Business Process Outsourcing and Offshoring: briefing by Department

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Trade and Industry

22 May 2007
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Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
23 May 2007

BUSINESS PROCESS OUTSOURCING AND OFFSHORING: BRIEFING BY DEPARTMENT

Chairperson: Mr B Martins (ANC)

Documents handed out:
Department of Trade and Industry (DTI) presentation: Business Process Outsourcing (BPO) and Offshoring

SUMMARY

The Department of Trade and Industry said that offshoring of non-core activities is becoming a global trend, and that investors are starting to look at countries other than India for this purpose. The DTI made it clear that South Africa could not afford any delays, as Business Process Outsourcing (BPO) represented a wave of opportunity that would not last forever. The high costs and slow rollout in the telecommunications sector could single-handedly destroy the country’s chances of riding the BPO wave. The Chairperson emphasized that the stubborn approach being adopted by Telkom would be actively addressed by the Committee, and attention was drawn to the fact that Parliament had specific powers that could be utilized in the telecommunications issue. Concern was expressed about the negative perceptions of the country, and incentives to attract investors were outlined.

The formulation of an incentives-based package that would be aggressively marketed to investors, was discussed, and the pivotal role played by provinces and local government was clarified. Some concerns were raised about whether the benefits of BPO would actually reach the second economy. The DTI reassured the Committee that women, Black Africans and inhabitants of rural areas were the target beneficiaries of BPO, and that certain incentives were governed by compliance with the National Skills Development Programme. The DTI said that sustainable employment creation and the imparting of skills that would lead to career mobility and security, were important aims of BPO.

MINUTES

Briefing by the DTI

Dr Raymond Ngcobo (DTI Chief Director: Strategic Competitiveness) said that BPO is a window of opportunity for South Africa to pursue growth in employment creation, and that the practice of outsourcing non-core activities to different parts of the world is showing significant global growth. Research shows that 80% of outsourcing will go to low-cost areas such India and the Phillipines. BPO had the potential to create 500 000 jobs worldwide, and 65 000 to 100 000 jobs in South Africa. BPO could further attract more than R100 million in foreign direct investment in South Africa.

Dr Ngcobo highlighted the constraining factors that deterred foreign investors. He said that even though South Africa has a very strong financial services sector, our talent pool is not considered to be good enough. He said that it was ten times more expensive to set up and operate a call centre in South Africa, than it is in India, and that high wage costs in South Africa are seen as a further deterrent. He referred to widespread  afro-pessimism, particularly in Europe, and said that red tape still presented a problem. Emigration procedures at the Department of Home Affairs and registration procedures at the DTI further hampered investor confidence. Dr Ngcobo said that other challenges that had to be addressed were the availability of managerial talents, concerns about the safety of personnel, and concerns about the flexibility of labour regulations.

Dr Ngcobo said that South Africa is struggling to secure a place on the international radar, as investors would rather turn to India than to an African country. This means that South Africa has to compete with low-cost destinations such as India, even though we are not a low-cost destination. South Africa has a competitive edge over India in that there is good fluency in English which is spoken in a neutral accent. However, the high costs of telecommunications weakened this competitive edge.

Dr Ngcobo said that most of the identified weaknesses are actually perceptions, as the problems pinpointed my be found anywhere in the world, even in places such as New York. Investors were slowly starting to turn away from traditional BPO countries such as India and China, as a number of bottlenecks and challenges had emerged. Investors are therefore looking to diversify, and are starting to take South Africa seriously.

Dr Ngcobo said that the Minister of Trade and Industry had established a partnership with Business Trust to provide financial support. Incentives would be given for a specific number of jobs created, and this would act as a guarantee for jobs. He added that incentives formed a crucial component of the package that would be aggressively marketed to foreign investors, in order to secure South Africa’s position as a preferred BPO location. Dr Ngcobo said that strategies had to be devised with labour partners, in order to ensure that the jobs created are stable and sustainable. Attempts would also be made to mainstream the Department of Trade and Industry into the current changes in the education sector, and to utilize opportunities created by the recapitalization of FET’s. He added that the University of the Free State was already offering courses related to call centres.

Dr Ngcobo said that strategies were being rolled out to provinces, and that provinces would be encouraged to outsource some of their activities. He added that rural areas are a priority, and that the establishment of call centres in rural areas was a major focus.

Dr Ngcobo emphasised that this window of opportunity will not remain open for long, and South Africa has to act without delay. Other countries were coming up with unusual incentives, such as giving away free land. Even though the Minister of Communications had deregulated the telecoms sector, the country could not wait five years for costs to come down and infrastructure to be developed, as the current wave of opportunity would have passed by that time. It was imperative that the telecommunications issue be dealt with as a matter of urgency.

Discussion

Prof E Chang (IFP)  asked if the cost of importing materials had been taken into account for BPO purposes.

Dr Ngcobo replied that there was no intention to import materials, as the country could provide all the facilities required for the BPO sector. He added that BPO involved a trading of services rather than an import-export scenario.

Prof Chang expressed concern about the high cost of capital in South Africa and asked what the effects of this would be.

Ms Yolandi Smit (Director: Enterprise and Industry Development, DTI) said that this was a difficult question to answer as there was conflicting information on the cost of capital. DTI was taking a sector approach to the issue. In respect of BPO, there is general consensus that the interest rate is not that bad, but that the high cost of labour presents more of a problem.

Ms F Mahomed (ANC) asked for clarity on how jobs would be guaranteed.

Dr Ngcobo replied that the money available for talent development programmes would not be provided up front. Incentives would be performance based so that a certain number of sustainable jobs have to be created before funding is awarded. It is a job, and not a person in a job, that would be guaranteed for at least three years. A contractual element that would lock in investors, would be in place.

Ms Mahomed asked for reassurance that women would benefit from these initiatives in terms of employment opportunities and skills development.

Dr Ngcobo replied that Black Africans and women were priority target groups, and that the National Skills Development quotas would be directly applied to BPO. Ms Smit added that the DTI was engaging with the Services Sector Education and Training Authority (SETA), and that skills development would not only focus on entry-level positions, but also the development of managerial and supervisory skills.

Prof B Turok (ANC) said that an important factor to bear in mind is that BPO creates mostly temporary jobs, or jobs with a high turnover rate. This was evident in India, where workers resigned from their posts after one or two years. It should also be acknowledged that temporary jobs displace permanent jobs.

Dr Ngcobo replied that the high turnover rate and the tendency towards casualisation of jobs within the BPO sphere would be addressed by a strategy that would encourage career building rather than just occupation of jobs. There were good investors and bad investors, and there were instances of quick profiteering where investors take the money and incentives for talent development, and then leave shortly thereafter. Strict measures would be put in place to combat this problem, and a clause to recoup financial losses would be included if necessary

Prof Turok said that care should be taken not to exaggerate the labour costs in South Africa. Someone he knew had gone to China, and had reported to him that wage costs do not present a problem in South Africa. He urged members to put an immediate end to the recurring mantra that wage costs are an issue, and requested the DTI to provide comparative research on wage costs in different countries.

 

Dr Ngcobo said that Professor Turok’s views contained a great deal of merit, as South Africa has a National Skills Fund that supports employers and absorbs some of the costs of labour. The DTI was already in possession of information on wage differences, and would formulate a report for the Committee on this.

In reply to Mr J Maake (ANC) asking how the perceptions of our labour regulations would be addressed, Dr Ngcobo said that organized labour would play a significant role, and emphasized that labour organizations should be seen as partners and not threats.


Mr Maake said that the matter should be approached with caution, as organizations like COSATU could not simply be dictated to. He asked whether the DTI would be proposing changes to labour legislation.

 

Dr Ngcobo replied that there would be no attempts to change labour regulations. These regulations are working for the country, even though they are a hindrance to investors. There appeared to be a lack of understanding surrounding the issue, and the intention is to explain to investors the reasons for SA's labour legislation, and also concepts such as employment equity and BEE, which act as further deterrents to foreign investment.

 

Ms Nthuli said that she cannot see why BEE in South Africa should be seen as a problem. She said that it was not a problem in Malaysia, where investors had readily agreed to give approximately 35% of profit to indigent peoples and also to provide training.

Mr S Rasmeni (ANC) said that our labour policies are supported by the International Labour Organization (ILO) and Prof Turok added that even the Harvard Group had given its support.

Mr Rasmeni expressed his concern about the perceptions that SA's labour costs and regulations are a deterrent to foreign investors. He said that it was disturbing to sit in a committee meeting and hear the DTI list these negative aspects without actually hearing the DTI’s particular stance and findings on the issue.

 

Ms Smit said that the DTI was looking at BPO from the perspective of the investor, and trying to determine how best to package the country so that perceived threats can actually be presented as strengths. In terms of this approach, factors such as high operating costs and inflexible labour regulations must be offset against the provision of attractive incentives.

Ms M Ntuli (ANC) asked why this country found it easier to provide incentives for foreigners than to encourage its own entrepreneurs. She noted the free land incentives offered by other countries and said she could not see this happening in a country where the majority of people had been dispossessed of land and was still struggling to overcome the land inequalities of the past.

 

Dr Ngcobo replied that there were opportunities within the BPO sector for SMMEs to upscale Black participation. While there were challenges in terms of finance, there was a possibility that BPO could be included in the cost of capital. SMMEs who wanted to go it alone would have to rely on training incentives, where compliance would be measured against the objectives of the National Skills Development Strategy. This on-the-job training would be based on an established agreement between employer and employee, and would also partially address the issue of the recent rise in fly-by-night colleges offering call centre courses.

Dr Ngcobo said foreign investment was required to create jobs locally, and aggressive marketing of incentives was required in the face of the broad-ranging afro-pessimism with which many investors were afflicted. Negative perceptions of the country were reinforced by media coverage overseas, which often fails to highlight the positive developments within South Africa. South African land will not be given away for free and some investors would be providing financial subsidies. Other countries were doing extraordinary things like offering 100 year leases from municipalities. South Africa had to maintain a competitive edge by means of incentives.

Ms Mahomed said that India had created a great deal of hype about their country, and this had helped to attract investors. South Africa should also start creating some marketing hype, as not everyone held negative opinions about the country. The country should start claiming its status as an innovator of note, and South Africans should realize that many people want to be a part of our country and its growth.

Mr Maake remarked that South Africans are a surprising species. The media could tell us that we cannot have the World Cup, or that Nelson Mandela is ill or the rand has fallen, and certain people would actually believe these stories. He said that we should use that very same media to spread positive stories about the advantages of investing in South Africa.

Dr Ngcobo said that one way of dealing with the negative perceptions would be to invite investors for visits to South Africa, so that they could see things other than that shown on programmes such as CNN. He said that while the intention was not to downplay famine and hunger, investors needed to spend time in the well-off areas in places like Johannesburg and Cape Town, so that they could see that it is not much different from living in London and New York. The situation is often worsened by South Africans living overseas, who paint a negative picture of the country.

Dr Ngcobo pointed out that telecommunications remained the one area that could not be defended on the international arena.

Prof Turok said that Alec Erwin had made a strong and timely commitment to addressing the broadband issue. The Committee is forgetting that Parliament is not without power. He asked the Chairperson to initiate a meeting between the Committee and Telkom. If it was simply a matter of overpaid executives stalling the development of the entire country, then the matter should be easy enough to address. He added that Parliament has the Budget as well as the power, and that the Budget Vote period should be optimally utilized to solve the problem presented by Telkom.

The Chairperson responded by referring to a meeting that had been held on 22 May 2007, where a decision  had been made to invite Telkom to address the Economics cluster. He added that this would represent a major breakthrough in the attempt to stop everyone from operating in their own silo.

Prof Turok referred to the concept of video-conferencing, and said that South Africa had not reached the stage of the United Kingdom, for example. He had already witnessed optimal use of telephone conferencing that escalated to videoconferencing, when he was in the United Kingdom 20 years ago. He emphasized that video-conferencing would never replace the concept of face-to-face meetings, as there are certain aspects of meetings that require physical interaction. Prof Turok said that people spend a great deal of time and money on traveling by air, and it would therefore be useful for South Africa to include video-conferencing in the package that is marketed to foreign countries.

Prof Chang said that the telecommunications obstacle could be overcome by allowing foreign countries to set up their own satellites. Mr S Njikelana added that the fact that virtual call centres are also possible should be taken into account.

Ms Ntuli said that the Department of Home Affairs should also be seen as a serious obstacle, and that this would pose a major problem for investors, as other countries did not have similar procedural delays. She asked for clarity on the Home Affairs issue.

Ms Smit said that Home Affairs had been provided with a BPO critical skills list and that a commitment had been made to speeding up processes. Ms P Salela (Deputy-Director: DTI) added that the DTI was embarking on a great deal of hand holding of investors in order to ensure that their experiences with Home Affairs are subjected to less problems. New Service Level Agreements with the Department of Home Affairs have been put in place.

Dr Ngcobo said that an attempt would further be made to reduce the number of steps investors had to follow before investing. The establishment of a one-stop shop is envisaged, so that instead of having to go from the municipality to Home Affairs, etc, all role players would be located under one roof. The aim was to make the entire process as user-friendly as possible for the investor.

Mr D Dlali (ANC) asked what the DTI was doing to address the problem of lack of co-ordination between government departments and added that clusters had been created for the purpose of addressing the co-ordination issue.

 

Dr Ngcobo replied that clusters did not address the fact that no agreed industrial framework was in place, and that there was no central point from which the DTI could operate.

Mr Dlali said that he wanted to check whether the different government programmes were speaking to each other. In 2001, the President had identified various areas for urban renewal and that five years down the line, no real progress could be seen. The DTI was working closely with municipalities. Discussions were underway for the use of empty government buildings, as well as under-utilised FET infrastructure.


Dr Ngcobo said that in respect of buildings that required restoration, the investor could be used to cut capital expenditure costs. Some of the DTI’s interaction with municipalities related to integrated sustainable development projects, but that many of the sites were not yet ready for BPO. The main reasons for this are inadequate ICT infrastructure, the lack of a joint structure for ICT, and the fact that ICT planning is not linked to a specific industrial policy. He cited the absence of broadband rollout in terms of the Regional Development Programme, and the fact that some rural towns could not even receive radio coverage, as further limitations.

Ms M Ramodibe (ANC) said that when one spoke about the second economy, the rural areas immediately came to mind. She needed clarity on how BPO would benefit the second economy.

Mr Maake said that he also needed clarity, and that he was particularly concerned about the contradiction in the second economy strategy proposed by the DTI. While the expressed aim was to establish call centres in rural areas, urban inhabitants will receive the training. These people would be confined to hostels in the rural areas and would not even be able to visit the local shebeen as the locals would accuse them of stealing their jobs.

 

Mr Njikelana added that targeting the second economy needed to be seen in terms of integrated planning that clarified the role of the legislator.

 

Dr Ngcobo replied that the legislators had to ensure that the benefits of policies reached ground level. He would circulate a report on the second economy so that there was clarity on how BPO would address the needs of the second economy.

Mr Njikelana referred to the fact that investors were attracted to the neutral English spoken in South Africa and added that certain accents in the country meant that certain sections of the community could be excluded from the BPO sector.

Dr Ngcobo said that he hoped the education system would play a role in this regard, and conceded that using our English as an attraction could unintentionally dilute certain cultural values.

Mr Njikelana said that this held important implications for cultural adaptability vis-à-vis cultural imperialism and afro-pessimism. Ubuntu and other philosophies cannot be separated from re-socialisation. Although many people deny that capitalism still exists, he is concerned that cultural adaptability will cause capitalism to stick to us like glue.

Mr Dlali asked why only certain provinces had been singled out for BPO initiatives.

 

Dr Ngcobo replied that certain provinces had been proactive, and that the intention was to focus to provinces other than Kwazulu-Natal, the Western Cape and Gauteng. These provinces were well-equipped, and had a strong local government structure as well as a strong economy, with the added advantage of discounted rates for municipal services. Funds and resources had been earmarked for the second economy, rather than provinces that were well-resourced. The DTI was trying to ensure that provinces could build their own value propositions and identify their own sites, and that the Department was also intent on promoting industrial development within provinces.

Mr Njikelana said that no matter how good the DTI’s strategies are, there were still risks. He wanted to know the extent to which these risks had been articulated and analysed before being presented to the Committee. He also wanted to know whether interaction with the World Trade Organization (WTO) had been considered.

 

The Chairperson said that the DTI should address these issues at their next meeting with the Committee.

Mr Njikelana said that perceived threats to the private sector must be taken into account.

 

Dr Ngcobo acknowledged that compatibility with the private sector did pose a challenge, as many private institutions are rand-seeking rather than development focused.

The Chairperson said that it was evident that further meetings had to take place with the DTI, and that a process of ongoing interaction should be determined for the Committee and the Department, in respect of BPO. Issues raised in the meeting that required further investigation, would be discussed at meetings to follow. He particularly wanted to clarify the role of Parliament in addressing the factors that acted as deterrents to investors, and that posed obstacles to South Africa grasping the opportunities presented by BPO.

The meeting was adjourned.

 

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