus in Q4 2018 to a R4 billion deficit in Q1 2019. Exports to Africa decreased by R15 billion to reach R77 billion in Q1 2019 from R92 billion in Q4 2018. Despite the decline in export, the trade balance with the rest of Africa remains positive at R45 billion in Q1 2019. However, South African exports to the continent are largely destined for the SADC region, principally other SACU member states. With the opening of markets in Africa through the Continental Free Trade Area, export penetration to other sub Saharan African economies is anticipated.

Financial performance
DTI spent 99.6% of its R9.5 billion. This spending pattern should be considered in the context of its cost drivers:
- 66.55% or R6.3bn transferred to beneficiaries across various incentive scheme programmes
- 15.41% or R1.5bn transfers to DTI agencies, foreign governments, international organisations and others
- 17.85% was utilised for DTI operational expenditure.

DTI achieved a financially unqualified opinion with no findings, commonly known as a “clean audit”. This means that its 2018/19 financial statements were free from material misstatements and there were no material findings reported on performance objectives or non-compliance with legislation.

Mr M Dangor (ANC, Gauteng) said the loss of jobs in the financial services sector is going to be a crisis because of the technology now deployed by the banks. Banks are changing as they now have no need for branches and their workers are affected. Has DTI thought of engaging with the financial services industry to look at options of re-employing these people as they have skills that should not be lost. Perhaps SA could become the banking hub for Africa keeping in view the trade agreements SA has across the continent. Another worry is the possible collapse of the industrial heartland of the country due to the pollution in the Vaal River. If the upstream polluters such as Johannesburg and Tshwane do not pay Emfuleni Local Municipality to clean up the Vaal River system, it is definitely going to create a crisis. What is the plan to build upon what industries we have here? For example, if one walks into the supermarket nowadays you will find strawberries and bananas coming from Israel. What is the policy on this kind of import? Are there engagements with the large supermarket chains to nudge them to be more patriotic? Strawberries and bananas are available in SA so why import them?

Mr K Mmlemang (ANC, Northern Cape) noted that DTI plays an important role in black empowerment but the presentation was silent on the National Empowerment Fund. This is an area where Members would have liked to hear about its recapitalisation; was that done or not? The presentation was also silent on the work of the BBBEE Commission. What is the response to the challenges faced by the orgnaisation? What work is being done towards the amendment of the National Credit Act? Given that Special Economic Zones (SEZs)  are a platform to deepen industrialisation, what work has been done on the feasibility of the Upington SEZ and is it on your agenda? What work has been done about Industrial Parks in Northern Cape?

Ms H Boshoff (DA, Mpumalanga) said that even though DTI got a clean audit, why are there references to irregular expenditure and under-spending? There is an under spend of R41.1m and another R10.4m on the SEZ and Economic Transformation Programmes. Another concern is that some senior managers have not submitted signed performance management agreements. This is a bad practice that should not be accepted. If disciplinary processes have been initiated, how has this progressed so far? Can more light be shed on the Youth Employment Service (YES) initiative? Can you clarify the 15 000 jobs created under this initiative? What impact has the closing of the Hulett's sugar plant had on the labour market?

Ms B Mathevula (EFF, Limpopo) noted the 50 South African government officials trained on SEZ development in China; how many were women and youth? Of the 610 companies that benefited from the Global Exporter Passport Programme (GEPP), how many are black owned, and women and youth owned?

The Chairperson said in future DTI should link each programme to the budget provided for it in the presentation. By so doing, it will be easier to ascertain how much was spend, under spent and overspent. The presentation has nothing on the WTO and a lot is happening with that body. It was recently reported that the US actions are likely to see the WTO not having a quorum next year. If the judges are not appointed next year, what are likely to be the consequences for the body? It is reported that the African market is worth R3.1 trillion; the concern is the slow pace of countries endorsing the African free trade agreements. How many countries are yet to sign the agreement? What will be the impact of other countries outside Africa having bilateral arrangements with African countries saturating the markets with products made outside of Africa? Countries like China will likely flood this market with their own goods. What will be the implication of having the SACU agreement with Europe without the UK?

The Chairperson requested a status update on all the Industrial Parks. How much has been invested by DTI in each one? What projects qualify for the industrial development incentives? What are they about and in what areas are they located? On the provincial performance incentives, what areas of business are they and in which provinces? On the R10 billion invested by Mercedes Benz, are their economic incentives embedded in this investment? As no investment is to be made at the East London port used by Mercedes Benz, will it not hamper their ability to export their merchandise?

Ms Mabitje-Thompson replied that there is worry in what is happening in the financial services sector and somehow that trend is not going to change but rather get worse as machines are replacing people. What has to be noted though is that those being retrenched have inherent skills of which the machines have not. The global services incentives launched in London are meant to plug that gap and most of our banks require back office work including IT work which is not done in SA. These jobs are being sent offshore to other destinations of the world and there has to be pressure on the companies to retrain their workers for other professions in the value chain. Discussions are ongoing with the industry in global services who are also engaging the banks on how some of those jobs could be brought back to SA. The jobs we are talking about are quite huge and are sitting in places like India. The interesting thing is that companies in the automotive sector have their IT services done here in SA and have over a R1 billion of their work done here in SA. If the automotive sector can do their IT here, why not other sectors like the banks should also follow that cue. Pressure therefore has to be brought to bear on the banking sector to stop sending their jobs offshore.

The recapitalisation of the NEF has been a long discussion over a period of time and that discussion is ongoing and the feedback is that the NEF and IDC are now under one ministry. As a result decision making in theory should be quicker than previously. There are ministry level discussions taking place and the Committee's question will be communicated to them. The NEF and BBBEE Commission are part of the DTI but the NEF has its own Annual Report. That explains the silence of DTI on other agencies of DTI. These agencies could come to the Committee to present and that will help to close the information gap. However performance indicators of these other agencies could be included in the next DTI presentation. Meanwhile the answers to question specifically asked about those agencies will be sent in writing to the Committee since none of the agencies is represented here today.

When it comes to SEZ and industrial parks, DTI also relies on the work done at provincial and local government levels. In terms of money, if the Dube SEZ is moving fast it is because it is paying attention to this priority and not because less money is allocated to another province. Money is only allocated to places from where requests are made and that is the main issue in most instances. Such requests also have some prerequisites in place such as governance, institutional arrangements so that DTI can report to Parliament with certainty.

On senior managers failing to provide their performance agreements, it is a priority now for DTI. The issue here is that the agreements were not compiled in time instead of manager totally refusing to provide them. If they are not submitted on time by the manager, it attracts a disciplinary process. Less than 5% of performance agreements are not submitted.

The Hulett's sugar factory closure is part of the sugar master plan being developed to ensure that we have a sustainable sugar industry given all the demand side pressures the industry is facing. On the WTO process, the participation of the US in that appellate body is critical and if they fail to fill the posts, then there is definitely going to be a lack of quorum. On the African Free Trade Area, the rule of origin will ensure that it supports SA because if it does not, then we will all be in trouble. It is important that a clear protocol be enacted on the rule of origin as that will allow second products to be able to qualify to get preference in market access. DTI is discussing and considering why some impoverished areas should not qualify for Special Economic Zone status as it benefits everyone. What this programmes is doing is situating industrial infrastructure and ensuring that investors are attracted to invest in this areas.

Mr Stephen Hanival, DTI Chief Economist, replied that as part of the Jobs Summit Agreement, the President meets with business, labour and government constituencies on the first Mondays of every month – the Presidential Working Committee on the Jobs Summit. These meetings have a detailed agenda and the last meeting dealt with water and sanitation issues and the visa regime for tourists. The Vaal River will be on the agenda and retrenchment issues at a general level has been added to the agenda by organised labour. There is a constantly rolling agenda that looks at all matters on a consistent basis. There is a support scheme called the Temporary Employment Services Scheme (TESS), which is aimed at helping workers who have lost their jobs as result of changes in technology, and it is now being reworked and recapitalised and periods shortened so that workers can get support rapidly. Progress have been made in this area.

The Vaal River pollution has also been raised by the Manufacturing Circle who are part of the Vaal Region Rejuvenation Action Plan process. In terms of the local procurement and the trade balance, it is worth mentioning that when DTI engaged with Pick and Pay, they indicated that the only time they import fruit and vegetables is due to seasonal changes when that produce is not available in SA as it is often more expensive to import perishable products. There are however challenges in the procurement of local products and DTI has designated 24 products for local procurement, the most recent being two weeks ago when it designated plastic pipes as one of those. All infrastructure construction work henceforth has to be made of locally produced plastic pipes and this will plug import leakage. As part of the Clothing, Textiles, Footwear and Leather Master Plan, DTI found that 165 000 jobs are existing outside SA because clothing retailers import fully made up clothes. What the Master Plan for this sector has done is to sign an agreement between retailers, local producers and government to ensure that clothing is localised to support local jobs.

There is a Sugar Master Plan. Hulett's is in a difficult situation because of financial irregularities. DTI is concerned about the effects of the drought and the health promotion levy on the sugar industry as a whole. The Master Plan is looking at industrial diversification opportunities and benefits will be realised from the sugar import tariffs and other opportunities such as biopolymers and bio fuels. Ongoing consultations are taking place with  the Department of Science and Technology to look at new technologies to be deployed in the sector to create new opportunities for sugar to be used for biopolymers. We hope that these initiatives can find ways of supporting the sugar industry. DTI cannot at this time respond to port investments as this information has to be obtained from the Department of Public Enterprises. Any information obtained will be sent to the Committee by way of a written reply. This information is part of Operation Phakisa and the ocean economy.

Mr Shabeer Khan, DTI Chief Financial Officer, replied that the current fiscal environment with which the state is grappling, does not allow for the expansion of any programmes. DTI is working with Treasury to find how best to deal with this. The economic cluster only attracts 12% of government expenditure and we have to find ways to broaden this pie so as to attract economic growth. On the clean audit, the audit environment has audit standards to be adhered to. What audits do not do is provide absolute assurance but rather reasonable assurance by means of a sample. There might be misstatement in the financial statements but they must not be material enough to affect the financial statements. The AG also ensures that the performance indicators are accurate and complete and that there is compliance with legislation. He noted that the Public Service Act regulates the performance management agreements. This Act is quite punitive if the time frames are not adhered to.

Mr Maoto Molefane, DTI Chief Director: Special Economic Zones, replied that DTI to date has trained over 120 government officials across the three spheres of government on SEZ. They are mainly young men and women and last year alone, 23 people were trained from Limpopo alone. These were young people from various municipalities because of the massive projects being developed in these areas. Members should be assured that young people including women are being trained. The training comprises how to develop and plan in SEZs. China is one of the countries that has successfully developed SEZs and they contribute a large chunk to its GDP, and so SA can learn a lot from them.

The Chairperson thanked DTI and said all unanswered should be submitted in writing.

Southern African Customs Union & Mozambique (SACUM) and United Kingdom Trade Agreement
Ms Niki Kruger, DTI Chief Director: Trade Negotiations, explained that the intention of the new agreement was to reproduce the conditions of the current EU trade agreement. The current trade agreement would continue to govern trade with the UK until the end of 2020, even if the UK managed to reach a withdrawal agreement with the EU before the 31 January 2020 deadline.

Ms Kruger explained the existing Economic Partnership Agreement (EPA) with the UK as part of the EU. She drew attention to a provision that allowed South Africa to increase tariffs if surges in imports of certain goods were disrupting the domestic market. The current discussions were not a re-negotiation, but rather a technical change. The reason for this was that the UK could not currently negotiate trade agreements independently, as it was still part of the EU. The technical negotiations, which had concluded on 7 September 2019, had focused on five key issues: tariff rate quotas (TRQs), which determine the volume of various goods that can be traded tariff-free, sourcing of inputs from the rest of the EU into UK production for export (and similarly into South African production), bilateral safeguard measures, other transitional arrangements and a built-in agenda (for negotiations once the UK can negotiate independently of the EU).

On these five issues, Ms Kruger explained:
- changes in TRQs for SACUM countries and the UK.
- a new provision, valid for three years, that would allow inputs from the EU into South African manufacturing chains (for example, an engine from Germany in a vehicle manufactured in South Africa) to be regarded as local inputs for the purpose of tariff calculations. There was a similar provision for UK products.
- the exiting safeguard protecting the South African poultry market would remain in place for as long as it remained in place with the EU.
- transitional administrative arrangements.
- the agenda of matters once UK is able to negotiate trade agreements independently of the EU.

As the Committee did not have a quorum to deliberate on this international agreement, the Chairperson postponed deliberations to a yet to be determined date.

The meeting was adjourned.

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