DTIC Quarter 2 & 3 Performance 2020/21

Meeting report

The Chairperson welcomed the members of the Committee. There was a quorum so the meeting proceeded. The agenda was presented. The main item on the agenda was the briefing by the DTIC on its second and third quarter financial and non-financial performance for 2020/21. He asked the Committee to adopt the agenda.

Ms J Hermans (ANC) moved for the adoption of the agenda.

Ms N Motaung (ANC) seconded the adoption of the agenda

The Chairperson welcomed the Director-General of the DTIC and the delegation present. He invited the DTIC to brief the Committee.

Briefing by the DTIC on its second and third quarter financial and non-financial performance

Mr Lionel October, Director-General, DTIC, briefed the Committee on the DTIC’s second and third quarter financial and non-financial performance. The period being presented was between June to December 2020.

He briefly went through the economic overview part of the report. It detailed the economic recovery of the global economy and optimistically projected the growth of the South African economy.

Summary of second and third quarter performance

The Department had a total of ten programmes. Programme one was administration. Programme two was Trade Policy, Negotiation and Cooperation. Programme three was Spatial Industrial Development and Economic Transformation. Programme four was Industrial Competitiveness and Growth. Programme five was Consumer and Corporate Regulation. Programme six was Industrial Financing. Programme seven was Export Development, Promotion and Outward Investments. Programme eight was Inward Investment Attraction, Facilitation and Aftercare. Programme nine was Competition Policy and Economic Planning. Programme ten was Economic Research and Coordination. 

In the second quarter there were 33 planed targets and 30 targets were achieved. This meant that 86% of the targets were achieved for the quarter. The Department spent 97.7% of its budget in the quarter.

In the third quarter there were 47 planned targets and 40 targets were achieved. This meant 94% of the targets were achieved for the quarter. The Department spent 92.3% of its budget in the quarter.

Financial Performance

Mr Shabeer Khan, Chief Financial Officer, DTIC, presented the financial performance of the Department over the two quarters. Between 1 April 2020 and 31 December 2020, the spending was R5.1 billion or 92.3% of the cash flow projections, which was based on the special adjusted budget. Of the R5.1 billion spent, R1.6 billion was transferred to the public entities, followed by R1.5 billion disbursed to the beneficiaries across the various incentive programmes. R744.1 million was disbursed to the external programmes while non-profit organisations as well as international organizations, which South Africa is a member, accounted for 3% of the total spent. Spending on operational costs was R1.1 billion.

For the remainder of the 2020/21 financial year, the Department’s spending focus would be towards:

• Working closely with IDC and NEF on the continuation of the industrial loan facility that provides working capital support.

• Supporting various investments under the Special Economic Zones programme.

• Providing financial support under the manufacturing development incentives, which includes the Automotive incentive, Black industrialists programme and Agro processing.

• Providing financial support to the Global business services sector.

(See Presentation)

Discussion

Ms Y Yako (EFF) said that the DG mentioned that there was optimism for South Africa’s economic growth in 2021. This optimism was based on China. Covid-19 had impacted South Africa in 2021 with the second wave. Government kept opening and closing the economy. What informed the projection of optimism for economic growth for this year considering how devastating Covid has been in South Africa? The presentation also mentioned Mobicel. It was not a question but rather a comment she wanted to make. The presentation said that there was the growth of Mobicel in South Africa. She recently used a Mobicel cell phone. She would speak to the Chairperson in private about Mobicel. Maybe the Chairperson could speak to the manufacturers of Mobicel about the quality of their phones. She apologised for bringing the matter up but it bothered her.

Mr M Cuthbert (DA) had a question on the Department’s Trade Division. There was limited work done on furthering South Africa’s trade agenda particularly with the global south partners and China. Under the current dispensation, through the Belt and Road Initiative, South Africa received some benefits related to the beef industry but that was the extent of it. Why has the Department not pursued a free trade deal with China like Mauritius has? The Department has rather relied on a series of undisclosed MoUs to have trade relations between the two countries. Would the Department be willing to share those MoUs with the Committee so that it could better understand what levels of cooperation and negotiation were going on between South Africa and China? He said the Department should read his opinion piece in the Daily Maverick arguing for a free trade agreement with China as opposed to the Belt and Road Initiative.

Has the Department, through its economic research unit, done an impact assessment of the lockdown regulations on the economy? There were headlines of South African Breweries (SAB) cutting jobs because of the alcohol regulations. Farmers were going out of business and various tourist-related businesses going out of business. Did the Department have an impact assessment on exactly how much the lockdown regulations contributed to the decline of the economy and what the metrics thereof were?

Another thing Mr October referred to was the Government spend. This was informed by the basics of economics that stated that if Government spends it would boost aggregate demand and thus get out of the downturn. Did Mr October have a figure on what the projected economic benefits from Government spend would be as a result of the multiplier effect? He wanted Mr October to inform the Committee of that. The last time a trade policy was issued by the Department was in 2010 and then revised in 2012. What steps were being taken to revise the policy suite as a country? What ongoing efforts were there by the Department to ensure that policy accurately reflects the current economic context with the Covid-19 pandemic and taking into account the previous ten years where the country has had an old economic policy in place? It was important that the service industry was focused on and regulation as well as a strategy to deal with that particular sector. At last count it was R43 million that had been spent for the National Lotteries Commission’s Covid-19 Relief Fund. Could Mr October inform the Committee how much had been spent up to date? He understood that the NLC took out a tender to find out the impact of Covid-19 but had failed to disperse all of these funds. He wanted to understand what progress the NLC had made on this matter. There were a number of NGOs that were still struggling due to lockdown and were not able to service their communities as they were previously able to. 

Mr S Mbuyane (ANC) had a few clarity seeking questions. He wanted to know the progress of the merger between the two Departments (DTI and EDD) into DTIC? He then discussed the Department’s programmes. He wanted clarity on the first programme, administration, and how it would be impacted by the merger. The merger would also impact on the structure of the Department. Were there any programmes of learnerships or internships? He then discussed programme three which dealt with spatial industrial development and economic transformation.

He wanted to know more about the SEZ capacity support in Nkomazi. The presentation spoke about National PMU. He needed more clarity on that matter specifically in Nkomazi and also the Ekandustria industrial park. The last report said that the industrial park needed to be revitalised. He then discussed programme four which dealt with industrial competitiveness and growth. He wanted to know the progress of the implementation of the masterplan. What measures were implemented to support industry to increase localisation and specifically PPE and other products? How many companies were supported to increase the localisation of PPEs and other products? In which provinces were those companies based? He then discussed the designation of poultry products. When was it going to be designated? The Committee was told that it was going to be designated. Did the Department have any companies that have already been targeted to do this programme? He then discussed economic research and coordination. There were two programmes that had not been implemented and not achieved. Could the Committee be clarified on the research? What were the challenges of implementing those two programmes in terms of research and coordination? He said that hospitals were running short on gas because of the Covid-19 pandemic. Has any company or Department assisted hospitals with gas supply?  

Ms Hermans applauded the WTO appointment of Dr Ngozi Okonjo-Iweala as the Director-General. As the Minister said, it was historic and it was applauded greatly. She said that most goods traded across nations were made by women. As beneficiation was pursued the reality was that at the moment most raw products, for whatever was produced across the world, comes from Africa. It was therefore fitting that a black women would head the WTO and she wished her well.

She asked Mr October if the localisation designation applied to the private sector as well, or did it only apply to Government? Was it not time for Government to reach out to the private sector if it was not applied to the private sector just to make the impact bigger? She said that during SONA the President spoke about the ease of doing business and improving the country’s ranking. There was a technical working group. She suggested that the Committee ask that technical working group, headed by Mr October, to report to the Committee on its work. That way the Committee could have an in-depth knowledge of what was keeping South Africa where it was at the moment. She did not see anything in the presentation about Brexit and its effect on South Africa’s imports and exports. Were there any effects, negative or positive? The Minister had done advanced work and had agreements signed before Brexit. She wanted the Committee to be provided with some clarity because there was a lot of discussion in Europe about Brexit. Slide 31 spoke about $5 million. She was not sure why that figure was in dollars and not rands? Was it supposed it supposed to be in dollars or was it supposed to be in rands?

Mr October responded to Ms Yako’s comments on Mobicel. The Department worked closely with Mobicel. The Department needed to ensure that the products would be high-quality if it would maintain its competitiveness and compete with imports. The Department noted the comment and will follow-up on the matter.

He responded to Ms Yako’s question about the prognosis for the economy and the basis for the Department’s cautious optimism. The hard lockdown had quite a negative impact on investment and business. The liquor ban had a negative impact on the alcohol and beer industries. The first priority of our country, and all countries, was to deal with the pandemic. There cannot be any growth until that problem was solved first. The country needed to err on the side of caution. The Government did need to move earlier with regard to putting restrictions in place because if it was left to late it could have a detrimental impact on the long-term economy and the recovery as well. It was always a question of balance. Stats South Africa, and all indicators, was predicting positive growth for 2021. The World Bank, IMF, the South African Reserve Bank and independent economists were all predicting positive growth. This could be seen through the spectacular performance of the stock exchange. Mining companies were back into profitability and the agricultural sector. In the real economy the Department was seeing the green shoots. The momentum needs to be maintained and Government needed to act in a balanced manner with regard to restrictions. There was the prediction of a third wave which the country needed to prepare for and be cautious about. There were a critical few months ahead which would decide whether the economy turned a corner or not.

He acknowledged the point raised by Mr Cuthbert. The Department would be issuing an updated policy review. By June, the Department would have a complete set including on services with regards to the policy update. The Department’s general position about China was up for discussion. The Department was constantly debating that matter. The Department’s assessment thus far was that a free trade agreement with China would have a massively detrimental impact on South Africa’s agricultural and manufacturing sectors because the economies of scale and the levels of competitiveness would wipe out certain sectors of the South African economy. The clothing and textile industry would be negatively affected. That was why the Department decided against a free trade deal with China. A key emphasis of the trade policy has been integration on the African continent. The reason for all the success in Europe is because instead of Germany and France having wars with each other they were now a common market of 500 million people. In North America, Canada and Mexico the biggest bulk of their trade was on their own continent. If it was not for colonialism the African continent would be in the same position. The priority of the trade policy must be the continent and then markets needed to be opened up like was done with Europe. South Africa needed to maintain its access to the US market and then compete with Asia. The Department could do a presentation to the Committee on its prognosis but generally the Department’s view was that China would wipe out significant sectors of South Africa’s manufacturing sector. The impact of Covid has been especially bad on tourism. Unfortunately, if these restrictions were not put in place for Covid then the impact would be even bigger in other sectors.

He said the questions on the NLC would have to be referred to the NLC to provide an explanation. The Department was awaiting a number of investigations done with the NLC.

He responded to Ms Mbuyane’s question about the process of the merger. The Departments have been completely merged and there were ten programmes. All the information about the demographics could be forwarded to the Committee. The two Departments had always operated very closely and they were one Department before so the integration has been very smooth and easy. Before the formal merger the two Departments were already working as one. The Department was fully transformed and fully empowered with regards to demographics. The Department had strong leadership of black women in top leadership structures. The Department was very proud of its internship programme and kept it going. The Department was working towards having 5-10% of its staff being interns every year. The Department then offered employment to some of them. The Department also facilitated their employment in other Departments or in the private sector. The Department had very strong internship programmes. The Department also used the National Skills Fund to run programmes for over a decade now and internship programmes for the private sector.

The Department assisted more 50 companies to export and expand their manufacturing. The poultry designation had been completed and the research had been done. It was currently with National Treasury as Treasury was responsible for procurement and for using of the instruction notes. The Department would keep following up with Treasury.

He then discussed gas supply. The Department intervened immediately because there was a shortage of oxygen. The Department was working with Afrox to ensure that they have been able to supply oxygen. The Project Management Unit (PMU) was now up and running. It was not located at the DBSA as the Department hoped but it would be at the IDC. That was now functional. The Department was sorting out the modalities around funding. The people were in place and new staff would be recruited. The Department put into place, with the Deputy Minister and senior leadership, to assist with Nkomazi to help the province and the industrial park programme.

He said that localisation currently applied to all National Departments, Provincial Departments, municipalities and State-owned Companies. It was the public sector that the Department had leverage over. It would only have a multiplier impact if it was extended to the private sector. The President and Minister have been raising it forcefully in Nedlac for the private sector to commit. Part of the recovery package was to get the public sector to commit to also buy local and to support localisation.

He then discussed the ease of doing business. The Department would arrange meetings with the World Bank and have them do a presentation for the Committee.

 Brexit was having a negative impact on the UK because it was the first time in history that a country decided to raise tariff barriers instead of lowering them. Brexit was having a negative impact on the UK’s exports to the European Union. South Africa’s imports were going smoothly there as South African products were reaching all the shelves. This was due to the trade agreement with the UK. South Africa’s relationship with the UK has grown stronger after Brexit. Government valued that partnership because the UK was South Africa’s traditional partner and the country South Africa has been having the longest links with. The UK also took a large portion of South Africa’s auto exports.

He then discussed the point Mr Cuthbert raised. Government spending has saved countries coming out of the Great Depression. It saved Europe after the Second World War. This was because the private sector collapses and counter-cyclical policy was needed. The problem in South Africa was that there were low levels of Government spending, especially spending by SOEs. There has been massive underinvestment for close to a century in areas where black people live. South Africa needed a programme of public investment especially in townships, rural areas and former Homelands. That was why South Africa was in an inequality trap. South Africa had a massive backlog of public investment. South Africa needed a Keynesian programme. It was important to get public investment going forward. It could not be expected for the private sector to invest in public goods. It was the State’s responsibility to invest in public goods. The private sector was investing in private goods in auto plants, in food plants and in poultry plants. It could not be expected that the private sector invests in hard infrastructure. That was the role of the State.

Mr Stephen Hanival, Chief Economist, DTIC, said that the fiscal multiplier for South Africa was quite significant. It varied from a low of 1.68 to between 2 and 2.5. There were a range of forecasts. There were always disagreements in the economics community. Even at the lowest level of 1.68 that meant that for every R1 that Government puts into or spends in the economy R1.68 was created on the GDP side. The slightly higher number would be between 2 and 2.5. That meant that for every R1 Government spending R2.5 was created of GDP. It was a significant multiplier. The key issue was whether the economy was in a slack mode, whether there was an output gap in the economy. At the moment production was significantly below the capacity of the economy so the use of fiscal multipliers would be very beneficial now. One would not see the expected increase in inflation that would happen if the economy was operating at full production already.

He responded to Mr Mbuyane’s question about the localisation study. That study was delayed. It was a study that sought to address the comments Ms Hermans raised as well. It was a study that tried to bring together both public spending and private sector spending to support local industry. That study intended to bring all social partners onboard to develop a mechanism that was not only public sector focused, in terms of the designations, but brought together all spending within the economy to support local industry. The study was delayed. Nedlac constituencies had comments on it and those comments had been taken into account. The study has been commissioned through the Department’s strategic research partner at the Development Policy Research Unit at UCT. The Department hoped to report back to the Committee in the next couple of months to provide a sense of the outcome of the study.

He responded to the question raised by Ms Yako. The optimism for the South African economy was partly based on the recovery in the mining sector and the expected recoveries in the service sectors but also the agricultural sector last year had the second strongest export performance in the last 20 years. Around $10.2 billion of agricultural exports took place last year. All the predictions were that that would be matched, if not exceeded, in the coming year. Notwithstanding some of the risks around a third or fourth wave, the emergence of successful vacancies and the positive outlook for global growth gave the Department some optimism about the GDP growth in 2021.

The Chairperson said that if there were any further questions the members could ask them. The Parliamentary Research Unit issues were issues that would inform the implementation of the programmes of the Department. It was quite important. He discussed the rate at which the Committee looked at these issues. He said that with regard to PPEs the quality and standard would become very important issues. He mentioned the two entities of the Department, the SABS and NRCS, and that there needed to be real stability of quality and standard. At the end of the day it might become a real important issue with regard to what makes the country successful. He asked the members if there were any further questions or comments?

Mr Mbuyane had a question about the NEF and IDC on the matter of industrial financing. He wanted to know whether the NEF and IDC were part of the Economic Reconstruction and Recovery Plan. He also wanted clarity on what the Interest Make-Up Scheme was? There was R11.3 billion worth of automotive incentive. Where they different from the financing industry? If an applicant made an application for funding to the NEF or IDC, was there any due dates or timelines? How were the processes moving forward? There were some applicants who never received communication on whether their application was being processed. He wanted clarity on the timelines of processing applications from Department structures.

Mr Cuthbert said that Mr October raised a very interesting point regarding AMSA. AMSA registered profit in the last quarter on the back of a number of job cuts, particularly in Saldanha Bay, Vereeniging and Newcastle. While this was beneficial for private business as they were able to put in place cost reduction strategies they also had a lot of protection from Government. What was Mr October’s view on that matter because it was fine for private business to be profitable but at what cost to unemployment in the country? He was not sure if Mr October read the piece by Peter Bruce, last week, regarding the protections that were provided in the steel industry and in the scrap metal industry. He wanted to understand whether that kind of criticism has been taken onboard? The last time he raised that issue and the fact that there was a potential loss of jobs in the scrap metal industry he was rebuffed by Minister Patel. He wanted to understand whether or not the Department had reconsidered their view. Was the Department happy for scrap to sit in people’s warehouses and not be sold because local foundries were not wanting to purchase the scrap?

The Chairperson discussed the targets that were set by the Department. How was the Department doing in terms of implementation? The programmes were quite clear and it was important for the Department to perform against the targets. There also might be issues of funding and expenditure that the Department may have to look at. The implementation approach of a district model was also important. It spoke to the three spheres of Government. The Department did comment on the working relationship with the province but he was looking at the three spheres which were National, Provincial and Local. On the local level it was more on the point of the district model in implementation. How was the inter-departmental engagement and work happening? There were opportunities for the different Departments to work together to help stabilise, develop and grow different areas that needed attention. The final issue he raised was business rescue. He was not sure how the Committee was able to follow-up on that. He viewed business rescue as ‘holes in the container’. Those holes needed to be closed so that there was content that could be worked from. He wanted to know how the Department was dealing with the matter of business rescue. It was important that the Department followed-up on its programmes to ensure that there was implementation. He asked Mr October to comment or respond to the issues raised.

Mr October responded to the Chairperson’s comments on quality standards, SABS and NRCS. Both SABS and NRCS were operational in terms of doing the quality checks, the conformity assessments and the testing. There were now no longer any backlogs and the turnaround times have improved. The Department would keep monitoring the situation. SABS would be reporting to the Committee in the next few weeks. The Department was monitoring that situation to ensure that the manufactured products were of an appropriate quality. He replied that in quarter two the Department had 33 targets and achieved 30 of those targets. In quarter three there were 47 targets and 44 targets were achieved. Across a broad range the Department was on track with implementation. This was also reflected in the budget where the Department spent 98% of its budget. The Department was doing well with implementation. He responded to the questions raised on the NEF and IDC. Both were an integral part of the Department’s programme and that was why the Department transferred R700 million to them. Those entities handled companies in distress and also provide assistance to companies who produce PPEs.

He commented on the Interest Make-Up Scheme. As a developing country South Africa faced very high interest rates. It was hard for people to invest at that high interest rate because there needed to be a higher rate of profit to pay off the interest rate. The Interest Make-Up Scheme was there for Government to reduce the interest rate. The Department’s grant was very focused to ensure that people got zero interest rate loans. That burden was taken off the lender and, in that way, promote investment. The Department would come back to report to the Committee on turnaround times. There were supposed to be quick turnaround times for applications. The Department would follow up with the IDC and NEF.

He then discussed the district development model. The Department was championing that actively. The Minister and two Deputy Ministers were active in the provinces and in the municipalities. The Department has successfully executed the district development model for all the SEZs. The Department canvassed the province. The reason for the success of the Tshwane SEZ was based it was one-third owned by the Tshwane Metro, one-third owned by the province and one-third owned by National Government. All the players cooperated fully in the success of the SEZ. That was the model the Department was rolling out in all of the provinces. The Department had buy-in from all the provinces. He provided an example of a Department official who visited the Eastern Cape, Northern Cape and the Western Cape rolling out the district development model ensuring that the Department coordinated its investment spending.

He commented on the points raised by Mr Cuthbert. The criticism of AMSA was that they did not have a very positive track record. The Department was engaging them fully on this matter. The company did not invest and that was why there were inefficient plants. The company sweated the assets in terms of investing. This was what the private sector did when it did not face competition. AMSA had monopolised this market for many years. That was why the Department put in place the price mechanism for them not to overcharge and abuse their monopoly position. The Department was engaging with them to get them to reopen the Saldanha plant and to reinvest into the upgrade of their equipment and machinery. The question about profitability was important because no company was going to invest if it was going to make a loss. A company needed to get back to profitability because once they were profitable they were able to undertake an expansion. It was a green shoot but it was not sustainable if the company did not invest and upgrade their plants. He indicated that every country protected its steel industry. If a country closed down its primary steel then it might as well forget about industrialisation. There was no country in the world that could claim to be industrialised if it does not have a primary steel industry. That was why Donald Trump successfully changed the conversation because there was a rust belt emerging in the US. There was de-industrialisation in the UK because they allowed imports to wipe out their steel industry. Both countries have reversed those processes and protecting their industries. The first executive order that Biden approved was to protect and buy local steel for their rail industry. There was no doubt that South Africa needed to maintain its primary steel industry. If the Department were to follow Peter Bruce’s advice them Government might as well close down the country and forget about manufacturing. South Africa has been relying on its mining industry for over a hundred years but commodity prices go up and down. South Africa could not rely on the mining industry. It was an important industry but South Africa must have a manufacturing and agriculture industry. While Government needed to discipline the abuse of AMSA it must ensure that they also become viable. That was a lively debate. He said that the steel masterplan should be close to finalisation soon.

The Chairperson thanked Mr October for covering all the comments and questions. He asked the members if there were any further comments or questions. There were no further comments by members. He asked Mr October if he had any closing remarks,

Mr October thanked the Chairperson and the members for the robust engagement. He said the Department had one more quarter left for this financial year 2020/21. The Department looked forward to that. The Department had its programmes in place and hoped that there would an upturn in the economy that it could take advantage of.

The Chairperson said the focus should now be on the implementation of the programmes and the performance of the programmes against the targets. Funding and expenditure were areas that the Department needed to take notice of as well. In some cases there might not be funding at the appropriate time and in other areas there was resources available for work to be done but less implementation. Another area that needed to be looked at is how the Department could best contribute to South African products improving its quality and standards, specifically as it related to Covid-19 PPEs. The work done with the SABS and the NRCS was very important. There needed to be a good standard of products in the fight against Covid-19. At the end of the day the competition would be on the basis of quality and standards. He once again raised how important the implementation of programmes was in the fight against Covid-19. The Department and Committee had a responsibility to accelerate economic recovery and to drive inclusive economic reforms.

The meeting was adjourned.