DTI Enterprise Organisation Incentives & Industrial Development Zones

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Trade, Industry and Competition

05 June 2007
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Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
06 June 2007
DTI ENTERPRISE ORGANISATION INCENTIVES & INDUSTRIAL DEVELOPMENT ZONES


Chairperson: Mr B Martins (ANC)

Documents handed out:
DTI (Enterprise Organisation) Incentives, and Industrial Development Zones

Presentation on Coega Industrial Development Zone
Presentation on East London Development Zone

Audio Recording of the Meeting

SUMMARY
The Enterprise Organisation of the Department of Trade and Industry briefed the Committee on the various types of incentive schemes that the Organisation offered and managed for incentivising businesses, in particular by small and medium enterprises. Many of the incentives were planned for a period of six years and this enabled the Organisation to assess their impact and worthiness. A description and explanation was given of the incentives under the Small and Medium Development Programme, the Strategic Industrial Project, the Critical Infrastructure Project, the Developmental Electricity Price Programme, the Business Process Outsourcing and Off shoring, Export Marketing and Investment Assistance, Black Business Supplier Development Programme, Support Programme for Industrial Innovation (SPII), Technical and Human Resources for Industry project, Small Enterprise Development Association incubators, and Film Production Rebate. The Competitiveness Fund and Sector Partnerships Fund were discontinued in 2005 but their successes were noted. The recommendations from the Incentives Review Process were tabled. It was noted that new incentives would be offered around investment, competitiveness, trade facilitation and export and small enterprise development.

Questions by Members addressed the adequacy of the budget for different programmes, whether there was full spending, examples of incentives, the number of women benefiting, whether there was focus in rural areas, why the micro enterprise sector were not being targeted, work on cooperatives, administrative costs of the programmes, sustainability of jobs, the reasons for discontinuing programmes and the impact on applications received already. Members asked how South Africa compared to other similar economies, foreign and local investors, and the predominance of the chemical industry under the SIP programme,

A brief presentation was made on the purpose and intent of the Industrial Development Zones, of which four had been approved to date, noting that these were intended for export industries and would be located near exporting channels, with a controlled customs and service area. They offered proximity to international ports, low costs and efficient services, a singe window facility, and linkages between zone-based industries and local entrepreneurs. Further advantage were lower logistics costs, exemption of duties on imports for export production, zero rating on VAT for imports, a dedicated customs service and electronic customs clearing, high quality and world class infrastructure and lower transaction costs. The Industrial Development Zones at Coega and East London were described with details being given of their investors, the targets, the impact upon the surrounding businesses and metros, and the projected figures. Challenges included fierce competition for global investment, funding, setting up of customs controlled areas, operators permits with suspensive clauses, power supply, rail links and port facilities. In Richards Bay further challenges existed around environmental hazards and the type of area. Members addressed the skills challenges,
opportunities for small enterprises on the sites, challenges in power and electricity, development of railway lines and beneficiation, the ratio of domestic and foreign investors, the possibility of starting other projects in other provinces and benefits to inland industries. The Chairperson commented that many questions still needed to be posed and there was a need for another meeting.

MINUTES

Prof B Turok (ANC) noted that in Europe and many other countries farmers were given substantial subsidies, which would spill over into pricing. He produced a locally-produced tin of tomatoes, costing R7, and three Italian tins that were selling at R10 for 3. He said that salaries, transport and raw materials were all expensive in Italy, and that in the face of globalisation and free trade competitiveness was the driving force. South African producers were being hindered by foreign subsidisation, and in fact 20 000 farmers had recently been forced to leave the agricultural sector whilst their counterparts elsewhere were receiving substantial assistance. He would like the Department of Trade and Industry why it was not addressing these issues and urged it to do so. 

MINUTES

Department of Trade and Industrys Enterprise Organisation (dti):  Incentives Briefing
Mr Tumelo Chipfupa, Deputy Director General, The Enterprise Organisation, dti, indicated that The Enterprise Organisation (TEO) was responsible for developing and managing incentives. It had been implementing programmes over the last six years. It was currently conducting a review of the dti incentives schemes. He indicated the strategic objectives, based upon the mandate of development and administration of incentives. Presently some incentives were managed in other divisions, but eventually it would like to centralise oversight, so that the department could better see the impact of the different sectors and regions.  The motor industry development programme, duty certificate schemes and the national industrial participation programme would not be covered in this presentation.

The incentives introduced today were commonly known as the "Six Pack" and were set up to last for six years. They constituted about R2 billion (35%) of the dti's budget. They did not include tax allowances. Cabinet approved the National Industrial Policy Framework (NIPF) document, which laid out the incentives for dti, and which attempted to match them to targets. Some incentives were being phased out as planned, and new ones were being introduced.

An overview of the different programmes was tabled, and it was noted that these fell under the headings of investment grants and tax incentives, competitiveness, and trade facilitation. A table was presented that classified the incentive areas, and the available incentives. 90% of incentives did go to small and medium enterprises (SMEs) so the categories were not cast in stone.

The Small Medium Enterprise Development Programme (SMEDP) offered a grant of up to 10% of investment per annum, for investments of up to R100 million. The labour intensity of the investment was an important qualification criteria for the third year. Since 2000 around 12 500 SMEs had received incentive grants, to a value of R13,9 billion. Most of South African manufacturing capacity tended to be concentrated in the three largest provinces. The major investment was in firms investing between R500 000 and R5 million. This was the largest incentive programme in the dti, and over 330 000 jobs were projected. The annual budget was R650 million per year over the next three years. It was currently under reviewed, as it was originally due to end in August 2006. The dti had measured the effectiveness of the programme, and was trying to ensure that support was given where most needed. The number of applications was burgeoning, and there would have to be additional funding to continue with the programme. Consultations were currently under way with key stakeholders to finalise new programme guidelines, and to ensure sufficient funding.

The Strategic Industrial Project (SIP) was a tax allowance to attract large scale investment. The application window lapsed in July 2005. The approved company had to upgrade local industry, create small, micro and medium enterprise (SMME) linkages and provide employment opportunities, as well as submit progress reports to the Minister when approved.  Of the 45 projects approved, 25 were established and the investment was worth R7.8 billion, with 12 000 jobs being created. The sectors where approvals were given were tabled.
The Critical Infrastructure Programme (CIP)  provided up to 30% grants to support infrastructure necessary for establishment of investment projects, and this could be bulk infrastructure. Dti would share in costs with companies, municipalities or provinces. The Industrial Development Zones (IDZs) had been funded from this programme for the last four years. Eighteen projects were with private sector companies and three were IDZs. The approved amounts were R990 million, which included both contributions, and supporting investment projects. There was a better provincial spread of allocation.

The Developmental Electricity Pricing Programme (DEPP) had been launched last year in conjunction with Department of Public Enterprises (DPE) and Eskom. This was related to special concessions on electricity input costs for energy intensive investment projects with a minimum of 50 megawatts. Alcan, in Coega IDZ, was the only project approved to date, and it would be required as part of the conditions to supply aluminium to downstream industries at competitive prices.

The Business Process Outsourcing and Off shoring (BPO&O) was intended to attract investment by offshoring BPO operations to South Africa. It was linked to training and skills support. A company had to be establishing a minimum of 100 seats and providing 200 new jobs to qualify for the incentive, which took the form of a grant calculated on the number of seats established.

The Export Marketing and Investment Assistance (EMIA) was set up in the mid 1990s. It provided small and medium enterprises with a cost-sharing grant for marketing their product internationally, which might involve undertaking export market research, travelling to do research on clients in foreign markets, investment recruiting with joint venture partners or South African meetings with potential investors. 3 447 SMEs had been assisted over the past three years. The sectors were tabled.

The Black Business Supplier Development Programme (BBSDP) was an 80/20 cost sharing grant to assist black owned small enterprises to improve their capability for supplying corporate and public sector contracts. Small black companies could get assistance by a consultant on marketing, growing business plans or raising capital. Nearly 3 000 projects worth over R97 million had been approved, and R56 million had been paid as grants. Most of the opportunities were in the small business sector. The breakdown of services offered was tabled.

The Support Programme for Industrial Innovation (SPII) was a grant whereby dti shared the costs of developing new products or process technologies with companies. The budget was around R50 million and there were 85 approved projects, of which 34% were BEE owned and 18% women-owned in 2006. The World Bank had benchmarked this as one of the best performance schemes compared to other world programme.

The Technical and Human Resources for Industry project (THRIPP) tried to link industry to the science councils and tertiary institutions. It aimed to develop skills in industry as the grant was tied to universities training students. The research had to be relevant to industry. In 2006, 339 projects were approved and 66% of industrial partners were SMMEs. There were 3 1 78 students involved. 

The Small Enterprise Development Association (SEDA) Technology Incubators was funded by dti to the amount of around R50 million. This was a technology incubator and technology transfer programme. Most of those incubated were based in the second economy. During 2006 dti had incubated 49 technology based SMMEs, 272 SMMEs were supported, and there were 22 technology transfers.

The Film Production Rebate (FPR) was introduced in 2004 to attract large-budget film productions to South Africa. It provided a 15% rebate, rising to 25% for South African owned companies, and was now also attempting to develop the local industry. 38 productions were approved, of which 15 were SA-owned, 3 were joint-owned and 20 were foreign owned. 17 productions had been completed and received rebates of R122 million. It was being reviewed to introduce incentives also to promote smaller budget local productions

The Competitiveness Fund and Sector Partnerships Fund ran in conjunction with World Bank between 1999 and 2004, aimed at SMEs. They were discontinued in 2005. Those enterprises that had been assisted had on average enjoyed annual sales and export growth of 2% and 1% higher than comparative firms that were not assisted. There was a plan to re-establish the competitiveness promotion incentives with a view to support implementation of industrial policy.

Recommendations from the Incentives Review Process included ensuring the rate of investment manufacturing, and increasing competitiveness and trade facilitation. Dti was advised to tighten the selection criteria for choosing projects in terms of their potential to have additional benefits to the public, and to select  projects that could not have developed without dti assistance and ensure that the conditions were tightened. It was suggested that conditions for reciprocity be given to allow claw-back. There should be a focus on the sectors government had targeted. It should also improve on monitoring and reports on the impact of incentives.

The action plan with new incentive programmes was tabled. There would be new incentives around investment, competitiveness, trade facilitation and export and small enterprise development.
Discussion
Ms F Mahomed (ANC) asked about the spending of R12.3 billion on small enterprise development, noting that the figures did not appear to tally, and asked for clarity whether some of the money was rolled out.

Mr Chipfupa explained that the SMEs approved would normally be given amounts spread over a period. If the investment was less than originally anticipated, or if their plans did not materialise, then there would not be full release of funds. The figure of R13.9 billion was captured for all business plans, but this might not necessarily  be spent. About R2.5 billion had been paid out so far, and TEO was still approving projects that came in August 2006. Further amounts would be paid over the next MTEF although dti might not pay out the full amount.

Ms Mahomed asked if dti would try to spend what it had, noting that roll overs were undesirable.

Mr Chipfupa noted that for the past two years TEO was spending all its budget. Most of the programmes were quite well subscribed so most of the allocations were spent. There used to be a problem with CIP, but that had been resolved. R70 million was unspent on BPO because the incentive programme was not finalised at government consultation levels.

Ms Mahomed asked for an example of a sector partnership fund.

Mr Chipfupa noted that he used to manage this programme. He gave the example of a number of companies in the auto industry that might form themselves in to a club, and borrow from each other, bench-mark themselves against each other and jointly hire lecturers or consultants to teach them best practice.  Smaller programmes might also join together in a working arrangement. 

Ms Mahomed asked for an example of the film incentive scheme, and asked how much advocacy was being done.

Mr Chipfupa replied that the focus had been so far on large budget films, not on developing local producers or small budget films. Now however CIP was working with South African Broadcasting Corporation,  Department of Communications and the video and film associations to try to develop the smaller sectors  and amend the incentives accordingly. He said that the film industry was not only about the final shooting, but involved a number of other service industries, such as sound mixing, lighting, accommodation, costuming. Over the past two years many of the intermediary industries had also become well developed.

Ms Mahomed asked how many women were receiving incentives.

Mr  Chipfupa said this would depend on the programme. He agreed that in future the dti would try to give a more comprehensive analysis for the Committee. The BBSDP addressed mostly micro enterprises, and probably targeted between 40 and 50% women. The SIP involved publicly-owned companies, and it was difficult to try to get a breakdown, as although dti would look at shareholding in large companies it would not necessarily look to gender percentages. The majority of SMEDP programmes probably involved about 15 to 18% women. The gender reach was therefore not yet adequate. However, dti had a strong gender desk and was making concerted efforts to reach women enterprises.

Mr S Rasmeni (ANC) noted that the references to SMEs left out the micro-enterprise sector, and noted that probably the majority of black-owned businesses were in this sector. He asked why they were not included in the incentives. He also asked if there was any indication of who and where the SMEs were, and how many were black owned.

Mr Chipfupa agreed that most of the incentives were targeted to small and medium enterprises. Micro enterprises were not traditionally the target sector for some incentive programmes. He stressed that he had not given a full briefing on every programme of the dti, and noted that dti gave assistance also through funding institutions like Khula and SAMAF, and that the incentives described today had traditionally been geared to other areas. One of the problems was that micro businesses needed a local presence, and because dti was largely centralised, it was difficult for micro businesses, particularly in rural areas, to utilise dti effectively. TEO did recognise that the mandate was being shifted to micro enterprises and it was hoping to be able to work with SEDA and other institutions to try to extend its reach and assistance through those smaller programmes, and with local government. It would probably continue to work with small and medium enterprises for the foreseeable future although there was a possibility that the micro enterprises might grow.

Mr Chipfupa indicated that once again he did not have all the statistics requested. Dti did not always capture the breakdown between rural and urban applicants, and although the locations were known, there was no automatic classification of whether these were urban, rural or metro. He said that he could try to amend this in future.

Mr Rasmeni asked about the critical infrastructure and noted that the percentages per province were indicated but nothing was reflected for Free State, and he wondered why this was so.

Mr Rasmeni asked for an indication of the outputs for the Competitive Fund administered between 1999 and 2004.

Mr Rasmeni asked if work was being done for cooperatives, as the Committee was worried that they were not receiving as much support as they could from dti, and no specific budget had been allocated to them. He pointed out that that was where the real black economic empowerment was to be focused.

Mr Chipfupa indicated that cooperatives were not being focused on much at present, though this would be included in programmes. 

Prof B Turok (ANC) asked about the competitiveness aspects. External markets must be looked at, and he would like dti to address the question of obstacles to local farmers. He believed that dti and its work was being undermined by foreign subsidies so the Committee needed to get a balanced understanding of the picture. If  dti was spending billions on incentives, but not managing to increase competitiveness through the external market, then this was a cause for concern.

Mr Johan Potgieter noted that the SPII programme competitiveness elements were described in the Annual Report. The measurement was whether the product could be sold locally and overseas. He noted that in 2006 there had been a total of R300 million produced, of which R107 million were exports, so he felt that this indicate that competitiveness was being addressed.

Prof Turok asked for the administrative cost of each programme. He wondered if sometimes the expenditure exceeded the amount being invested. He would like to see a comparison between the cost of incentives and the result.

Mr Chipfupa said that the administrative costs were less than 5% or 6% of the total costs. He noted that the task was to enhance the administration, to raise the level of skilled people.

Mr  Johannes Potgieter added that the administrative costs for THRIPP had been 5% for the  last four years and SPII administrative costs were around 10% because of due diligence being undertaken in terms of which the coordinators would visit the companies. The THRIPP costs were so low because the monitoring was being undertaken by the universities.

Prof Turok also addressed the question of the rural areas; and said that the micro and black and rural businesses must all be addressed.

Prof Turok noted the mention of the World Bank review and Organisation for Economic Cooperation and Development (OECD) reports, and asked that copies be provided to the Committee. He noted that the dti had been engaged with the World Bank for a while and this relationship had not been reported to this Committee although Parliament must be informed about international agreements. If the reports were sensitive he would be happy to receive confidential reports. 

Mr Chipfupa indicated that there was an indirect relationship between the World Bank and the dti, as the funding was procured by National Treasury and therefore the direct relationship was between Treasury and World Bank. dti was involved at an implementing level. However, dti did have the reports and he would forward them to the Committee.

The Chairperson noted that the reports should be requested by the Committee specifically; otherwise departments would not automatically send on everything they received.

Ms M Ntuli (ANC) noted that the intensification of the fight against poverty was an essential element. She asked whether the jobs created were sustainable.

Ms D Ramidobe (ANC) asked about the BBSDP, who was paying for the development plans, whether there was integration with other agencies and avoidance of duplication and whether the jobs were sustainable. 

Mr Chipfupa noted that dti would pay 80% of the costs, and the enterprise was being asked to pay 20%, so that was the funding structure that applied over all the costs, including the business plans. There were 330 000 jobs, and the incentives were being paid over a three year period, after a firm had been audited so it was sure that there were targets being met. Those jobs were sustainable*

Ms Ntuli noted that 90% of incentives went to SMEs and she asked how many were in rural areas, especially those around infrastructure developments.

Ms Ntuli noted that there were some businesses that were described as healthy and were assisted to make plans. She asked how the assessment of health was made.

Mr Chipfupa noted that the firms were audited and the incentives were paid over a three year period.

Ms Ntuli referred to the competitiveness fund and sector partnership funds that were administered up to 2004. She also asked for an indication of the impact, and the reasons why the programmes were discontinued in 2005.

Dr Rabie asked when would the competitive promotion incentives be re established and why they had been discontinued if they were so successful.

Mr Chipfupa noted that when the programmes were created they were intended to provide support to SMEs to ensure that they were competitive in that they were using the latest technology and management methods. The only way to check whether the programme had an impact was to look at the firms that benefited as against their peers who had not. It was noted that those participating were doing far better when measured on a number of different aspects. Dti also did look at the impact in terms of the continued employment of others by those enterprises, and that formed part of the reports to World Bank

Dr P Rabie (DA) referred to the Developmental Electricity Pricing Programme and noted that it would try to prevent prices being downloaded by the beneficiaries to other industries. He asked for examples of the downstream industries, and asked if dti would be able to apply parity to prevent Alcon from raising its prices in the same way that other steel companies had done.

Mr Chipfupa said Alcan was trying to  benefit from the pricing and a specific term of the pricing policy was linked to their continued receipt of favourable price from Eskom so that there was in fact a built-in and agreed enforcement and reporting mechanism.

Ms D Ramidobe (ANC) asked for clarity on the East London and Richards Bay situation.

Mr Chipfupa replied that dti was providing some of the funding for these, but this would be dealt with in a later presentation.

Ms Ramidobe would also like to know the current situation slide 3

Ms Ramidobe asked for elaboration on the new incentives being introduced.

Mr D Oliphant (ANC) noted that the schemes were being reviewed and that a number of applications were still in the system. He asked how the applications currently being handled would be affected. Mr Oliphant also noted that he had a number of constituents who had no idea of how to be assisted.

Mr Chipfupa replied that at the present dti was not accepting any further applications. The policy was not to assess retrospective applications because this would become an open-ended commitment. When the programme was introduced, the advice given to applicants was that they must themselves evaluate their business case, decide whether they wanted to invest and do what they could to start, rather than holding back. There would certainly be more possibilities of incentives in future and investment should be made on the basis of the projects identified.

Mr Oliphant noted that there was little action in the rural areas. If these areas were being coupled with the urban areas in the province they were not really benefiting.

Ms Strauss, dti, noted that dti was committed to rural development. Last year it had trained 340 network facilitators at SEDA and Industrial Development Corporation, who were specifically picked because of their geographical nearness to rural populations. They were trained on all dti products as well as facilitating forms and disseminating information. Dti had also undertaken measures to trace the impact of the training. There was a further serious initiative to take dti to the people, targeting four rural areas in each province. All recipient enterprises will be black-owned. In addition, dti believed that with the recent tax amnesty for small businesses it would see more uptake on incentive products. Previously such enterprises would be discouraged by having to prove tax compliance before receiving funding, but many were now approaching the Revenue Services, would get tax clearances and would apply.

Mr Oliphant asked if the MPs could be provided with some sort of package of information from dti so that MPs could put this directly in the hands of their constituents. dti was not always so swift to respond to requests from individual clients.

Mr Chipfupa promised that he would see to this.

A member noted that some SIP projects were approved but not established and asked what had happened between approval and establishment. Some of the projects were vital, especially for revitalisation of the areas.

Ms Francisca Strauss, Director, Incentive Administration, dti noted that the reason was dependent on the programme. Projects must get approval from Minister before any plant and machinery could be purchased, and the larger projects took more time to establish. In the process some applicants decided not to continue, or to start at different times, so decisions could also be changed.

Mr S Njikelana (ANC) noted that the package of incentives was planned for six years, and he asked why this was so.

Mr Chipfupa noted that good policy dictated that most subsidy programmes had a time frame with a sunset clause, so that dti could assess them to see whether the money had been spent wisely and whether the programme was still suitable to continue or modifications were needed. Without the opportunity for such assessment dti could end up with ineffective programmes not adapted to changing economic circumstances.

Mr Njikelana noted that the budget allocation for the incentives constituted 35% of the total dti annual budget. He asked whether this was comparable to other similar economies.

Mr Chipfupa replied that similar economies would rely more on incentives, including tax holidays and the like. South Africa did not have the lowest budget in terms of assisting but also did not offer as many incentive packages.

Mr Njikelana noted that the SMEDP programme was quite successful, yet wondered why the budget allocation for it was so small and whether this had compromised the programme.

Mr Chipfupa said that so far dti had been able to deal with all the applications and had never rejected any because of insufficient funding. He felt that the allocation was correct.

Mr Njikelana asked how much had been allocated to the Development Electricity Pricing Programme and if there were other parties who had applied.

Mr Chipfupa acknowledged that there had been other applications, including two from energy intensive industries and those were still being considered. So far only Alcon had been approved.

Mr Njikelana asked for clarification on the export incentives and BPO & O criteria.

 
Mr Njikelana asked about the Black Business Supply Development Programme, where Gauteng had received about 70% of the allocation. He noted that the Committee was concerned about the preponderance of payments to the larger provinces and asked whether there were other incentives to ensure that the efforts by other agencies were extending to the smaller provinces. He noted that there could not be perpetuation of imbalances between the poor and richer provinces.

Mr Chipfupa replied that dti was aware of the discrepancies and the concerns and was  working with SEDA ad local government to try to reach the smaller and poorer provinces.

Mr Njikelana asked for detail on the 85 projects in SPII and THRIPP, stating that these could be sent to him in writing. He noted that SPII had been commended by World Bank, yet once noted again the budgetary allocation seemed low.

Mr Johan Potgieter, Chief Director, Innovation and Technology, dti replied that there was a lower budget for SPII. He said that THRIPP was oversubscribed and could only give about 70% of requested funding. The annual allocation was R75 million per year,  but this year it had fallen to R50 million as a part-figure, because projects extended over several years and would only be paid out at the time needed. Insofar as the projects were concerned, the range under SPII was wide, and once again these were addressed in the Annual Report. They were both low and high technology. They ranged from ICT systems to prevent fraud on computers, developed by university students, to an entrepreneur in Gauteng who had been supported to develop low smoke coal, to another manufacturing taxi seats that would fold to protect passengers in the event of an accident.

Mr Njikelana noted that within the creative industry focus was on film making and asked whether there were other incentives.

Mr Chipfupa replied that at the moment the incentives were for film, but within the broader creative industry dti would be looking in future at drama, craft and others.

Mr Njikelana asked what the action plan meant, and whether there would still be updates on the programmes under review.

Mr Njikelana was pleased to see cooperative incentive schemes, and he asked whether the budget was considered sufficient.

Mr Chipfupa noted that the cooperative incentive schemes were a new item. Dti intended to work with stakeholders such as National Treasury to try to increase the amount of resources. Once the demand was established and could be better assessed if was hoped that the budget would grow.

Mr J Maake (ANC) asked whether there was differentiation between foreign and local investment, as he believed it was vital to encourage local entrepreneurs.

Mr Chipfupa responded that the incentives generally did not differentiate between foreign or local investors, except in the case of the FPR, where a larger rebate was permitted for local film producers.

Mr Maake asked about the chemical industry, querying the numbers and what types of chemicals were produced, and also whether this was foreign investment.

Mr Njikelana noted that on there was a strong focus under SIP on two main industries, metal and chemicals. He asked why these specific industries were targeted.

Mr Chipfupa noted that the majority of the SIP recipients were in the metals and chemical industries, as they were highly capital-intensive and could benefit from this programme. There was a requirement that all projects must create jobs. They were fulfilling these requirements and were being monitored. The tax allowance would only apply when the job-creation had been confirmed. Ms Strauss added that the minimum requirement for the SIP was R50 million, but that this figure also overlapped with the SMEDP programme, which provided funding up to R100 million. Many of the textiles and agri-programmes that were more labour intensive had a choice as to which incentive they should request. Although in the end  the SIP benefit was larger, it would be deferred to when the enterprises were in a taxable situation. A new or Greenfields company took longer to reach a profitable status, but those wanting to expand took far less time to reach profitability. Many companies,  especially those in the R50 to R100 million band who had a choice preferred to apply for SMEDP because of the cash grant, but the capital-intensive investment companies such as the chemical firms preferred the tax incentive.

Ms Ramidobe noted that most of the incentives were supposed to make interventions into the second economy and she asked if she could be given a list of the places in Gauteng that had been assisted, in order to be able to include them on oversight visits.

Mr Chipfupa indicated again that he could provide a list but unfortunately this did not give a breakdown between rural and urban assistance.

The Chairperson noted that there were follow up questions, but ruled that a further meeting would be arranged to address them.

Industrial Development Zone (IDZ) Briefing
Mr Tumelo Chipfupa, DDG, TEO, the dti, indicated that an Industrial Development Zone (IDZ) was a purpose built industrial estate linked to an international port that was designated by the Minister of Trade and Industry, comprising of a customs controlled area (CCA) and an industry and services area. It was meant for export industries. The CCA would be located near exporting funds and industry, and the services areas would link to CCA and other industries. IDZs would have proximity to international ports, low costs and efficient services, a singe window facility, and linkages between zone-based industries and local entrepreneurs. They were intended to cut down on the logistics costs, which could otherwise account for around 15%. Benefits to investors in the IDZ included exemption of duties on imports for export production , zero rating on VAT for imports, a dedicated customs service and electronic customs clearing, high quality and world class infrastructure and lower transaction costs. There were four designated IDZs at Coega, East London, Richards Bay, and JIA-IDZ (Johannesburg International Airport)

Coega IDZ update briefing

Mr Khwezi Tiya, Executive Manager, Zone Operations, Coega Development Corporation, noted that there were core objectives in an IDZ linked to financial sustainability, growth, preferred investors and the destination map for the future. Most of the Coega work from 1999 was in planning and trying to get the infrastructure in place to attract private sector investors. Coega was currently trying to increase the pace of investment and service the customers. A major challenge was that it could not succeed if not integrated into the rest of the Eastern Cape. Over and above the work done for customers and investors, Coega would assist the provincial government to do critical infrastructure and skills development.

The business model was tabled. The focus was on investment infrastructure zone operations, CDC consulting services and Human capital solutions. A summary of the financial position in 2006/07 was tabled. Coega had achieved revenue of R42. 5 million, slightly under target, and had signed nine of its proposed ten investors. It had created 337 jobs, which exceeded the target of R2 500.

Mr Tiya stressed that finding new investors was vital. The investors and sectors list was tabled, showing the largest investor as the Alcan Smelter, which was to start construction in 2008. There were a number of smaller investors, who were South African companies looking for expansion opportunities in modern facilities. Some of the developers would also impact on the metro, for instance in terms of water supply.
Much time was spent on global and local research into human and capital resources, partnerships, and material resources and there was a minimum target of 10 investors for each of the next three years, to reach a target of 40 projects over the next three years in the Coega IDZ.

Mr Tiya said that originally there had been some doubt whether the investment into infrastructure was warranted, but tabled comments from investors indicating that it was of huge value. Photographs of the various projects demonstrated the road and conveyor networks. There was a great deal of work around infrastructure, and 16 142 jobs had been created through the IDZ. Although it was anticipated that only 70% of skills could be sourced locally, in fact 85% were local skills.

Challenges included fierce competition for global investment, funding, setting up of customs controlled areas, operators permits  with suspensive clauses, power, rail links and port facilities. Although funding had been allocated, the type of investment attracted would require a faster response time for infrastructure and for ensuring that regulatory issues were also dealt with speedily. Coega was working closely with Eskom to try to tie in with their delivery platforms and new sources of energy were also a focus area. It was heartened to hear Transnet's announcements in regard to upgrading the rail line to Gauteng and would like more attention to be paid to the rail links to iron resources in the Northern Cape, rather than trying to get raw materials from outside.

East London IDZ Briefing

Mr Simphiwe Kondlo, CEO, East London IDZ ran through his presentation, indicating that many of the points on challenges and exporters had been covered in the Coega presentation

East London IDZ saw itself as one of the front runners of the programme launched by dti, as a purpose- built site for export oriented industries in the medium sized and cleaner sector. It was the developer of the Greenfield Site, and the promoter and operator of the industrial complex. This IDZ was being done in a phased fashion. In Phase 1  430 hectares had been sourced from the local government, it had obtained eleven investors, worth R750 million and ten were already on site. It had created 3 200 direct construction and 1 118 direct manufacturing jobs. The site was about 2 km from the airport and about 7 km from the port. It concentrated on the West bank side of Buffalo City, which was not previously growing, and it had managed to strengthen the infrastructure base. The milestones between 2001 and February 2007 were tabled. The Automotive Supplier Park was now in operation. The investors were tabled, and it was noted that they were predominantly in the automotive sector, with one aqua culture and one glass manufacturing firm. The mandate was to strengthen the manufacturing capacity of local industry in Buffalo City, particularity in automotive sectors. Investment in the automotive supply park would also strengthen Daimler-Chrysler to remain competitive. New technology had been introduced, which had added new skills into the work place. It was attracting export-orientated industries, benefited local materials, and was attracting foreign direct investment (FDI) companies. Most had also partnered with local companies so there was empowerment. Young people were being employed. Key investment sectors were the automotive sector, with critical suppliers supplying to the outside Daimler plant. Agro-industries were also important, strengthening the linkage with the rural economy, and there was beneficiation of agricultural produce, including pineapples and tomatoes. ICT and electronics took advantage of the BPO incentives and linked into the key industry clusters.

Mr Kondlo indicated that the future projections were that R1.3 billion would be invested. To date R700 million had been put in. Ultimately it would look at increasing investment to close to R7 billion, and when the zone was full, it was looking at being able to make a 6% contribution to GDP and have created 17 000 direct permanent jobs, with R10.9 billion being invested by the private sector.

Discussion
During the question time a number of different questions were asked, and the Chairperson noted that Members should focus on what the presenters had presented to the Committee. There were a number of broad policy issues and he asked Members to bear in mind that dti's responsibility was limited to implementing policy and not formulating it. They could not, for instance, answer as to why investment had been taken to one area rather than another. These issues could be addressed at another time.

Mr Chipfupa thanked the Chairperson for his perception and agreed that his team was implementing policies within the department, and he would comment where he was capable of exchanging views on the broader policy issues. As an implementation agency, his focus was not on policy making.

Mr Rasmeni asked what were the challenges, and whether jobs would be made available for the second economy on a broader scale. He asked if IDZs would be able to absorb small businesses and cooperatives.

Mr Chipfupa noted that the challenges from a departmental point of view were different from those of the operating entities. One of the areas that would receive attention was the area of governance and ownership of the operating entities, which required coordination between the three spheres of government. Provinces would also have a strong interest in ensuring that development was taking place. the Department was considering how best to coordinate and ensure that all spheres acted in consort.

Mr Kondlo said that the East London IDZ challenges would include funding, and especially the need for more predictability and flexibility around the funding model, and competing with other aggressive economies to attract investment. Policy instruments and incentives therefore became key to decisions on the best way forward.

Mr Tiya noted that skills were a problem and operators on the ground were experiencing that first hand. Without skills there would not be investment. Logistics costs were another factor. South Africa was far from the main markets and therefore needed to do more to streamline logistics internally or have incentives to counter the costs. Telecommunication costs were particularly challenging. The operators of Coega had learned some valuable lessons that dti were now factoring in to future plans, including those for the medium and short term, which focused on strengthening the policy framework of IDZs and ensuring programmes were functional.

Ms Ntuli asked if there were opportunities for SMMEs on the IDZ sites.

Mr Kondlo said that East London IDZ was looking at development of an incubation programme for small manufacturers, who were second tier suppliers to the manufacturers on site, to support the various industries in strategic areas. This would therefore include auto-component manufacturers, furniture, office paper and a host of other small industries.

Mr Tiya confirmed that Coega was following a similar path and was already encouraging zone industries to use SMME suppliers.

A member asked about the challenges around power and electricity. He noted that there was apparently a move towards alternative power sources. He asked how secure those would be and how soon they would be in operation, as also their scope and cost implications.

Mr Themba Koza, Executive Manager, Coega Development Corporation said that power did remain a challenge. The types of industries depended upon secured sources of power and the alternatives would not necessarily provide the solution. Coega was looking at segmenting the investors into those who needed secure power and those who did not, so the interventions would be different. It was also looking to different investors who would be adding to the grid. As this was ultimately administered by government, Coega would have to go back to the Department of Minerals and Energy to initiate discussions on power sources. In addition the legal framework around the provision of power would be changing and it would be necessary to find out the role of the IDZ in the Regional Electricity Distributors (REDs), as they owned certain infrastructure. Alternative sources were not being paid for by the public sector, but from private funding

A member noted that the railway lines had been a long debate as many towns between the Northern Cape and East London had been annihilated. Metal beneficiation itself was a large current consumer. He asked how that had been factored into the challenges.

Mr Kondlo noted that this was a policy issue, and touched also on balance of payments and how much comparative value would be obtained from the rail links or the material. A number of studies had been done as to how the rail link could be built up again and how it could be run efficiently, and this was a matter to be discussed also in the minerals cluster. A number of investors said they were looking for places to spend, but were cautious because of the challenges on rail and power.  There was ongoing interaction with Transnet, although there was not sufficient momentum to date.

Mr Maake asked how many local investors there were and whether there was any fear that foreign investors could decide to disinvest, leaving white elephants similar to those that had been left in the old Bantustans.

Mr Kondlo noted that the East London IDZ was conscious of the fact that it must encourage foreign direct investment but was not exclusively focused on this and would also encourage local investors. Four in East London were local investors and some were exporting to international markets. There were targets in terms of the ratio between domestic and export, and FDI and local companies.

Mr S Maja (ANC) asked how many local people obtained various skills in both projects, especially youth and women, and if there was a percentage of money to be ploughed back to the communities after every financial year 

Mr Tiya noted that interventions were made at Coega to ensure that people were skilled in advance of being employed on site, and Coega was working with Labour Sector Education and Training Authority. He would provide the statistics of a Coega Programme that would develop a skills database that identified youth, women, and disabled. Many youth had been employed. There was an intensive internship programme.

Mr Njikelana spoke of Breaking New Ground (BNG) housing projects and he asked to what extent the housing delivery programmes were taking the BNG principles into account. He asked if Daimler-Chrysler had contributed to housing.

Mr Rasmeni asked whether there was any possibility of starting an IDZ at Mafikeng.

Mr Njikelana asked what were the criteria for establishment of IDZs, as he also wanted to enquire about Kimberley, Nelspruit and Taung, which were all strategically located. He noted that other provinces might be keen to be involved.

Mr Njikelana noted that there were skills inland in the Eastern Cape, particularly in farming, and he asked to what extent inland development was taking place as one of the wider benefits.

Mr Chipfupa said that dti was looking at a new programme on regional industrial strategy and was trying to look at the different initiatives that could be established in provinces where economic activity was not export-based, as it would be with IDZs. This would include  business expansion and retention, and how to turn around provinces that were losing business. The IDZ programmes were biased heavily to coastal provinces because of the ports. Dti was also talking to the other provinces, and was considering logistics in Harrismith and Polokwane for other incentives for the inland provinces.

He noted that Mafikeng was interested in establishing an IDZ and dti had been looking at business plans to ensure that the Minister would be able to designate it. There was an issues around obtaining an international licences for the airport at Pilansberg and that involved the Department of Transport. Other matters still also needed to be finalised before the Minister could consider the designation.

Mr Thapelo Makhetha, Executive Manager, Projects and Operations, Richards Bay IDZ, commented that at Richards Bay there had been a great deal of construction to upgrade the John Ross Freeway to link the N2, the City and the IDZ. R61 million out of a proposed R636 million was already committed with an intention to complete these processes in March 2010. Tinto Steel had a major development on the ground that would run from October. There were around twelve projects of different sizes and he would welcome the opportunity to detail these to the Committee. The challenges in Richards Bay related to the nature of the area, which was half-urban, half-rural, with a lot of migration. International competitiveness was limited as there was shortage of relevant skills and technology. It would like to beneficiate, but many other human resource factors prevented this. Secondly, there was diversity of vegetation, habitats, and eco-systems. There was conflict between conservation and development. The Environmental Impact processes were rigorous and the time frames were not welcome to investors. Richards Bay was constrained as to the type of investment that could be brought in, as already there was an indication from the air quality monitoring unit that it was already close to the limits,  and in the epicentres of the industry the limits had already been reached. There was a further constraint around container handling facilities at the port, but there had been no constructive engagement with the port authorities. Because of the nature of the industry that Richard Bay would like to bring in, it was imperative that different facilities were put in place. He said to Mr Chipfuwa that there was a absence of IDZ incentive initiatives at dti, and an IDZ programme needed to be differentiated from the general jurisdiction of the Department as it had a unique character.

The Chairperson noted that there still seemed to be some outstanding issues here too, and he would try to arrange another session.

The meeting was adjourned.

 

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