The Department of Trade and Industry, supported by National Treasury and the South African Bureau of Standards, briefed the Committee on measures to ensure compliance and verification of local content requirements. Thereafter the International Trade Administration Commission of South Africa presented its Third Quarter Report for the 2019/20 financial year.
The local content policy was first implemented in December 2011 and revised in 2017. The Minister of Trade and Industry had the power to designate a local product as a requirement and once a product had been designated, all state organs were required to ensure that the particular product met the local content requirement. The role of the Department was to designate local content but it did not have the powers to enforce compliance. The relevant regulations did not indicate how enforcement would take place, nor did they indicate what a department or entity should do if a particular designated product was not available or did not meet the needs of a particular organisation.
The Department was working with the Auditor-General to scale up monitoring of compliance to the local content requirements and the expanded powers of the Auditor-General would be able to address non-compliance. The Department was developing Master Plans for all industries in which there were designated products to link all the relevant support mechanisms for the local economy. In conjunction with Proudly South African, Department was also training procurement officials on the process. Funding of the verification of local content, which was being conducted by the South African Bureau of Standards, was another grey area. The Department had provided R22 million to the Bureau to verify local content but the scale of tenders being issued was very high and other methods of dealing with a declaration of local content were necessary as it was unlikely that the Bureau could keep up with the need to verify local content.
The Department also had a problem with non-reporting by state entities on the procurement of designated products. Accounting Officers were obliged to provide documents showing compliance to the Department for compliance investigation and monitoring but many were not doing so. The Department was able to provide an exemption where the required products were not available from a local producer.
National Treasury requested government departments as well as the Members and the public to give input in respect of the Procurement Bill which had been advertised for public comment in February 2020. National Treasury was also in the process of developing a reporting framework which would require reporting on regulated requirements such as local content and B-BEEE requirements.
Members noted that the Bureau of Standards had conducted only 55 verifications which was far below the number of tenders awarded in the same period. Were the other products not verified? How was the SABS to be funded for the function of verification, and what would be the ideal funding? Was there any incentive, such as tax incentives, to persuade private companies to use local products? What were the common loopholes for not using SA-made goods?
Members also asked what National Treasury was doing besides issuing circulars. Could Treasury verify that the funds were going to local content? Who had the powers to terminate a contract? On what grounds was ArcelorMittal South Africa considered a local company as the owners were Indian and the headquarters were located overseas. Had there been a measurement of the price inflation of content by local producers? How did the rules of origin and local content merge? What should the Committee do to address non-compliance and maximise usage of local products?
The International Trade Administration Commission, which had been involved in the economy of South Africa for nearly a century, had moved back into the Trade and Industry fold following the merger with the Department of Economic Development. The Commissioner explained tariff trade remedies and informed the Committee that three tariff applications had been finalised in the Third Quarter: two for domestic appliances and a rebate for sodium hydroxide for uncoated paper. There were 23 tariff amendment applications in progress in the quarter.
The Commission’s budget for 2019/20 amounted to R108.9 million. The budgeted expenditure to the end of December 2019 was R81 675 000 while actual expenditure was R79 497 925 or 97.3% of the total budget to date. The largest portion of the budget, 79%, was spent on the 106 employees. The Chief Commissioner added that when the Commission did not approve tariffs requested, there was a tendency for applicants to litigate but he said that there had been no litigation in past two years.
Members asked if there were there any applications from the steel industry regarding a possible tariff increase as there had been a downscaling of the SA steel industry. What steps would the Commission take against ArcelorMittal South Africa as it had not stuck to the job retention targets agreed upon in return for the tariff rates? Was the 22% import tax for steel validated?
Members also asked if the cooling down of the economy had impacted negatively on Commission operations? How much should the budget be? In the light of the fee to be levied, how much, or what percentage, of the budget could be raised via the fee?
Several Members expressed concern about the sugar industry. SA had previously suffered a blow because of imports of sugar from Brazil, in particular. How was that to be prevented again? If sugar companies were operating both in SA and Swaziland, were they not business hooligans? Were such companies not industrial bullies because when they were hammered in the international world, they sent sugar to SA through the Southern African Customs Union? How did one prevent other companies from also operating in both SA and other countries? What was the Commission going to do about the huge amounts of scrap metal being exported? What measures was it putting in place to protect SA industries against international companies from that received subsidies?
With regard to the operation of the Commission, Members were concerned that 73% was spent on employees. How could such a high percentage be spent on employees? Exactly how much was employee compensation and how much went towards fulfilling the mandates of the Commission? Did the Department fund the Commission to do a job in the Southern Africa Customs Union or did it generate an income for itself? Did it not have a source of revenue to be self-sustaining?
The Chairperson welcomed Members of the Committee as well as the presenters and noted that as the electricity was off, presenters would have to work without showing the presentation on the screen.
The Chairperson informed Members that the request to the presenters was to look at measures to ensure compliance and the verification of local content requirements. The Department of Trade and Industry (DTI) and National Treasury would be presenting. Thereafter the International Trade Administration Commission of South Africa (ITAC) would present its Third Quarter Report for the 2019/20 financial year.
The Chairperson added that the purpose of the first agenda item was to engage in a discussion on the compliance of government departments and entities with minimum local content requirements in terms of designated goods and services. Local procurement had been identified as a means to increase the demand for domestic goods. The Minister of Trade and Industry, in conjunction with the Minister of Finance, was tasked with identifying goods and services that could be designated. The designated products had to comply with the minimum requirement of local content when purchased by government. As there appeared to have been a lack of compliance across government, the Committee needed to determine whether there were appropriate measures to ensure compliance or whether appropriate measures were being considered to address the matter.
Mr M Cuthbert (DA) asked whether the meeting was being properly captured.
The Chairperson assured him that the secretariat had small gadgets to record the meeting and the support staff were taking notes.
Presentation by the DTI on Measures Local Content
Ms Thandi Phele, Acting DDG: Industrial Sector, DTI, explained that her division was responsible for industry sector strategy, implementation and development. That meant that her division was responsible for ensuring the procurement of local content as regulated by the 2017 Preferential Procurement Regulations. The function was being co-shared with National Treasury as the custodian of the procurement regulations and the South African Bureau of Standards (SABS) which had been appointed to verify the standards of local content.
Dr Tebogo Makube, Chief Director: Industrial Development: Local Content, DTI, outlined his presentation. He would speak on policy and regulatory contexts, the process of designation, products designated, compliance with local content requirements, the process of verifications By SABS and challenges in respect of verification. He reminded the Committee of the regulations that regulated local content. The policy was first implemented in December 2011 and revised in 2017. The Minister of Trade and Industry had the power to designate a product for local requirement and once a product had been designated, all state organs were required to ensure that the particular product met the local content requirement. State departments, entities and companies could determine local content for particular contracts and procurement. The compulsion to buy designated local content did not apply to private companies as per the World Trade Organisation (WTO) regulations, although private companies were encouraged to buy locally as far as possible.
The role of the DTI was to designate local content but it did not have the powers to enforce compliance. The regulations did not indicate how enforcement would take place, nor did they indicate what a department or entity should do if a particular designated product was not available or did not meet the needs of a particular organisation. Local content requirements on pharmaceuticals were determined in conjunction with National Treasury and the Department of Health.
The DTI was working with the Auditor-General to scale up monitoring of compliance and the expanded powers of the Auditor-General would be able to address non-compliance. The DTI was developing Master Plans for all industries in which there were designated products in order to link all support mechanisms available to support the local economy. In conjunction with Proudly South African, DTI was also training procurement officials on the process.
Funding of the verification of local content by SABS was another grey area. DTI had provided R22 million to SABS in the current financial year to verify local content but the scale of tenders being issued was very high, so other methods of dealing with declaration of local content were necessary as it was unlikely that SABS could keep up with the need to verify local content. DTI also had a problem with non-reporting by state entities on the procurement of designated products.
Challenges experienced in relation to designated local content:
-Manipulation of the bid price to meet local content thresholds.
-Non-compliance to the local content requirements once the tender had been awarded.
-Inadequate funding of local content verification.
-Anti-competitive behaviour by some manufacturers, especially in respect of inflated prices.
-There was a need to develop a non-financial local content declaration method (e.g. self-declarations signed by a Commissioner of Oaths).
-Enforcement of local content reporting by organs of state.
-Closer working relationship by DTI, National Treasury, SABS, SARS, ITAC, Auditor-General, law enforcement agencies, PSA, industry associations, and unions.
-The Public Procurement Bill created an opportunity to strengthen compliance with local content.
Presentation by National Treasury Ms Leanda Pietersen, Director: Supply Chain Management Legal Advisory Services, Compliance Office, National Treasury, did not want to repeat the comprehensive presentation made by DTI, especially in respect of legislation and circulars issued in relation to local policy, but she would touch on the legal mandate. Procurement found expression in section 217 of the Constitution which presented public procurement principles and talked about levelling the playing fields which had led to the Preferential Procurement Policy Framework Act (PPPFA). The 2017 Regulations gave expression to local content and fostered grounds for DTI and National Treasury to work together. DTI undertook research into local content and National Treasury looked at the impact of designation and the impact on jobs, etc.
In 2011, Instruction Notes were issued by National Treasury and after the 2017 Amendment, Circulars had been sent out as that legislation did not provide for Instruction Notes. Accounting Officers were obliged to provide copies of contracts, standard billing documents and certificates to DTI for compliance investigation and monitoring availability of procuring local content. The DTI was able to provide an exemption where required products were not available from local producers. Currently, the enforcement focus was on addressing the submission of false documents which could lead to cancellation of a bid, etc. DTI could request that a company be prevented from supplying products to government entities for a particular number of years.
She believed it was a good opportunity for government departments and Members, as well as the public, to give input on the Procurement Bill which had been advertised for public comment in February 2020. National Treasury was also in the process of developing a reporting framework which would require reporting on regulated requirements such as local content and BBEEE requirements.
Ms Pietersen assured the Committee that there was a good working relationship between National Treasury and DTI, although enforcement remained a challenge.
The Chairperson called for comments and questions.
Mr F Mulder (FF+) asked about the role of SABS. SABS had conducted 55 verifications but how many tenders had been awarded? The number of tenders was very low. The Committee had visited the SABS and was aware of the situation there. The local content issue showed exactly why it was so important to get SABS to work efficiently. Funding was an issue. How would SABS be funded for that function, and what would the ideal funding be?
Ms Y Yako (EFF) believed the presenters were trying to say that there were loopholes in the policy in terms of compliance and non-compliance. How could the Committee amend the legislation to address the loophole, as a matter of urgency? Even though SABS was working administratively, it was dysfunctional on an operational level, as had been seen during the Committee’s visit to SABS. It did not have capacity, so it was a worry to have an entity of the state unable to assist where needed.
She asked if there was there any incentive, such as tax incentives, to persuade private companies to use local products. What were the common loopholes for not using SA-made goods? Bidders said they would use SA goods but then they sub-contracted and the sub-contractors did not use SA goods.
Ms P Mantashe (ANC) said that it was disturbing that the policy had been there since 2012 but it was still not working perfectly and could not be enforced. It called for an Amendment. What was the Bill that they had spoken of? Could it assist? Also, those who applied for tenders seemed to comply but did the contractors comply in the actual implementation of the tender. How was that problem going to be dealt with? It was an industrial policy tool. It had been not working for eight years. The Bill in process should address that.
Mr S Mbuyane (ANC) asked about the role played by National Treasury in relation to non-compliance. What was National Treasury doing besides the circulars issued? National Treasury funded all entities? Could National Treasury verify that the funds were going to local content? Who had the powers to terminate a contract?
He asked about steel products for construction. Were those products manufactured in SA? Who could clarify that issue? He was not sure as ITAC was determining tariffs for steel. DTI was meant to conduct compliance audits with a view to monitoring implementation. What was the Department of Public Enterprises doing to monitor local content, especially as it only had three entities? Was that Department in the meeting? He wanted to know how it monitored the SoEs. But if government was failing to implement B-BEE, how was it managing compliance with local content? How could the Portfolio Committee assist departments to deal with policies? There were some rules, such as those of the WTO. How did those rules impact on the issue of local content?
Mr Mbuyane raised the question of SABS and the IT systems: if SABS had not implemented the ICT systems, how was it going to manage the verification? He was not clear about the education and awareness programmes because he did not see any pride in SA. What was Proudly SA doing?
Ms N Motaung (ANC) asked National Treasury about the issues to be ironed out for local content. What were the challenges and how could the Committee assist National Treasury?
Mr Cuthbert asked on what grounds ArcelorMittal South Africa (AMSA) was considered a local company as the owners were Indian and the headquarters were located overseas. Had there been a measurement of price inflation of content?
He further asked about the rules of origin and local content. How did those two merge?
The Chairperson noted the working relationship between DTI and National Treasury.
Ms J Hermans (ANC) felt that the remedies presented in the presentations were insufficient to deal with non-compliance. What should the Committee do to address non-compliance and maximise usage of all products?
Ms Phele informed the Committee that the point that the presenters were making on non-compliance was that it would take a collective state to move in the policy direction. Legislation was in place but the implementation and enforcement was supposed to happen at the level of the procuring entity.
Organs of state issued the tenders and those organs had to ensure that the designated local products were available and to check the quality of the products before signing the contract. Post-award, the entity had to submit the contract or tender document, together with Annexure C, and a document on how it would be implemented to the DTI. The DTI would then monitor. The issue of reporting by state entities also had to be addressed as too many entities were not submitting reports. The picture presented was therefore that of those state entities that had submitted documentation. The DTI had no information on those entities that had not submitted the documentation.
She added that in 2011/12, when DTI had been working out the policy framework, SABS had been chosen to assist as it was the state custodian for quality management and had existing capabilities and expertise in the institution. A local content manufacturer should have some quality processes built into its system of production. DTI had ring-fenced the local content function in SABS with the support of Minister Patel but noted the concerns of the Committee around sustainability and the ongoing concerns, including theft. She asked Ms Scholtz to speak on the topic.
Ms Phele informed Mr Cuthbert that as far as AMSA was concerned, the point about local content was that the designation was dependent on local production or manufacturing happening in SA using SA labour. Where products are produced in SA, those could be designated local product. The designation did not depend on the owner or where the headquarters was located but was dependent on the actual manufacturing.
She added that the private sector had already made commitments to using local content, especially of the designated products so that private sector companies could piggy-back on the government entities. The private sector was the biggest procurer of pharmaceuticals and many were produced locally, so it was important to work as a collective. Discussions were ongoing with the private sector.
Ms Phele addressed the question of how to ensure compliance and presented some of the learnings. For example, a Water Board contracted a sub-contractor to install a water pipe system for a municipality. The responsibility to enforce the use of local products by that contractor rested with the Water Board because it was the contractor and was using state money to pay for the water pipe system. The tender document had to be crafted in such a way that contractors were forced to adhere to the requirements. It was not a question of being a private company but it was a question of whether state money was being used to pay for the goods and services.
Dr Makube provided some background on the WTO regulations. He explained that SA was a signatory to the WTO but, in addition to the main compulsory agreement, there was another voluntary agreement in respect of government procurement. SA was not a signatory to that agreement, which was why SA could implement compulsory local procurement, B-BBEE and other such policies on government entities. However, SA could not force private business to buy local which was why NEDLAC had come up with a social accord to buy local. Local content also provided an opportunity for investment by international companies. If they manufactured in SA using local labour, they would definitely have access to government entities. Any manufacturer could get permission to produce goods locally in SA. General Electric was one of those companies.
He added that as far as the African Continental Free Trade Agreement was concerned, the clause on enforcing the use of local content had been shelved for the moment.
Dr Makube informed the Committee that he and Ms Scholtz were board members on the Proudly South African board, but he was not permitted to speak on behalf of Proudly SA. However, work was being done by Proudly SA across all sectors on its business forum and the public sector procurement forum. Later this month, there would be a “Buy Local” summit and expo.
He informed Ms Yako that the rules were clear when it came to local content. For example, if a government entity wanted to purchase furniture, local products had to be procured. However, in terms of the regulations, the entity could stipulate in the tender that it had to be a women-owned company, etc. There was also, in the regulations, a compulsory amount above which one could not buy products that were not local. For example, if one were buying furniture above an amount of R30 000, it had to be locally produced. The DTI was developing Master Plans for all areas of manufacturer. The competition element was improving.
In response to Ms Mantashe’s queries about the results of the local content programme, Dr Makube stated that the results were uneven. The procurement sector was one where there were serious challenges and the challenges were not particularly about local content. There was a great deal of corruption in procurement. In fact, he and his colleagues had had a meeting with the Hawks the previous day about cases of corruption in procurement. DTI was not involved in the bid process so most of the cases it came across were cases of corruption, if he had to be honest.
What assistance was needed from the Committee? Dr Makube explained that Regulation 14 assumed that it would be the bidder who was in the wrong, but, in actual fact, it was often government, or organs of state, that was in the wrong. The remedy had to be tightened up. Institutional alignment was another issue. DTI and National Treasury alone were not big enough to manage the situation. There were many institutions in the country that needed to join forces in enforcing local procurement. For example, one needed law enforcement, the competition authority and policy making institutions. The Procurement Bill created consequences for corruption but the section on remedies in the in the enforcement section of the regulations, needed strengthening so that, if it was necessary to call in law enforcement, the rules would be clear.
Ms Jodi Scholtz, co-Administrator, SABS, explained that SABS had identified a couple of areas that it wished to fast track and IT was one of those areas. An IT specialist from CIPC had provided guidance and advice. The focus was on the certification area and so SABS had recently bought a system called the C-System and it was being customised and expanded before being rolled out. Members were correct in that the certification process was a manual process that would be resolved with the new IT system. It would take six to eight weeks to get the system up and running.
Ms Scholtz added that the point made by Ms Phele about ring-fencing the budget for local content verification had certainly assisted. There had not been certainty about the budget but DTI had provided ring-fenced funds and that had created certainly. Currently, 10 companies were working with SABS and that had bolstered capacity while SABS was building internal capacity. She added that there was a strong recognition of the need to get the IT programme up and running and that would be done as soon as possible.
She added that an awareness programme was being conducted by Proudly South African and the Committee could ask Proudly South African to share its programme with Members. SABS had partnered with Proudly SA and would have a strong presence at the Buy Local summit and expo.
Mr Katimba Matemba, responsible for local content verification, SABS, responded to the Committee’s concerns about capacity at SABS. He said that it was not a defensive stance but SABS was definitely engaging in capacity building and he would like to give context to the verification process. SABS applied a two-pronged approach: the financial part and the manufacturing part. The companies collaborating with SABS in capacity building assisted on the cost accounting side to determine whether the company had the financial capacity to produce the goods. The manufacturing side was related to the technological side and the question was whether the company had the capacity to undertake the manufacturing. For example, if the application was related to cables, there was a need to determine whether the company had the capacity to manufacture cables, so when a verification was being investigated, the auditors from the division of SABS that worked with cables went to the company to investigate. In addition, there were some full time staff in the unit for verification that managed the processes. He was aware that the scope and demands would grow. However, the intention was not to build a huge empire in SABS but to work on partnerships.
With respect to steel beams, SABS had not conducted verification in relation. He had noted the issue and would check the tenders and check compliance requirements. There were other steel structures that had been submitted for verification: some had been approved and others not.
He added that there had been a number of challenges since 2012 and SABS had been moving very slowly. Contractors were reluctant to undergo the verification process even when they had won the tender. It was a mission to find all the required documents. There were many stories of people being too lazy to provide all the documents necessary to verify. Some suppliers came forward; others were reluctant to do so. SABS had learnt a number of lessons and was trying to simplify the process. SABS required the procuring entity to take more responsibility.
Dr Makube added that the Committee had asked DTI to include municipalities in the local procurement process and following research; that had been done. Dominant in that market was structural steel but steel was not always included in a tender as a standalone product. It might be an input into a product. For example, a working crane would be made of steel but there was no verification that the steel components had been made in SA. That was an area that DTI was working on.
The Chairperson said that the Committee should look at national government departments and also look at provincial and municipal level but the education and awareness programme was key as there might be a level of ignorance, especially at the national level. There should be a stimulation of local industrial development that would lead to job creation. That was the reason for promoting the approach. The Committee encouraged more, and more active, working together between DTI and National Treasury as that would bring a lot of value. He wished to conclude that topic.
Ms Mantashe said that the Committee could not keep quiet as legislation was required to close the gap. That was urgent. In the last term, the Committee had visited black industrialists set up by DTI but SA government entities did not buy from them; they bought from international companies instead. Had that situation been rectified and if so, how?
In addition, she asked Ms Scholtz why SABS did not have a CEO. She had heard that Garth Strachan had resigned. How soon would a CEO be appointed?
Mr Mbuyane asked if there was an MOU between role players in the space of local procurement, such as DTI, National Treasury and SABS. If yes, could the Committee see it?
Mr Mbuyane was particularly concerned about yellow plant equipment. Was the steel in the yellow plant equipment locally produced?
Ms Pietersen indicated that National Treasury could not respond to the question of the yellow equipment as she knew it had not yet been designated. However, she assured the Committee that there was a very good working relationship with DTI. National Treasury had, essentially, a policy-making role but where there was a need to monitor compliance as far as broad procurement was concerned, it also had a role. However, the document about Local Content spoke mostly to the role of DTI.
In response to the question of what the Committee could do, she informed Members that the Procurement Bill had been published in February 2020 and required public comment by the end of May 2020. She encouraged organs of state and the Committee Members to provide input. There would be a concerted effort to consider all the comments. It was a Law of General Application and National Treasury required extensive input to validate process, especially if the law should be challenged later on. The policy was comprehensive and provided even for the sub-contractors. It stated clearly that sub-contractors could not compromise the local content policy.
She agreed that implementation was the problem and, in particular, by organs of state, mostly because they said that it did not support ease of business. In addition, bids were sometimes four times as expensive because of local content. She usually suggested that entities take local content out of the contract and procure separately. Entities often asked if there was a list of who did produce the designated products later might be helpful. National Treasury and DTI would see what could be done to assist with the ease of business.
The Chairperson asked if the Bill had gone through Treasury. Would the Bill cover the gaps identified, or was another process also necessary? Did the Bill talk meaningfully to the gaps?
Ms Pietersen explained the process that a Bill goes through. A need was identified, such as gaps in the current legislation. Thereafter, there were initial consultations with stakeholder groups. The Bill was not at the point of being ready for promulgation but Cabinet had approved it for public comment. Depending on the public comments, there might need to be additions or changes. It was important that Treasury covered the gaps. That was why input was critical.
Ms Sizi Qolohe, Director: DCPO (Contract Management) – Governance, Monitoring and Compliance, National Treasury, stated that National Treasury had noticed that there was some misrepresentation about what the accounting officer should do if there were difficulties with local content in a contract. National Treasury could advise an accounting officer where he or she was not sure what to do. If the entity was having difficulty in getting an appropriate bid, National Treasury could assist. After a bid, if there was non-compliance, there was a process of applying the audi alteram partem rule and if the matter was not resolved, then National Treasury could ban a company.
Ms Pietersen added that the Auditor-General played an important role in the process of local content. Where the Auditor-General found that there was non-compliance with local content and indicated a finding of irregular expenditure in his report, National Treasury had found that the department or entity quickly scrabbled to correct the matter.
Ms Scholtz informed Ms Mantashe that, with approval of the Minister, SABS was in process of appointing a service provider to deal with the CEO appointment.
Dr Makube explained that the Black Industrialists programme was a government programme and the Black Industrialists did participate in the tenders for local products but there was a challenge in that the time that it took state entities to adjudicate tenders created a challenge for the company. It had to remain afloat for months that it had to wait for the finalisation of tenders. The Committee had performed some oversight over that and the problem seemed to have been resolved. However, the DTI found that there were huge problems relating to the bid adjudication process.
Dr Makube stated that DTI had plans in place to designate yellow metal equipment but, most municipalities had outsourced the function of road making, etc. and those companies did not have to comply with local content. The remaining volumes might well not be big enough to sustain local content in those products.
Ms Phele assured the Committee that progress had been made in addressing the local content issue. The time it took National Treasury to get a circular out had been shortened. Contracts were starting to adhere to requirements but the verification process and the submissions of contracts and Annexure Cs remained challenging.
The Committee could assist in strengthening the consequence management both for bidders and the government entities as the corruption had largely been on the entities’ side. From an operational perspective, the method and funding of local content verification was essential. There had to be a long-term process for funding verification. That required a bigger discussion, as well as legislation, to provide clarity to the market. DTI was very proud of the work that had been done. Proudly SA was now getting traction, but there had to be a meaningful discussion on how to make the local content issue more visible and relevant to everyone.
The Chairperson invited the International Trade Administration Commission (ITAC) to present on its Third Quarter Performance.
Briefing by International Trade Administration Commission (ITAC) on Third Quarter Performance
Mr Meluleki Nzimande, Chief Commissioner, ITAC, stated that the entity had moved with the Minister from Economic Development to Trade and Industry and Competition and was meeting the Sixth Parliament for the first time. For that reason, he began by explaining what ITAC did, its mandate, vision and core functions as well as the legal framework. ITAC was almost 100 years old and been involved in the economy of South Africa for nearly a century.
Mr Nzimande explained to the Members what was meant by the trade remedies of anti-dumping, countervailing and safeguards.
In Quarter 3, three tariff applications had been finalised: customs duty reduction for Defy appliances with hoods and an increase in tariffs for side by side refrigerators. Sappi Tugela Mill in KwaZulu-Natal had received a rebate for the sodium hydroxide for uncoated paper. There were 23 tariff amendment applications in progress in the quarter. In terms of trade remedies, there had been four sunset review investigations, two anti-dumping investigations and two safeguard investigations in the 3rd Quarter.
The anti-dumping products were PET from China and clear float glass from Saudi Arabia and UAE. The volumes of non-SACU sugar imports had shown a significant volumes decrease since the adjustment of tariffs.
ITAC also administered import and export controls on selected products, mainly for health, safety, environmental and strategic reasons. During the reporting period, 4 385 import permits were adjudicated and issued against a target of 4 000, while 4 215 export permits, which include 1 791 permits issued for scrap metals, were adjudicated and issued against a target of 3000. As part of ensuring compliance with permit conditions and provisions of the regulations, the Import and Export Control unit conducted 111 scheduled and 968 unscheduled inspections, and also carried out two investigations of permit non-compliant activities that had been detected.
ITAC had a staff vacancy rate of 19.08% as it had put a moratorium on the filling of vacancies due to financial constraints.
Ms Ntsobe Nkoana, CFO, ITAC, presented the financial performance. ITAC’s budget for 2019/20 amounted to R108.9 million. The budgeted expenditure to the end of December 2019 was R81 675 000 while actual expenditure was R79 497 925 which was 97.3% of the total budget to date. The largest portion of the budget, 79%, was spent on the 106 employees. Goods and services amounted to 21%.
She noted that the overspending on professional fees and legal fees were a result of an increase in labour-related matters and active cases in relation to ITAC’s core functions.
Mr Nzimande added that when ITAC did not approve tariffs requested, there was a tendency for applicants to litigate but he said that ITAC had had no litigation in past two years
Mr Cuthbert asked the Chief Commissioner if he had any feedback, at secretariat level, around the African Continental Free Trade Agreement (AfCFTA) tariff line agreement and what the discussions were. Secondly, were there any applications from the steel industry regarding a possible tariff increase as there had been a downscaling of the SA steel industry? AMSA plants in Saldanha had closed down and it was downscaling in Escort and Vereeniging. His view was that AMSA was being over-protected and that the steel industry downstream should be supported. What steps would ITAC take against AMSA as it had not stuck to the job retention targets agreed upon in return for the tariff rates? Was the 22% import tax validated?
Regarding Defy Appliances, he asked about the tariff on side-by-side refrigerators for Defy in PE. Could the Chief Commissioner please provide further information on that issue? Were there any arguments around the ad valorem tariffs raised on that particular item?
Mr Mulder asked about the vacancy rates and critical posts that had not been filled in light of the constraints on the budget. SA’s economy had been under stress even before the Coronavirus and the economy had cooled down. Did the cooling down of the economy impact negatively on ITAC operations? How much should the ITAC budget be? In the light of the fee to be levied, how much, or what percentage, of the budget could be raised via the fee?
Ms Mantashe had not heard what she had wanted to hear about the sugar industry. SA had suffered a blow because of imports from Brazil, in particular. How was that to be prevented again? If sugar companies were operating both in SA and Swaziland, she would be most uncomfortable. Were they not business hooligans? Were such companies not industrial bullies? When they were hammered in the international world, they sent sugar to SA because they were part of the Southern African Customs Union (SACU). How did one prevent other companies from also operating both in SA and other countries?
She noted that 73% of the budget was spent on employees. How could such a high percentage be spent on employees? She asked ITAC to tell her exactly how much was employee compensation and how much went towards fulfilling the mandates of ITAC. A clean audit did not mean that that ITAC was carrying out its mandates.
Ms Mantashe asked what ITAC was going to do regarding the scrap metal. There were huge amounts of scrap metal being exported. What was ITAC going to do about it?
Mr Mbuyane questioned the establishment of ITAC in 1924. What would SA be celebrating a century of in four years’ time? The Minister of Trade and Industry was looking at the economy of comparative advantage. How did the mandate of ITAC relate to that and what was its core function in terms of job creation?
He asked about the dual role played by ITAC in SA and in SACU. The sugar cane farmers had left SA in 1994 and had gone to eSwatini and Mozambique but now they were coming back and they were part of the South African Sugar Association (SASA). If SA could not export sugar while neighbouring countries were dumping sugar in SA, he did not see ITAC fulfilling its mandate to protect industry in SA. What was ITAC doing about the issue of the import and export control and the permit free agreement?
He asked if ITAC was sustainable. Did DTI fund ITAC to do a job in SACU or did ITAC generate an income for itself? Did ITAC not have a source of revenue to be self-sustaining? Did ITAC have a revenue strategy?
Mr Mbuyane referred to the point in the presentation on anti-dumping, countervailing and safeguard – was there a strategy? Why was ITAC overspending on professional fees and who did they pay for professional services? Did the Commission not have capacity? How far was the tariff support for the sugar industry? The Committee had been told that ITAC would have instituted tariffs in the sugar industry by about July 2020.
He was happy with demographics of the Commission staff.
Ms Motaung asked what measures ITAC was putting into place to protect SA industries against international companies that receive government subsidies, within the framework of WTO.
Ms Hermans thanked the entity for the presentation and for staying within the budget but asked about the impact on the organisation of not filling vacancies. What was the impact on fulfilling the mandate of ITAC? She asked for figures on designated groups such as disabled, women and youth. Emanating from SONA, the focus of government was on the empowerment of women and youth. She suggested that any entity that reported to the Committee had to report on those sectors.
She believed that the CFO had spoken about cost recovery or income generation in respect of permits. What was their estimation of money to be raised from permits and what would be offset by those monies?
Mr Nzimande began with the questions on sugar because so many Members had had questions on the industry. The SA sugar industry was a regulated industry that had geared its production so that it produced a surplus. It sold locally and exported quite a lot of sugar. There was a global oversupply for sugar. India was responsible for the current oversupply. Export prices were currently a third lower than local prices. The sugar industry thus desired to sell as much sugar as possible locally and to export as little sugar as possible. The industry was geared to supporting the rural economy.
The government of SA, out of concern for the health of its citizens, had introduced a sugar tax and that had reduced the size of the sugar market by 20%. People were consuming less while the industrial consumers of sugar, such as Coca Cola, had reformulated their products to minimise or eliminate sugar, which was what the tax was designed to do. As a result, less sugar was sold in SA, there was import competition and exported sugar was sold at a very low price. That was an extremely difficult position for the industry to be in.
As of August 2018, ITAC had altered the dollar price for sugar to give a level of protection to the sugar producers and the import of sugar had dropped significantly as duties had been very high, ranging from 60% to 80% because it responded to the fluctuating prices of sugar. ITAC had asked the sugar industry if there were particular countries that it was concerned about because ITAC had other instruments, such as the anti-dumping tax, that could be imposed on a country. ITAC had held a meeting with the sugar industry to inform the role players how ITAC could introduce anti-dumping taxes on particular countries. However, the sugar industry had not made an application to date.
He reminded the Committee that SACU was a free trade area. Everything that was consumed in eSwatini was produced in SA, except sugar, and SA was objecting to eSwatini exporting sugar. It was not entirely fair. What was the advantage of a free trade area? It allowed for a common market without duties. The existence of SA companies in eSwatini was similar to many SA companies that were operating in other countries. MTN derived a lot of money from its base in Nigeria. That meant funds came into the SA fiscus. The African Continental Free Trade Agreement would allow SA to increase its market share for the many products that SA produced to the entire African continent. SA had the biggest manufacturing sector in all of Africa so SA stood to benefit most from a free trade area. There was, of course, the downside that if another country produced the same thing, better and cheaper, the SA product would lose out. SA had a master plan on sugar that included reducing the impact of sugar tariffs in the rural areas. The Master Plan also promoted making other products from sugar, such as polymer which would make up 30% of bottles produced in SA.
Mr Nzimande moved on to the vacancy rate and the budget of ITAC. The biggest budget item was salaries because of the nature of ITAC. It was like a consulting firm as the work was done by highly skilled lawyers, accountants and other professionals. It was inescapable that lots of money would be spent on such professionals. Rental was 6% of the budget. He hoped that now that ITAC was back in the DTI fold, it could negotiate a better rental with its landlord – DTI. Professional fees varied, depending on the litigation rates, etc. ITAC used lawyers as consultants as it had one senior legal manager and another who had considerable legal skills. The vacancy rate affected the Commission but did not blunt ITAC. Critical positions were filled as required. In the coming year, ITAC would make some appointments in the financial directorate as that was where the greatest need currently lay.
Where else could costs be cut? ITAC was required to send inspectors out into the field to see what was happening on the ground and that was an expensive process as inspectors had to go to places inland, for example, to find out what was happening in the scrap metal industry. Enforcement in the scrap metal unit had been increased but inspectors had to travel to the key points in Gauteng and the Durban port. The Commission was doing fewer inspections but was targeting the highest consumption areas. It would be better if there was more money, but one had to do with what one had. The Chief Commissioner would have liked to have a Special Advisor and a Chief Economist. The impact of the work should be the domain of a chief economist, but other economists in the Commission currently did that work.
As far as export subsidies were concerned, the instrument was meant to off-set the benefit that producers got when supported by their government. The challenge with the instrument arose because when a country acted against the companies that received subsidies from their government; then the SA government was going against another government. That complicated matters and so the instrument was not used a lot.
The Chairperson suggested that owing to time constraints, the Commission should send the other responses to the Committee in writing within seven days. He suggested that the minutes also be discussed at the next meeting. He thanked ITAC for the interaction.
The Chairperson stated that on 17 March 2020 the Committee would be briefed by DTI on its Third Quarter Performance Report for 2019/20.
Ms Hermans asked for a joint meeting with other Committees involved in the Sugar and Cannabis industries.
Mr Cuthbert asked if the secretariat had received the terms of reference as promised the previous day by the National Lottery Commissioner.
The Secretariat stated that he had not received the document.
The Chairperson requested that the secretariat follow up the matter.
The meeting was adjourned.
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