A summary of this committee meeting is not yet available.
TRADE AND INDUSTRY PORTFOLIO COMMITTEE Mr B Martins (ANC)
18 May 2005
CLOSE CORPORATION AMENDMENT BILL AND NATIONAL CREDIT BILL; INTERNATIONAL TRADE ADMINISTRATION COMMISSION ON TEXTILE SECTOR: DEPARTMENT BRIEFINGS
Documents handed out:
TRADE AND INDUSTRY PORTFOLIO COMMITTEE
Mr B Martins (ANC)
PowerPoint Presentation on Textiles and Clothing
PowerPoint Presentation on the Close Corporations Amendment Bill
PowerPoint Presentation on National Credit Bill
Proposed Amendments to the Close Corporations Amendment Bill
National Credit Bill (tabled version awaited)
The Committee was briefed on the Close Corporation Amendment Bill, National Credit Bill and the developments within the clothing and textile sector.
The Close Corporations Amendment Bill was intended to address the unfairness to a member or members in relation to the termination of member’s liabilities on restoration or re-registration of a close corporation. It would also broaden the definition of a firm to allow a close corporation to perform the duties of an accounting officer. The amendments would allow a trustee of a trust inter vivos to be a member of a Close Corporation.
The Committee also received an informal briefing on the National Credit Bill. The Bill would address the issues of ineffective consumer protection, particularly in relation to consumers in low income groups, the high cost of credit and access to credit, rising levels of over-indebtedness and reckless behaviour by credit providers, as well as exploitation by micro-lenders, intermediaries, debt collectors and debt administrators. All credit transactions would be treated equally but the Bill recognised that there were different products and categories of agreements. Credit providers would be obliged to assess if credit applicants would be able to meet their payment obligations. It would establish a National Credit Regulator and a Tribunal to oversee the implementation of the Act.
The Department and the International Trade Administration Commission (ITAC) then briefed the Committee on the developments within the clothing and textile sector. The presenters lamented that the industry was not negotiating with the government in good faith. They had thus far failed to make the necessary application that would allow the government to implement protective measures. Both the Department and ITAC could not act unless they had certain information held by the private sector. The industry was calling for a blanket increase of tariffs and this was not practical. South Africa was a member of the international trade community that was governed by rules and could not just disregard these. Companies were encouraged to be innovative and to produce what the market required and not whatever they wanted to produce. The restructuring of business models was also important. The government had been and was always willing to assist the industry.
Members could not believe that the industry was reluctant to spend money in order to protect itself. They felt that the industry should be called to explain its views because the stand-off was causing massive job losses. They asked why South Africa was not following in the footsteps of both the European Union and the USA in protecting their industries.
Close Corporations Amendment Bill
The Department’s delegation consisted of Mr M Moeletsi, Mr M Netshitenzhe, Ms A Ludin (Deputy Director-General) and Mr J Strydom (Departmental drafter).
Mr Moeletsi said that the Department had previously briefed the Committee on the Bill. The Department had requested Members to consider the addition of further amendments to the Bill. The Department had drafted the amendments to the proposed Bill. The Bill was intended to address the unfairness to a Member or Members in relation to the termination of a Member’s liabilities on restoration or re-registration of a close corporation. The Bill would also broaden the definition of a firm so as to allow a close corporation to perform the duties of an accounting officer.
The Close Corporation Act prohibited a Member of a trust inter vivos to be a Member of a Close Corporation. This was necessitated by tax considerations. This reason no longer applied and there was therefore no reason for the prohibition. The amendments would allow a trustee of a trust inter vivos to be a Member of a Close Corporation. The Bill would also bring fairness to prejudiced Members, promote good corporate governance and create more opportunities for Close Corporations to participate as entities in the economy.
Clause 1: Amendment of Section 26 of Act 69 of 1984, as amended by Section 6 of Act 38 of 1986
Mr Strydom referred to Section 2(3) of the Close Corporations Act. It provided for the limited liability for Members of the Close Corporation for the liabilities or obligations of the corporation. Section 26(5) provided an exception to the rule of limited liability. In terms of Section 26(5) "if a corporation is deregistered while having outstanding liabilities, the persons who are Members of such corporation at the time of the deregistration shall be jointly and severally liable for such liabilities". In terms of subsection (7) a corporation, shall, upon re-registration and issue of notice of re-registration by the Registrar, continue to exist and be deemed to have continued in existence as from the date of deregistration as if it were never deregistered.
Mr Strydom said that in Mouton and Another v Boland Bank Ltd. the question arose whether the restoration of the registration of a close corporation affected a Member’s liability under Section 26(5) of the Act if the liability remained undischarged at the date of restoration of the close corporation’s registration. The court found that the Member’s liability was not extinguished upon the restoration of a close corporation’s registration. The Department was of the view that this could lead to prejudice to certain Members. For example, if a Close Corporation had three Members and it was deregistered, all Members would be jointly and severally liable for the liabilities. It might happen that only one of them would be in a position to settle the debt. As a result the creditors would seek to recover the whole debt from the Member who had enough money to settle the debt. The Department was proposing that should the Close Corporation be re-registered, the Member who was in a position to pay the debt should be able to approach the court for an order that the Close Corporation should be liable for the debt.
Clause 2: Amendment of Section 60 of Act 69 of 1984, as amended by Section 9 of Act 81 of 1992
Mr Strydom said that the current Act had no provision that allowed a Close Corporation to become an auditor of another Close Corporation. The Bill was intended to make it possible for a Close Corporation to become an auditor of another Close Corporation.
He said that Section 29 of the Act specifically provided that no trustee of a trust inter vivos could in that capacity directly or indirectly hold a Member’s interest in a corporation. However, a trustee of a testamentary trust could hold such interest. The question was why the trustee of a trust inter vivos was excluded from holding a Member’s interest. The exclusion was based on tax considerations that no longer applied in the present moment.
Dr M Sefularo (ANC) asked if the amendments were merely intended to bring the Act into line with the tax regime. He thought the Bill would also try to align Close Corporations with the new economic and trade environment and also simplify the form of business entities. He wondered if these issues would be addressed in other legislation. He asked what would be the implications of the Bill for the second economy.
Mr Moeletsi replied that the amendments were necessitated by the court judgement in the Mouton case. They would benefit players in the second economy. The Bill was a piecemeal approach to dealing with the prevailing situation. A major process of law reform was underway and the Department would brief the Committee on amendments it intended to make to other legislation.
Mr S Rasmeni (ANC) asked if the amendments had any effect on the transformation agenda. He also asked if they would assist in bridging the gap between the first and second economies.
Mr Moeletsi replied that the amendments alone would not bring about the new regulatory regime that the Department wanted to create. The new corporate law review would go beyond what the Bill was proposing. The court judgement affected people in the second economy in that they ended up with liabilities that should have been borne by the corporation. People in the second economy would benefit from the amendments. A player in the second economy who was a Member of a trust inter vivos was prohibited from being a Member of a corporation for tax implications. Those tax implications no longer existed and therefore there was no reason why they could not become Members of a corporation. The Department was initiating a major law review. It had submitted the initial thinking in terms of the policy to the Committee and had also taken it through the Nedlac process. The drafting of a new Bill would commence soon and the Bill would probably be introduced in Parliament before the end of 2006.
Professor B Turok (ANC) agreed that the Bill would improve the prevailing situation. He requested the Department to provide the Committee with a map of different institutions and the roles they played in the economy. This would allow Members to better understand the structure of the economy and the different institutions.
Mr Moeletsi replied that the Department would provide the required information.
Ms B Ntuli (ANC) said that her understanding was that the liabilities of a corporation were its own and not for its Members.
Mr Netshitenzhe replied that in terms of the law the corporation was liable for its liabilities and obligations as long as it was still in existence. The question was who was liable should the corporation be deregistered while it still had outstanding liabilities. If one were dealing with a company, liquidation would follow. In terms of the laws governing Close Corporations the Members became jointly and severally liable for the corporation’s liabilities. If the corporation had three Members and two of them were "men of straw", the creditors would seek to recover the debt from the Member who had money or assets that could settle the debt. However, if all Members could pay, the creditors would sue them all. Rules of fairness demanded that a Member who had settled the debt, should, if the corporation was re-registered, be able to approach the court so that he could be reimbursed.
Dr Sefularo said that the Companies Act was recently amended to provide that if a person was incompetent to run a company, he or she should not be allowed to run any other company. He asked if it was possible to say that any person who led to the demise of a corporation would no longer be allowed to become a Member of any other corporation. A lot of corporations were individually owned. Last year CIPRO had registered close to 100 000 corporations. He asked how the law applied to individually owned corporations.
Mr Netshitenzhe replied that the Department had amended the Companies Act in order to deal with delinquent directors. The principle could be extended to include Members of a corporation.
Dr E Nkem-Abonta (DA) felt that there should be penalties for those Members who could not pay the debt. It was worrying that such people could walk away with impunity. They should be black listed or some other measures should be used to encourage good behaviour.
Mr Strydom replied that there were some consequences that followed people who did not pay the debt. In practice, the creditor would institute proceedings against all Members irrespective of their financial positions. The court would give judgement against all of them and warrants of execution would be served on all of them. It might be the case that the Sheriff would come back with a return of no property against some of them. There were also credit implications for the Members.
The Chairperson said that people got involved in corporations or partnerships knowing the rules governing them very well. They went into such associations with their eyes wide open and prepared to stand for anything that could happen. A person would be very negligent if he or she was to enter into any association without looking at the rules governing it.
Ms D Ramodibe (ANC) asked what would happen if the corporation was not re-registered.
Mr Strydom replied that Members would continue to be liable if the corporation was not re-registered. In terms of the amendment, there would be a possibility of shifting liability to the corporation if it was re-registered.
Mr L Labuschagne (DA) asked the Department to explain what it understood to be the first and second economies.
Mr Moeletsi relied that Professor Turok could explain the concepts for the Committee.
Mr Labuschagne said that it was important to have the official understanding of the concepts. The President, Minister of Finance and the Department frequently referred to the concepts.
Professor Turok said that he had developed a definition of the second economy. The government did not have a definition of the concept. His ‘definition’ was more of a characterisation than a definition.
The Chairperson said that it was still important to have the Department ’s understanding of the concepts.
Mr Rasmeni said that it might be important to conduct a workshop so as to have a better understanding of the concepts.
Dr Nkem-Abonta said the concepts were not new. The more respectable term was ‘dual economy’.
The Chairperson said that the Committee would conduct public hearings on the Bill next week.
Mr Strydom said that the Department was not in a position to effect any amendment to the Bill since it had already been introduced in Parliament. Only the Committee could amend it. He requested the Committee to attach the proposed amendments to the original Bill so that people could also consider them for the purposes of the hearings.
National Credit Bill briefing
Ms Ludin briefed the Committee on the Bill. The Bill was certified on 17 May 2005 and had not yet been tabled in Parliament. This was an informal briefing and the Department would conduct another briefing once the Bill had been tabled in Parliament. Credit was currently regulated in terms of the Usury Act of 1968, Exemption from the Usury Act Notice and the Credit Agreements Act of 1980. None of this legislation had been significantly reviewed for the past 25 years. The Exemption from the Usury Act Notice was probably the most significant change that had been effected.
Since 1994, the Department had always maintained that the Exemption Notice was a temporary measure. The intention was to holistically review credit legislation. The process that led to the Bill started in 2002 when the Director-General mandated a team to review the current policy environment and legislation. The team presented its report in October 2003. The Department developed a policy and drafted the Bill in 2004. There was a lot of consultation with various stakeholders on the Bill. The Bill was tested against various stakeholders and an international panel of experts. It was sent to the State Law Advisor last year and certified yesterday.
Ms Ludin said that nobody had, during the consultations, raised questions about the need for reform. The Usury Act dated back to 1968. The Exemption notice introduced a different set of rules for a majority of consumers. There were problems with the Usury and Credit Agreement Act. They regulated different transactions but when put together, there were loopholes that industry was exploiting. They would, for instance, advertise ‘no deposit’ transactions. There was no such thing as a ‘no deposit’ transaction. There was only a hire purchase transaction that required a deposit, a micro loan or a loan. The loopholes should be addressed. The current framework did not address the challenges that South Africa was facing. The reality was that there was one credit market that served middle and high-income consumers and another that served the majority of people. The regulatory framework was reinforcing this split by creating one set of rules for the majority of consumers and another for the minority. The country was facing particular challenges in the credit market. Access to credit was very limited and credit was expensive to those who had access to it. Some consumers were over indebted and there was no adequate protection for them. No uniform set of rights for consumers existed. After ten years of democracy, the country was still facing similar constraints that were raised in 1994. There were different views on whether discrimination in the credit market was real or perceived. 67% of the population only received 6% of the credit and the average interest rate was 175%. Only 20% of small, medium and micro enterprises (SMMEs) received financing. Only 7% of SMMEs received financing from banks.
The Deputy Director-General said that there was no insolvency law that assisted the poor. A person could only be declared bankrupt if he or she had assets. Creditors would not institute proceedings against a poor creditor and there was therefore no way out for the poor. Debt administration provided a temporary respite but was very expensive. Most people would try and run away from their creditors and this created risks in the market. Credit providers also resorted to less palatable methods of debt collection. Some people were forced to sign garnishee orders when signing for credit. Credit providers were not interested in whether or not the person could pay the debt. They were happy as long as they knew that they could go to court or the employer and get their money. The government should be able to deal with the problem of reckless provision of credit. The question was why one would extend credit to a person who was already struggling to pay normal bills due to too many debts. The industry would argue that government could not tell it how to do its risk assessment. It was in the market interest to do so. The credit market was dysfunctional and there were a lot of perverse incentives in it.
Ms Ludin said that there was inadequate protection for low-income earners. They received protection through the Exemption Notice The existing legislation was outdated and did not deal properly with marketing and disclosure. There were always hidden costs to most of the contracts and most people found out when they started paying. There was also interest rate protection for low-income earners. Unlike the Usury Act, the Exemption Notice did not impose a ceiling on interest rates. It was difficult to prove if there was discrimination in the market. People were often refused credit on the basis that they were blacklisted. There was also little that consumers could do about inaccurate information in possession of the credit bureaux.
The industry was likely to say that the Bill would not facilitate access to finance. The Bill was not about facilitating access but protecting consumers and creating a market that would provide sustainable access to credit in the long run. Consumers who were over indebted would not get further credit. There would be measures designed to get help them get out of over indebtedness. The objective of the Bill was to promote transparency by treating all credit transactions in the same way. The Department was aware that a loan of R500 payable within a month was different from a R100 000 home loan. There should be clear rules across the board. The government should be able to deal with reckless lending. It should regulate the conduct of participants in the credit market.
The Bill would apply to all credit extensions to individuals. It would only apply to arm’s length transactions. It would not apply to loans between family members, friends, and stokvels. The Bill recognised developmental credit as a special category. The Usury Act only applied to credit to individuals up to R500 000. The Bill restated the constitutional rights against discrimination. It provided for protection against discrimination against small businesses. It would provide the right to have the dominant reasons for the refusal of credit to be made known. The National Credit Regulator would help with the enforcement of this right. There was a need to exclude small businesses from some of the provisions of the Bill.
The Bill would introduce three different kinds of agreements. The first was small credit transactions that included pawn broking transactions. There would be a threshold to determine the different kinds of transactions. The intermediate transactions would cover credit facilities like credit cards and overdrafts. There would also be large transactions covering mortgages and home loans. Small transactions would be more prescriptive and there would be a standard contract to be used. One might want to be as prescriptive when dealing with large transactions. It was assumed that parties to large transactions would normally read the contract before signing them. There might be some unfair terms to such contracts.
Ms Ludin said that the Bill would also introduce registration for credit bureaux, debt councils and credit providers. Not all credit providers would have to be registered. The government would not be able to regulate the Matshonisas. Small lenders should be excluded and there was a definition for small lenders. The Bill would still apply to them but there would be no need to be registered. It would also introduce commitment to fighting over indebtedness and Black Economic Empowerment as part of licensing requirements.
The Bill would also introduce a special category for developmental credit providers. Any institution could provide developmental credit. Developmental credit could be credit for education, small business and housing. Developmental credit would not be subjected to the rules in the same way as other credit. For instance, there was a rule that one could not go from door to door selling credit and signing the agreement in the house. Developmental credit should be developmental in its nature. Part of the problem was that one could find a housing loan extended at an interest rate of 250% per annum. The question would be whether this was a developmental credit.
The Bill would also focus on disclosure. A person would be entitled to get a quote before entering into an agreement. Research had shown that most institutions, banks included, did not give quotes. The quote would assist the consumer in deciding which institution to use and identifying all costs involved. It would also be binding on the credit provider for at least five business days. The Bill also set out the kinds of agreement that would be illegal and what kinds of provisions in the contract would be illegal. The whole contract would be illegal and therefore unenforceable if the credit provider was not registered. The debtor would not necessarily get to keep the money but the lenders would also not get it. There were a number of unregistered micro lenders. It had been found that, upon signing contracts, people were forced to waive certain rights that they had in terms of the common law. This would be illegal. There was no legislation that dealt with unfair terms of contracts. A person would not be able to unilaterally change the terms of a contract, as was the case at the moment.
The Bill would also prohibit ‘negative option’ marketing. For instance, a person could receive a card from some of the clothing and other stores even though they did not apply for it. A letter saying that it would be deemed that the person had accepted the card if it were not returned within a specific number of days would accompany the card. The person would then be forced to pay whatever monthly fees were applicable. People frequently found out that their credit had been extended even though they had made no request to that effect. This was contributing to over indebtedness. This was not to say that people who had confirmed the credit should not get it. People should be allowed to think about it. The Bill would allow certain increases that could be made. It also set out the kind of information that should be contained in statements of accounts. There would be a standard statement for small transactions. Unregistered lenders would be prohibited from advertising.
Credit providers should disclose all costs involved in a transaction. There were a lot of additional fees that people were paying. These included transport and insurance fees. Insurance fees were the biggest (60% of the credit). The Department was concerned about the potential for the abuse of credit insurance. It was not sure how consumers were benefiting from credit insurance. Consumers were not necessarily getting the best product available in the market. Consumers, especially in the furniture business, were seldom given a choice with regard to which insurer to use. The Bill would only allow interest, service and application fees. The Minister could impose limits on these fees. The Bill would limit what could be collected and also sought to codify the in duplum rule. The rule provided that the interest that one could charge upon default of the debtor could not exceed the amount owed. The Bill would also address the issue of credit life insurance. The intention was not to prevent people from getting insurance. However, consumers were not given a choice on their insurer. In could be in the best interest of the consumer to shop around for the best cover. A lot of consumer education would be required to enable consumers to shop around for the best product. The reality was that credit providers received commissions from the insurers and they therefore tried to maximise the commission instead of giving the most affordable cover. The industry would probably say that the Bill was trying to regulate the insurance market but this was not the case. The Bill was merely trying to regulate the relationship between the credit provide and the insurance provider given the existence of perverse incentives.
The Deputy Director-General said that credit bureaux must be registered. Not everybody could be a credit bureau. The Department knew of the existence of two credit bureaux but there were many others that were operating. There should be clear consumer rights and a consumer should be entitled to one free record on his or her status every year. The consumer should have the right to force the credit bureau to correct any inaccurate information about him or her. He or she should then be entitled to a free record for the purposes of verifying if any correction had been made.
There would be a requirement for credit providers to first assess the income and obligations of a credit applicant before extending credit. The credit provider should be satisfied that the applicant would be able to repay the debt and still be able to pay for essential goods. A reckless credit agreement would not be enforceable and would be suspended until such time that the person was in a position to pay. This was quite a significant penalty and people were not happy about it. There was a need to introduce serious disincentives for people to recklessly extended credit. Reckless credit was very damaging to consumers and responsible credit providers.
The Bill would put more emphasis on encouraging credit providers to reach voluntary settlement with the debtor before going to court. Currently a consumer who was over indebted could go into administration. A lot who needed not go into administration were going into administration because there were insufficient options for them. Sometimes a consumer might have serious problems that were preventing him or her from repaying the debt. The Bill would provide for a debt review or restructuring process. An over indebted consumer might need to go and see a debt counsellor who would do an assessment. If there was any reckless credit given, the debt counsellor might recommend that the debt should be suspended. The rest of the debt might have to be rescheduled by decreasing the instalments and increasing the repayment period. The counsellor’s recommendations would have to be confirmed by the Tribunal or court. The Bill would slow down the whole debt administration process by encouraging credit grantors to use alternative ways of getting their money back.
The Bill would introduce the National Credit Regulator and Consumer Tribunal. This was a matter of concurrent competence and provinces could also legislate. Some form of division of labour between the national and provincial governments was anticipated. Provinces did not have legislation in place and there was nothing to prevent them from legislating. The enforcement of certain agreements was better done at provincial than national level. It was important to work together with provinces. It was envisaged that a credit provider who operated in one province should only be registered in that province or with the National Regulator. The Regulator would be responsible for registering credit bureaux and would monitor compliance with the law. It would also investigate, conduct inspections and prosecute offenders before the Tribunal. To this end, it would have to liase with alternative dispute resolution bodies such as the Banking Adjudicator. It was important for consumers to have different avenues for dispute resolution. This would facilitate quick redress of disputes. The Regulator would also be responsible for the national register of credit agreements. The register of credit agreements would be different from a credit bureau. It would be a registry in which consumers’ debt obligations would be recorded. It was necessary because the Bill required credit providers to do conduct proper credit/debt affordability assessments. There was a need to ensure that accurate information was available. The problem at the moment was that the two main credit bureaux kept different kinds of data and this made it difficult to get an accurate picture of a consumer’s debts. The Department was of the view that it was not interfering with credit bureaux or doing their work for them but only trying to regulate them. The work of the credit bureaux was to give information about a consumer’s behaviour in so far as it related to repaying debts. It was not about a consumer’s debt but behaviour. This was one of the reasons why they kept information about judgements and whether a person was a slow or bad payer.
The idea behind establishing the Tribunal was to ensure that not all matters relating to contravention of the Act went to court. It would be much quicker to deal with disputes if issues were referred to the Tribunal. The Tribunal would adjudicate upon contravention of the Act and would have the power to impose penalties and make declaratory orders. The courts currently performed some of these functions. The courts would still have a role to play.
Mr Labuschagne was worried that the Bill would leave too many things in the hands of the Regulator and regulators and out of the hands of Parliament. He asked if the Department knew what would be the cost of implementing the Bill. It would introduce a Regulator and the Tribunal who would also have their own personnel. He wondered if the Department knew of the costs of establishing the new bureaucracy and why it could not carry out the functions of the proposed Regulator.
Ms Ludin replied that the reality was that every piece of legislation should have regulations. There were certain things relating to implementation that one should be able to change. This would make it easier to effect changes within a reasonable time. The problem was that amending laws was a very long process that took at least a year. One could not deal with issues of implementation with this kind of timeframe. She was aware of the constitutional provisions with regard to what could be put in regulations. South Africa was coming from a history where there were laws that had little substance and allowed everything to be done by way of regulation. There was a need to move away from this but regulations were inevitable. One could not put everything in the Act and must allow for some flexibility.
The Department knew of the cost of implementing the Bill and also had some existing infrastructure. The Department would transfer existing infrastructure to the Regulator. These would include the assets of the Micro Finance Regulatory Council as well as the capacity that existed within the Department. There would be some additional costs but it was not sure of the figures. There had been an increase in the Department ’s budget and it had budgeted for this.
With regard to why the Department could not perform the functions of the Regulator, she said that it was important for the Regulator to be independent of political influence. Such independence would allow it to enforce legislation expeditiously. She did not believe that all administrative functions necessarily had to shift from the Department to an independent institution. The courts enforced the Usury Act. One would hand over a case to a prosecutor that had already had other cases. The Department was of the view that the new system would be more effective and the costs involved were justifiable. The effectiveness of any legislation depended on its enforcement. Contravention of rules became the rule if there was poor enforcement. What was envisaged was better capacity to enforce or regulate. One should be able to act quickly and effectively.
Professor Turok said that the Bill was a good initiative and should be supported. The Committee, at the request of the Minister, had raised the limit on credit and this had a bad effect. The Minister later agreed that the floodgates had been opened by raising the limits in the Usury Act. He asked if the Bill would introduce a cap on credit. He went on to ask if the Committee could get copies of the regulations. Parliament had in the past passed a lot of legislation led and directed by the state with little or no community supervision, participation and control. There was a bank in India that was based on the concept of community control. The bank would lend some money to a person. If the consumer did not repay the debt, it would approach the chief of the village instead of sending the police. He was aware that South African communities were different to villages in India. He asked if it was not possible to build such a system into the Bill. He was intimidated by the huge job of implementing the Bill. He urged the Department to implement the Bill in phases. He felt that the implementation of the Bill should be undertaken simultaneously with its evaluation. There were qualified people who could help in putting together an evaluation system.
Ms Ludin replied that the floodgates for micro lenders were opened in 1992 when the first Exemption Notice was implemented. When the Department increased the regulation and loan amount, it extended the scope in the market. It increased the size of the black or informal market and tried to regulate it. The intention was to have one credit market. The government could not and would not attempt to regulate everyone because the costs would be prohibitive and the benefits would decline. There would be a cap for service and origination fees and interest across the board.
The Bill was very ambitious. The Department had already done a lot of work on implementation, regulation and institutional design. It had provided for transitional measures. It should be able to implement as much as possible when the Bill came into effect. The Bill did not envisage that the Department would be able to do everything at once. There were transitional provisions. For example, it provided that if the Minister did not put in place an interest rate ceiling, the current Usury Act rates would continue to apply until such time as new rates had been set. The Credit Register would only come into effect once an independent body had certified it as being operational. The Register would not be operational by the time the Bill came into effect. The Department had also done an assessment on the impact of the Bill. It was important to have clear objectives and the implementation of the Bill should be assessed against the objectives.
She said that the Bill had to address some of the underlying issues in the credit market in order to ensure access to sustainable credit in the future. One should deal with issues like the perverse incentives that destabilised the market and prevented people from getting access to credit. The Bill would not have the desired effect overnight. The Bill, in itself, could not be the solution to addressing the overarching problem of access to credit. One should address the issue of collateral. Some people had not been able to accumulate assets that could be used as collateral. As part of the review, the Department looked at the township housing market. People could not use their houses to get credit. There was a need to address this because there were assets worth billions in the market that could not be used to leverage cheaper access to credit. There should be interim measures that would provide cheaper sources of financing. The Bill would not address such issues. It would address abuses in the market and some of the risks that existed for credit providers so as to be able to normalise the market and bring the cost of credit down.
With regard to community participation, she replied that the Bill did not explicitly provide for community regulation. However, the concept of developmental credit envisaged that developmental credit would be treated differently. One had to be careful because the communities that received loans from the Bank in India were generally the poorest of the poor. Those consumers should still have rights. Very often non-governmental organisations had noble intentions but one could not compromise the rights of the consumers. Consumers should still have right to recourse. There was a need to allow for peer pressure mechanisms. It would be interested to hear from the NGO community. NGOs were more likely to say that they should not be regulated.
Mr J Maake (ANC) felt that things would be much easier if there was a standard contract with no fine prints for all small agreements. He believed that some people would still not be able to access credit. The Bill intended to accommodate as many people as possible. He asked if the Department had any idea of how many poor people would still be left out. One might have to take another look at the Bill if it would still leave too many people out because it would not be serving its purpose. This did not mean that people should still get credit despite that they could not repay their debts. It was interesting that the Bill would not regulate transactions between family and friends. A debt was a debt irrespective of the relationship between the parties. He wondered why the Department had excluded such transactions. The implementation of the Bill would be a huge task. However, one should not be worried about how much such implementation would cost. The Bill would be one of the most "beautiful" pieces of legislation that the Committee had passed, especially for people in rural areas. The Bill was very much needed regardless of the costs involved. The important thing was how to implement it because shelving it would not be helpful.
Ms Ludin replied that the Bill envisaged standard contracts for smaller transactions. The Department would publish the standard contract that would have to be used. It would allow for flexibility on larger transactions.
Mr Moeletsi replied that the regulation of transactions between family and friends would require enormous capacity and would be difficult. It would have been ideal to include such transactions but enforcement would be very difficult. The Committee would be given a full presentation on the Bill once it had been introduced in Parliament. The Bill would exclude some people in the short term. In the long term people would have to restructure their debts so that they fell within the law. Most of the times credit providers recklessly extended credit to consumers and had them blacklisted once they could not make payments. There was an institution that was leading a campaign against the Bill. That institution had in the past recklessly extended credit to consumers. The Bill would outlaw any form of discrimination and refusal of credit on unreasonable grounds would also not be allowed.
Dr Nkem-Abonta asked if there would be any cap on interest rates. Ms Ludin replied that the current rates would continue to apply. The Regulator would come into operation when certified. It would not be possible to have it by the time the Bill came into effect.
Ms Ramodibe agreed that the Bill was very "beautiful" especially when considering that too many people had been exposed to unregulated blacklisting. She asked how the Department would monitor unregistered micro lenders. She was concerned that exploitation of consumers by unregistered moneylenders might increase.
Ms Ludin replied that it was hoped that the Bill would provide the ultimate penalty for unregistered lenders because they would not be able to enforce their contracts. Ultimately, this would depend on the Department’s capacity to enforce the legislation. The Banking Council believed that the Bill gave consumers the opportunity to enforce the contracts in that they were given rights that would always be enforced if a complaint had been lodged. They believed that the Bill intended to empower consumers to monitor the market. By coming forward they would be assisting the Department with enforcement. The Banking Council was of the view that this was an incorrect way of regulating the industry. It was important to ensure that consumers were aware of their rights so that they could assist the Department with enforcement. Civil society must play their role. The Department was, in consumer legislation, looking at giving NGOs and consumer movements much clearer powers. There was a need to look at financial support and mechanisms through which consumer movements could be supported.
Ms Ntuli said that the Bill was long overdue and people should be protected. She wondered how it would provide assistance to vulnerable consumers. Debt collection by law firms was a major challenge. Lawyers often added their fees on top of the debt. The question was what should be done about this. The insurance cover offered by furniture shops also had their own problems. The fine print in the agreements usually contained exclusions. She asked if there would be a standard form of insurance to guard against this. She was happy that the issue of credit bureaux was being looked. She was not sure if the Department had the capacity and resources to run the whole process. Too many people were trapped in debt and working for credit providers. She gave an example of a woman who had bought a bed for R2 999 from a furniture shop and subsequently lost her job. She informed the shop of her situation and that she was still looking for another job. After six months the debt had increase to R8 750. She wondered if the Bill would be able to address issues like this.
Mr Moeletsi agreed that law firms were causing too much hardship. The Bill proposed that there should be regulations on how debt recovery was conducted to address some of the problems people were facing.
Ms Ludin replied that the Debt Collectors Council regulated charges by debt collectors. There was also a law that regulated debt collectors. The Bill proposed maximum fees that could be collected. The in duplum rule could be extend to cover such fees. The Bill contained no provision on how insurance should be dealt with. The issue of insurance was dealt with in the Insurance Act. There was no need to regulate insurance in this Bill. There was a need to review insurance laws to ensure that there were adequate provisions there. One could engage the National Treasury on this.
Mr Rasmeni asked if the Bill would apply to government and its institutions. There had been cases where municipalities had sold houses belonging to pensioners in order to recover unpaid rates.
Mr Moeletsi replied that the Bill specified the jurisdiction of the Regulator. Municipalities would not be excluded as long as they offered credit. The Consumer Bill would deal with some issues. The National Credit Bill was specific to the industry. The Consumer Bill would deal with some issues which were not covered in the National Credit Bill.
Ms Ludin agreed that municipalities would be subject to the Bill to the extent that they extended credit. The Bill did not necessarily cover the enforcement of debt. This was covered in the Magistrate’s Court Act and other legislation. A municipality that had extended credit and charged interest could, to some extent, fall within the Bill. The Bill had a category called incidental credit and this was limited. Incidental credit was when the main intention was not to extend credit but levy penalties for late payment of an account. Charges for late payment of debt could technically be considered to be interest. There was no intention to regulate this but this practice would fall within the scope of the Bill if the institution gave a consumer a lot of scope and was charging a lot of interest.
Mr Labuschagne said that there were reports that the large credit industry was mature and functioning well. Most problems related to the under R10 000 loans. He wondered why the Department was fiddling with an industry that was working well. The Bill should focus on the small transactions. He asked if the Micro Finance Regulatory Council was not doing its job. It seemed that some people were getting too much credit as a result of reckless lending and at the same time a lot of people were excluded from borrowing. Credit agreements should be simplified. He asked if the Bill would apply to existing credit agreements and if the Credit Register would have to register all existing credit agreements. There was a need for a credit bureau. The absence of blessings from a credit bureau would mean that people would not get access to credit and would be exposed to reckless lending.
Mr Moeletsi replied that the policy document had outlined the Department’s intentions. The Department was looking at overhauling the whole system.
Ms Ludin replied that the Bill provided, as a transitional measure, that existing credit agreements should be reviewed and aligned with the law within a particular period of time. The Department was aware that existing agreements could not be aligned with all provisions of the Bill. The reckless lending provision would, for example, not apply to a loan granted 20 years ago. It was important not to reopen an opportunity for the banks to renegotiate contracts. However, they would have to ensure that the contracts were compliant with the law and that there were no illegal and unfair contract terms. The basic principles of contract would remain and banks would not be able to unilaterally change the terms of contracts. At the moment one could have variable interest rates. In South Africa most bonds were variable. There was a usury ceiling that moved. The bonds varied at all times with movement in prime interest rates. Sometimes the interest rate stipulated in the contract would exceed the Usury Act ceiling. This would probably change in the new dispensation depending on the interest rate ceiling that would be introduced. This would not affect the contract but only the application of the current law. Credit Bureaux were necessary and needed to be regulated. Good credit information was also vital for credit providers to be able make informed decisions and for proper functioning of the market. Credit bureaux became a hindrance to access to credit if they did not have accurate information at their disposal.
Mr Njikelana said that the Bill would help clean the credit market. The industry had an impact on the economy. The need to focus on micro credit was confusing and alarming. The micro credit market was R362 billion and R200 billion of this was on property. Poor people had access to R20 billion out of the R200 billion. The establishment of a consumer movement was important. He thought that co-operatives could be one of the promoters of developmental credit. It was surprising that they were not mentioned in the Bill. With regard to the capping of debt, he asked if the Department had taken into account the guidelines that were found in other areas. It was generally said that a family should spend more than 25% of its income on housing and 7% on health. He asked if the Department had looked into something like this. This was important because people could just keep on borrowing just because they had an income.
Mr Moeletsi replied that the Department’s policy document had outlined the intentions. It was looking at overhauling the whole system. He indicated that he had a credit card and had recently been offered two more credit cards and extension of credit. After looking at his income, he realised that his house would have to be sold in the near future if he were to accept them. Large lending institutions promoted some of this conduct. Large lending institutions were not able to give credit to some of the poor people because they had been blacklisted. Access to credit was a broad issue. For an example people who did not have bank accounts or identity documents could not access credit. The Micro Finance Regulatory Council had performed very well but there were still some gaps. The law was not adequate. The market was skewed and one sided. There was a need for a balanced market that would serve all South Africans.
Ms Ludin replied that the Department was saying that South Africa had a dysfunctional credit market that reinforced the existing split. The current framework was the root cause of the prevailing problems. The current regulatory framework was the cause of some of the problems. The Usury Act was not appropriate for the whole market. The Exemption Notice regulated the small lenders. This form of regulation split the market because it meant that micro lenders could not operate in the higher end of the market. This was reinforcing two economies and ensuring that the two would never become one.
She would check if co-operatives were included. The Department felt that it was important not to deal with institutions. One could have a non-governmental organisation charging very high interest and the question would be whether it was offering developmental credit. With regard to reckless lending, she said that the Bill provided for the Department to set guidelines. On the one hand, smaller lenders wanted some guidelines on what would be considered reckless lending. Big lenders did not want guidelines because guidelines would become law. The Department was caught in between and did not believe that guidelines were necessarily enforceable. At the same time there should be some indications given to the market on how the Regulator would view the matter. Ultimately, the Tribunal or court would decide the issue of reckless lending. The first case to be decided on the issue would shed more light on what the court would uphold. The Regulator could still have guidelines with which a court could disagree.
Department and International Trade Administration Commission (ITAC) briefings
Mr Rasmeni took over as the Chairperson for a brief moment as the Chairperson was still attending to some other appointments.
Mr I Sharma (Department: Chief Director: International Trade and Economic Development) and Ms N Maimela (Chief Commissioner: ITAC) briefed the Committee on the developments within the textile and clothing industry. (See PowerPoint presentation).
Mr Sharma focussed on global context of the clothing and textile industry, the dynamics in the South African textiles and clothing sector, the establishment of Technical Task Team and long term interventions. Ms Maimela focused on the issue of safeguards.
In 2003, global textiles and clothing exports were valued at US$395 billion, making it one of the world’s most traded manufactured products. The textile and clothing industry was one of the major sectors of trade of manufactured goods. The global textiles and clothing value chain was a buyer driven value chain, dominated by large retailers. Retailers did not own their own factories, but rather organised and controlled production on a worldwide basis. They were driven by changing consumer preferences and demands in terms of quality and price. Consumers’ demands had lead to retailers sourcing production from the lowest cost locations around the world. While price was still the primary determinant in terms of sourcing, quota elimination meant that lead times, quality, reliability and flexibility would be important aspects of competitiveness within the international value chain.
The South African clothing and textiles sector had been isolated and was in recession. There were high levels of protection, inefficiencies and general uncompetitiveness. The clothing and textiles sector was virtually completely closed off and protected. When South Africa decided to integrate into the global economy through the Uruguay Round, it had agreed to a gradually phase-down protection in most sectors. The clothing and textiles sector had been largely exempted from opening up to competition. The Multi-fibre Agreement (MFA), allowing quotas on textiles and clothing imports, was extended until 31 December 2004 and the industry was given notice of the expiry for over a decade. South Africa still maintained high tariffs in sector even though the World Trade Organisation (WTO) saw tariffs above 20% as high (40% on some products). The South African industry enjoyed double protection in the form of tariffs and subsidies in the form of the Duty Credit Certificate System (DCCS). The idea for the DCCS was to create a window for competitiveness.
South Africa had to operate as part of the global textiles and clothing value-chain. It accounted for less than 1% of global exports of textiles and clothing. The current challenges facing the sector had to be viewed in the context of increased global competition and inefficiencies within the sector. Past protection and increased international exposure had highlighted inefficiencies in the industry, lack of capital investment, innovation and technology. The challenge was to improve efficiencies in terms of management practices, technological and product innovation, human resources and firm linkages. South Africa’s industry was dominated by a small number of large retailers who welded considerable power over the value chain. Price and quality were key issues in terms of both the local and export market. The pressure on the Rand had forced companies to become more competitive beyond the band of the currency exchange rate. This became clear a long time ago. There had been numerous partnerships between labour, government and business. A lot could be done by all parties in terms of living up to the commitments that had been made. The private sector had not lived up to its commitments.
Early last year there were attempts to lobby Minister A Erwin for some relief from competition from China. At the same time there were lobbies from labour as a result of job losses. The Minister had felt that instead of dealing with each group individually, it would be better to have comprehensive engagements on the issue. He consequently established a technical task team comprised of labour and business. It was established based on industry's approach to government regarding the increase in imports from China. The purpose of the Task Team had been to look into factors that underlay the industry's vulnerabilities to imports and explore short-term and long-term responses to challenges. The government had made it clear that it was willing to assist with remedial measures and any other support measures that would be required in the context of a sustainable and restructured business plan for the sector. It was not practical to carry on business as it had been carried out in the past. It was made clear that it was the right of the industry to request protection. The first step in the process required the industry to complete an application that showed that they had been injured by the competition. This would have provided the basis for the institution of protective measures by government. No application had yet been made by the industry.
Ms Maimela said that there had been a lot of confusion about safeguards. There were two types of safeguards: the general safeguards in terms of Article 19 of GATT which could only be imposed on all Most Favoured Nations countries that imported or exported certain products (clothing for instance) above de minimus levels. The measure would have to be imposed on all exporters without discrimination. The second measure was in terms of Article 16 of the Chinese Protocol of Accession. This was very specific and could only be applied against Chinese products.
The Article 19 safeguard was governed by the WTO and there were rules, regulations and factors that had to be proven before it could be applied. The government would have to show a surge in imports, serious injury to domestic imports and that the surge in imports was unforeseen. The question was whether one could use this safeguard against China. It was anticipated that Chinese manufacturers would have the capacity to fill the market with their goods. This measure was therefore inappropriate. Safeguards were aimed at encouraging adjustments in the domestic market and were temporary measures. The general safeguard could only be imposed for a period of two to three years but could also be extended. There were certain concessions that had to be made when using this measure. There should also be consultations with other governments concerned.
According to the Chinese Protocol of Accession, one had to prove that the Chinese products were being imported in such increased quantities or in such a manner as to cause market disruption. This would not be difficult to prove if disruption did in fact exist. There should also be consultations to agree that imports from China were the cause of the disruption. China could take unilateral remedial action to stop or control the disruption. If no action was taken within 60 days, trade concessions could be withdrawn or imports limited. The safeguard could be used for a particular period of time. One should have to make some compensation should the measure be kept beyond the allowed period of time. This could mean that the South African government could say to China that it would open its industry in a particular market or that China should open its market.
Ms Maimela said that information was required for both safeguards. ITAC had a meeting with the industry in March 2005 where it tried to explain what kind of information was needed to enable it to act. It could not get the required information from industry. In another meeting, it became clear that none of the manufacturers were willing to provide the required information.
Mr Sharma said that the industry had failed to bring an application for safeguards. The reason given for the resistance to make an application was that the industry could not afford to employ the consultants who would complete the application. There was no requirement that consultants should complete the application. It was disappointing that labour movements, instead of the industry as one would have expected, were willing to pay for the application. The impact of lack of action on the part of the industry was being felt directly by the workers. The process of completing the application would cost approximately R100 000. The process was not moving because the industry still refused to make certain information available. Government had always maintained that it was ready and willing to assist the industry. Safeguards were some of the measures that the government was looking at.
Another measure was the DCCS that was in place. The idea was not to have subsidies over a long period of time but as a short-term intervention to allow companies to become more competitive. The industry felt that it still needed this form of support. In 2001 taxpayers gave the industry R400 million as a result of the Duty Credit system. Last year the cost had risen to R1, 2 billion. The reality was that the DCCS were not being used in the intended manner. Four out of five DCCS holders had sold the certificates to non-exporters who had used them to import clothing. Some manufacturers balanced the product mix by a mix of locally manufactured and imported goods. This could have been one of the causes of the resistance on their part because although they were manufacturers they were also importers. There was no intention that the DCCS would continue forever. Given the current situation the government had decided to extend the system but with conditions. One condition was that the holders would not sell the certificates to retailers who were not in the manufacturing sector. The idea of the certificates was for manufacturers to be able to subsidise their imported inputs into the manufacturing process. The government had restricted the tradability of the certificates.
As from 23 May 2005, the country of origin labelling would be added as a requirement. There was also a concern around illegal imports and under-invoicing. The Department was engaging the South African Revenue Services on better policing of ports and monitoring of containers coming into the country. There was a range of issues that were affecting the industry. International competition was one of them. The industry was failing to produce viable restructuring business plans. There was a general recognition that South Africa on its own might not be the most competitive environment for clothing and textiles. As a region, Southern Africa offered a good value proposition. There was a proposition for a regional pipeline wherein the region would be integrated into the clothing and textile value chain. For instance, cotton would be grown, spun and woven in different parts of the region. South Africa should, within the value chain, concentrate on its capabilities. There was a need for a regional value chain if South Africa was to compete globally. South Africa was a small player in the clothing and textile sector. There was a niche for South Africa and the region in the global value chain. There were companies that were exporting textiles to China. These were companies that had faced up to the challenges of globalisation and embraced the enabling environment that the government had created.
The work of the Technical Task Team would continue in the Textile and Clothing Development Council. The Council was a forum for engagement between the government, industry and labour. There was an intention to include all stakeholders in the discussions. There were serious constraints at company levels and companies should alter the business models in which they were operating. There were benefits in reshaping business models. In most cases when companies endured hardships, the first axe fell on the factory floor. Yet, in the face of declared losses, performance bonuses were being paid to the management of companies. There was lack of empowerment in the sector. This was still the lowest paid sector in the economy. Continuous pressure was being brought to bear on labour to be more flexible whereas there had been little or no change or flexibility on the part of management. The business models in this sector did not resemble the best practises in the world. The Department had been developing customised sector programmes that were collective documents made after consultation with labour and the industry. The customised sector programme for the clothing and textile sector would be ready by the end of June.
Professor Turok said that this was a very difficult area and globalisation had imposed many problems on our economy. He appreciated that the Department was in the frontline of how we globalised but not pay a heavy social price. Some analysts had shown that in 2002 and 2003 imported women’s cotton jackets had increased by 800%, men’s woven jackets increased by 239% and women’s woven cotton trousers had increased by 148%. If this was not a surge of imports he did not know what was. He imagined that the pattern had increased or worsened. The surge was there and was international.
He said that Peter Mendelson, the Head of the European Commission on Trade, had said that Europe could not stand by and watch its industry disappear. Protection should be extended to European industries if they were faced with a ruinous surge of unprecedented proportions. Mr Mendelson had also said that he welcomed that China preferred a solution based on dialogue and co-operation. South Africa should take a similar route. The USA was taking a similar stance about Chinese imports. It was difficult to understand that the industry was not willing to spend R100 000 in order to complete the required application. The industry was worth a lot of money. He could not accept that the industry was unwilling to spend a mere R100 000. It was unbelievable that they were reluctant to safeguard their industry despite heavy loses. They should be called to come and explain what was happening before the Committee. Rex Trueform was about to close down. It was one of the social foundations of Cape Town’s existence. Most coloured people in Cape Town depended on it. It was interesting that the presenters did not refer to it in their presentations. He asked what were the social costs for all this.
The Technical Task Team was formed in 2004 and the Committee only heard about it in the press. The Department had never reported on the Task Team until very recently. He asked why the presenters did not approach the Committee for assistance. Agriculture in the Western Cape was closing down because of tariffs and other tings. It was recommended that South Africa increase its duties to some extent. If Europe and the United States of America could say that they could not just stand by and watch their industries disappear, there was nothing to stop South Africa from saying the same. Chinese workers were being paid one-fifth of what South African workers were getting. There was no way that South Africa could reduce labour costs to that level. It was not good enough to just say that the industry should restructure because restructuring included efficiencies, cost of labour and costs of labour. There was a dilemma and it should be looked into.
Ms Maimela said that the issue of restructuring was very important. Safeguards were temporary measures and could only be used for three years. The industry should be able to run effectively once the period of the safeguards had expired. One should be concerned with something that would empower the industry in the long run. One could extend safeguards for four years. However, before one could extend the safeguards one should show how far the industry had gone in terms of adjustments. One was forced to end the safeguards if there were no adjustments.
Mr Sharma did not contest the figures. It would be interesting to know why the industry was not making an application despite those figures. The Department commented about the industry‘s reluctance to act. The press had not been able to reach the industry for comment. Safeguards were part of that on specific products. Mr Mendelson had one thing going for him that the Department did not have. He had been empowered by his industry to file an application. Safeguards allowed for protection of a few specific products. The EU was planning to take action on three product lines and would look at another six down the line. The South African industry wanted 980 products to be protected. In essence there were looking for a reversal of trade policy. They were looking at a blanket increase in tariffs and this was not practicable. Turkey had protected around 42 product lines. It was disgraceful that the industry was not prepared to pay for the application.
The Rex Trueform issue was complicated. The company manufactured a suit range but imported the Queenspark range from China. They had a mix within their basket. The management had said that the business was closing down because people did not wear suits anymore. This was a very naïve explanation to expect shareholders to swallow. The question to ask was whether the companies were being run by the best managers. The Department was concerned about the social costs. South Africa was a market-based economy and the government could only create an enabling environment but not run companies. The industry was not dealing with government in good faith. Their commitment to their social obligations was questionable. There was no intention that discussion should drag on for too long. There was a specific programme and only labour could provide ideas on how to move forward. The industry had promised that it would have 50 product lines by the end of the month for ITAC to consider.
He said that China was an economy in transition. It had to transform into a market-based economy. They were given ten years to achieve the change. 70% of the economy had been state-owned. The state had to extract itself and remove subsidies and support measures it was providing. The support measures did not give a true sense of operating costs. There was evidence that changes were occurring but they were unlikely to impact on South Africa in the near future. The Department had some ways of working out the costs and also had remedies. All trade remedies existed at industry level. They should come to the Department and ask for them.
Ms Maimela replied that Rex Trueform manufactured suits and also got DCCS incentives to enable them to import inputs so that they could be competitive. The DCCS were intended to allow them to export competitively. After getting the certificates, they had used them to import clothing from China to be sold in Queenspark. Other manufacturers were also doing this. They were part of the problem of imports coming from China.
Mr Labuschagne said that it was difficult to understand that the Ministers had not responded to letters written to him by the industry. The presentation seemed to suggest that the industry was to blame. It would be helpful for the industry to come and brief the Committee. He noted that the Task Team would recommend to the Minister that there should be country of origin labelling and safeguards. He asked which safeguards would be introduced if there was no information. There had been reports that there could be a 7,5% limit on the increase of Chinese imports. It was not only Chinese labour costs that were involved. He asked if the government had worked out what the real costs were over and above the labour costs. In South Africa companies had to pay rates and interest on capital and other things that related to production. There were other costs that were being absorbed by the State in China.
Ms Maimela replied that competitiveness was more than just the cost of labour. There was a need to debate with the industry and ask what kinds of companies were competitive globally. What were they doing that South Africa should be doing? The market was flexible and companies should be able to respond to the demands of the consumers. There was a need to be innovative and acquire the necessary skills in order to survive.
Dr Sefularo said that there developed countries, developing countries and least developed countries. He asked what "persona" the Department adopted which then made a certain regime applicable. He asked if there was a challenge wherein people in the first and second economies were experiencing things differently. There were other things like domestic trade distorting mechanisms. In Europe there were subsidies on agriculture and the USA had its own protectionist mechanisms. He asked if one could characterise China and say if there was anything, beyond the cost of labour that distorted trade. It was said that there should be a surge in imports and the industry was not helping. The Department should have the capacity to answer questions relating to the issue. Some industries had adjusted well to the changing environment. He asked if any new jobs had been created following the adjustments. He was trying to determine if any jobs were lost or if it was only the nature of jobs that had changed.
Mr Sharma replied that the economy was in recession in the early 1990s and there was high unemployment. There had been job loses over the years. There was a company in Cape Town that had been hiring a lot of people. A large part of the problem rested within the industry. Last year South Africa had some discussions with China on a number of fronts. There was some willingness on the part of China to assist with technology transfer and investment. They had also instituted export duties. This was a unilateral act due to the fact that China was feeling the pressure from different countries. The problem was the local market was not responding to the choices that consumers had. They were still operating under the traditional paradigm in which they sold what they produced and not what the market wanted.
Ms Maimela agreed that that there had been distortions in China. When the South Africa government issued a statement acknowledging China as a market based economy, ITAC studied how it would protect the industry using the instruments that it was mandated to administer. It could act if there was proof that one was dealing with imports that had been subsidised by China. This was called countervailing. Illegal imports came from all over the world and posed a serious threat. SARS was busy strengthening its methods to deal with illegal imports. ITAC was also dealing with anti-dumping. It had not used safeguards. The EU and USA were justified in making the statements that they had made because they had been given the necessary information by their industry. ITAC could not just disregard the rules and act. The information that was required related to the cost of production and the profits the industry was making. There was nowhere the Department could get this information from apart from the industry itself. All members who had instituted safeguards were required to report to the WTO twice a year on all measures that they had imposed. Safeguards were multilateral and not South African and South Africa could not make its own rules.
Mr Maake said that there was no sense of urgency. One could see that the industry was going down but people were still discussing technical issues. It had been said that one had to prove serious injury but the reality was that one could see the damage that had been caused to the industry. He asked what would happen should the industry not bring an application. Why was South Africa not objecting to the disappearance of the industry like it had been done by the USA and Europe? He also asked what advantages had been gained by opening up to the global market. He wondered if the presenters were saying that the Department was bound by the agreements not to do anything.
Mr Sharma replied that the EU and USA had been able to act because they had been empowered by their industries to do so. The Department had been beseeching the industry to give it such powers. It had been said that South Africa was hiding behind agreements. The reality was that as a responsible member of a group of trading nations in the international community, South Africa had to live by rules. Agreements were very important because the same rules that applied to South Africa applied to everybody else. The rules were very clear and the industry knew about everything that they had to do. They had investigated the issues and decided not to act. R100 000 was not a lot of money considering that it would save the whole industry. South Africa was not keen on raising tariffs because this would send the wrong signals to the international community. The predictability of policies was one comfort that South Africa could give to the international investors and operators.
Mr Ntuli said that it seemed that people were hiding behind globalisation. One could not avoid globalisation. It had to be managed properly. There was protection in Europe. Agricultural products were subsidised in Europe and USA. She urged the Department to look into the matter because many people were losing their jobs. South Africa was sitting on a time bomb. Something should be done urgently. There were Green Room agreements which were made behind South Africa’s back by the very same countries that were saying that South Africa should stick to the agreements it had signed. The industry should come and explain its position so that a common solution could be found. Many Chinese factories were manufacturing products in Lesotho and those products were finding their way into South Africa.
Mr Sharma did not support the view that Lesotho was killing our industry. The USA was looking at introducing quotas. They could afford to do this in view of their particular relationship with China. The EU had moved away from quotas. Given its size, South Africa could not make the same kind of pronouncements in terms of trade policies that the USA could. A comparison between South Africa and USA would be unfair. What the USA was doing amounted to the reversal of the accomplishments of the WTO. The fact that the US would institute quotas provided opportunities for our exporters.
South Africa had duty free access to the EU and USA. One major criticism against the industry in South Africa was that once they had received one major account, they tended to relax instead of trying to get more market share. It had been said that Rex Trueform’s woes started when their contract with Marks & Spencer expired. This was a common trend across the industry. Those companies that had export contracts would have contracts with one or two retailers. By contrast, a Chinese retailer would supply five or six retailers. The Department was trying to help the industry despite the fact that the industry was not co-operating. The Minister would extend the DCCS in order to help the industry. The Department would force the industry to come to the table in an honest fashion. They should complete the application or explain why they did not want to do so. They should not make the claims that they were making if they were not prepared to submit the application.
Mr Njikelana said that communication and sharing of information was important. Due to the seriousness of the problem, the Committee should have received a briefing on this issue. There was no need to wait until there was a crisis before taking action. It could be helpful to have public hearings including all stakeholders on this matter.
Mr Rasmeni asked what was the government’s thinking around finding solution to the problem given that the industry was not co-operating. He asked if there had been any attempts to engage SACOB and Business Unity South Africa on the industry’s attitude. The Department should be able to say that it would intervene in order to stop the retrenchments and form co-operatives that would turn the situation around.
Mr Sharma replied that it was hoped that the industry would not abandon its corporate and social responsibilities.
Mr Sefularo asked if the Department was engaging the WTO. He also asked if second hand clothing were posing any dangers.
Ms Maimela replied that second hand clothing disturbed the local market. In the past second hand clothing would come in the guise that they were going to be donated to charities. One would then find those clothes being sold in the shops. This had since been stopped. The second hand clothes that were being sold in the shops did not come into the country legally. SARS was dealing with illegal imports.
Professor Turok said that it seemed that there was a paralysis in the relationship between the industry and the Department. All stakeholders should be invited soon in order to get to the bottom of this issue. The Committee was being told that the WTO was some kind of a policeman on the world scale that must be respected without question. The WTO had to be respected in order to ensure the sustainability of a rules based system. However, the WTO was heavily biased in favour of developed countries. Developed countries controlled the decisions of the WTO. The Green Room met without third world countries and even India was excluded. As we complied with rules we should also manage globalisation in a way that we were not disadvantaged.
Ms Cheng said that companies that required DCCS should prove their ability to export. Some companies did not have this capacity.
The meeting was adjourned.