Interim Report of the Portfolio Committee on Trade and Industry on Budget Vote 36: Trade and Industry in line with the Budgetary Review and Recommendation Report, dated 12 March 2014

1. Introduction

In the current economic climate, the National Treasury has requested departments and other statutory bodies to contain their operational costs in an effort to minimise the national budget deficit. However, this call comes at the same time as the Department of Trade and Industry has legislatively established several new entities and has increased the legislative mandate of certain of its regulatory bodies. These must be adequately funded to effect important mandates that enhance South Africa’s global competitiveness, contribute to the much needed transformation in the economy and protect the most vulnerable consumers.

In light of these changes, it is essential that the portfolio committees are able to determine whether budget allocations and expenditure are efficiently and effectively used to achieve its core mandate to ensure that the South African government is providing service delivery and is spending tax-payers’ money responsibly. The Money Bills Amendment Procedure and Related Matters Act is intended to underpin this parliamentary responsibility.

1.1. Mandate of the committee

As an integral part of its oversight role, Section 5 of the Money Bills Amendment Procedure and Related Matters Act requires the National Assembly, through its committees, to annually assess the performance of each national department. A committee must submit a report of this assessment known as a Budgetary Review and Recommendation Report (BRRR). The overarching purpose of the BRRR is for the committee to make recommendations on the forward use of resources to address the implementation of policy priorities and services as these may require additional, reduced or re-configured resources for the Department. This gives effect to Parliament’s constitutional powers to amend the budget in line with the fiscal framework.

The BRRR process covers an eighteen (18) month period, starting with the tabling of a budget and the review of the Department’s strategic plan, oversight over the implementation of the strategic plan and the first six months expenditure of the following budget. This performance monitoring tool is meant to facilitate the committee’s legislative responsibility to ensure that the Department and its entities are adequately funded to fulfil their respective mandates. However, as the Budget Office is still in the process of being established, the committee was unable to exercise its full powers on providing detailed budgetary recommendations.

Due to the nature of some of the DTI’s work, for example trade negotiations and policy development, it would always be challenging to determine the short term cost effectiveness and efficiency of its financial allocation.

1.2. Purpose of the report

The purpose of this report is to provide an interim indication of the Department’s expenditure trend in the 2013/14 financial year and to link the recommendations, the committee made in its 2013 BRR report to the outcomes thereof in the 2014/15 budget allocation.

1.3. Layout of the report

The report lists the recommendations relating to budgetary allocations, which the committee raised in its 2013 BRR Report in section 2. Section 3 provides an overview of the 2013/14 third quarter financial performance of the Department of Trade and Industry, the National Consumer Commission and the National Lotteries Board. Section 4 briefly discusses the 2014 Budget Vote and highlights budgetary adjustments that align with the committee’s 2013 recommendations. Section 5 provides the committee’s conclusions.

2. Committee’s Budget Review and Recommendation Report Recommendations:

In its 2013 BRRR, the committee recommended that the House request the Minister of Trade and Industry to consider the following budgetary allocations:

· Adequate funding for the establishment of the following bodies in the 2014/15 financial year and over the Medium-term Expenditure Framework (MTEF) period to ensure that these bodies are able to fulfil their mandates:

o Broad-Based Black Economic Empowerment Commission,

o Co-operative Development Agency,

o Co-operative Tribunal,

o National Trust Fund on Indigenous Knowledge, and

o National Council on Indigenous Knowledge.

· Recapitalisation of the Export Credit and Insurance Corporation and the National Empowerment Fund in order for these institutions to fulfil their mandates of facilitating the export of trade and cross-border investments between South Africa and the rest of the world, and of broadening black participation in the economy respectively.

· Increasing the allocation to the Consumer and Corporate Regulation Programme to ensure adequate support to its regulatory entities, in particular the National Consumer Commission and the National Credit Regulator.

3. Expenditure up to 31 December 2013

3.1. Department of Trade and Industry (DTI)

At the end of December 2013, the Department had spent R6.7 billion (98 per cent of its projected year-to-date expenditure of R6.87 billion). Most of the programmes’ under-spending or over-spending was at a relatively acceptable level, below 5 per cent of the projected year-to-date spending. Trade and Investment South Africa was the only programme with a significant variance between its projected and actual expenditure with approximately 13 per cent of its projected expenditure being under-spent (under-spending of R36.18 million).

Figure 1: Department's Budget versus Expenditure

Programme	Budget 2013/14 R’000	YTD Expenditure R’000	Variance R’000	% variance	Available budget R’000	% budget available
Administration	724 954	516 473	(3 014)	-0.59%	208,481	28.76%
International Trade and Economic Development	142 138	92 599	(3 413)	-3.83%	49,539	34.85%
Broadening Participation	1 010 782	805 477	3 922	0.48%	205,305	20.31%
Industrial Development: Policy Development	1 596 674	1 305 414	28 006	2.10%	291,260	18.24%
Consumer and Corporate Regulation	256 157	226 461	-872	-0.39%	29,696	11.59%
Industrial Development: Incentive Administration	5 443 134	3 549 818	83 355	2.29%	1 893 316	34.78%
Trade and Investment South Africa	341 741	236 689	36 180	13.26%	105 052	30.74%
Total	9 515 580	6 732 931	144 164	2.10%	2 782 649	29.24%

Source: DTI 2013/14 Third Quarter Report

3.1.1. Expenditure by economic classification

In terms of economic classification, the Department’s budget is mainly allocated for transfer payments. Transfer payments accounted for 83.5 per cent of the total budget followed by employee compensation at 8.59 per cent and goods and services at 7.46 per cent. At the end of December 2013, there was under-spending of 20 per cent in capital assets and of 5.5 per cent in goods and services in relation to the projected year-to-date expenditure.

Figure 2: Department's Budget and Expenditure by Economic Classification

Programme	Revised Budget 2013/14 R’000	YTD Expenditure R’000	Variance R’000	% variance	Available Budget R’000	% budget available
Compensation of employees	817 522	580 504	13 783	2.32%	237 018	28.99%
Goods and services of which	709 852	468 712	27 687	5.58%	241 140	33.97%
Payments for financial assets	1	1 080	(1 080)	0.00%	(1 079)	0.00%
Capital assets	38 194	13 012	3 255	20.01%	25 182	65.93%
Transfer payments	7 950 011	5 669 623	100 519	1.74%	2 280 388	28.68%
Total	9 515 580	6 732 931	144 164	2.10%	2 782 649	29.24%

Source: DTI Third Quarter Report 2013/14

3.1.2. Non-financial performance

In the 2013/14 financial year, the Department has made significant strides in achieving its strategic objectives. According to the Department, among the highlights of the Department’s work in the third quarter ending in December 2013 were:

· The National Regulator for Compulsory Specifications (NRCS) had confiscated and destroyed large numbers of non-compliant products falling within the electro-technical sector at Durban and Cape Town ports.

· The Saldanha Bay Industrial Development Zone (IDZ) was approved for designation and launched in Saldanha Bay in October 2013.

· The Department signed Memoranda of Understanding (MOUs) with investors who are interested in leases at the Coega and Richards Bay IDZs.

· In line with consumer protection, the Minister issued a final notice on categories of goods required to have a trade description applied to them in terms of the Consumer Protection Act (No. 68 of 2008).

· The Manufacturing Competitiveness Enhancement Programme (MCEP) had assisted 276 enterprises and was project to assist the retention of 91 735 jobs.

However, some of the areas that required improvement included:

· The SEDA Technology Programme (stp): Only one incubator, of the four new targeted incubators, had been approved and one awaited approval. There were no further funds available to support more new incubators.

· Co-operatives: The business case for the establishment of the Co-operatives Development Agency had been approved and implementation had been initiated through the development of a draft staff migration plan from the Small Enterprise Development Agency and a draft organisational structure. Furthermore, the business case for the establishment of the Co-operatives Tribunal and a draft structure were in place.

· Critical Infrastructure Programme (CIP): A target of 12 evaluated and approved projects had been set. At 31 December 2013, only four (4) projects had been approved. Furthermore, approximately 74 per cent of the CIP budget had been transferred to other incentives despite only a third of the target being achieved. The lack of projects was attributed to the existing co-funding model with municipalities, as many municipalities were unable to meet these requirements. The DTI was therefore, review this model to possible adjust the required ration for co-funding.

3.2. National Consumer Commission

Since it became operational on 1 April 2011, the National Consumer Commission (NCC) experienced several teething problems in relation to its compliance with the Public Finance Management Act. These teething problems culminated into a qualified audit report in the 2012/13 financial year. This was due to irregular expenditure that could not be adequately confirmed due to supporting information being stolen from the NCC’s premises and inadequate filing of information; and operating expenditure for the prior financial year (2011/12) being incorrectly allocated to the 2012/13 financial year.

This situation had limited the NCC’s ability to access much needed funds for the critical mandate it must fulfil and to address capacity problems it had, such as a very high vacancy rate and a lack of human resources to skilfully manage its enforcement role. This resulted in the NCC addressing numerous individual complaints through compliance notices, which were later over-turned by the National Consumer Tribunal.

Subsequently, the new Commissioner had revised the NCC’s strategic plan to focus on establishing the requisite governance and operational systems while addressing the severe backlog of complaints to be resolved. This approach has yielded progress as was evident in its 3^rd quarter report for the 2013/14 financial year.

The NCC was allocated and received R44.5 million from the DTI. It also received R961 824.27 from the Sector-wide Enterprise, Employment and Equity Programme (SWEEEP) Fund for IT infrastructure.

The NCC has spent R33.1 million (98 per cent of its projected year-to-date expenditure). Although this is an acceptable level of under-spending, there appears to be a misalignment in terms of the actual expenditure against the projected year-to-date expenditure in terms of the individual budget line items. The resolution thereof would require the NCC to reconsider their planning methods to properly cost their planned activities.

The committee had requested that the NCC should prioritise the lowering of their vacancy rate to strengthen their operational capacity. However, this may place strain on expenditure on compensation of employees and the associated costs.

Figure 3: NCC's Budget and Expenditure by Economic Classification

	Revised Budget 2013/14 R’000	YTD R’000	Variance R’000	% variance	Available R’000	% budget available
Revenue	44 516	45 498
Other income	0	270.2
Total Revenue	44 516	45 768.3	(11 129)	(33.3%)	12 636.2	(27.6%)*
Compensation of employees	25 003	20 439.3	(1 687.1)	(9%)	4 563.1	18.3%
Goods and services	19 513	12 692.7	(2 936.2)	(30.1%)	6 820.3	35%
Total Expenditure	44 516	33 132	(4 623.3)	(0.2%)	11 384	25.6%
Surplus/(Deficit)	0	12 636.3

Source: NCC Third Quarter Report 2013/14 (*Calculated based on the year-to-date revenue)

Improvements in the NCC’s financial and non-financial performance included:

· The finances of the NCC have now been properly accounted for.

· Progress in the management of risks and addressing the majority of findings by the Auditor General of South Africa.

· The contact centre, email and telephone system has been functioning without any disruption, albeit minor sporadic hiccups.

· The complaints backlog is no longer a challenge with 73 per cent of complaints having been dealt with through co-operative relations with alternate dispute resolution agents within key industries.

· The appointment of attorneys to recover fruitless and wasteful expenditure incurred in previous years.

· The appointment of finance service providers for a period of six months to assist with asset management and supply chain processes.

· The functioning of internal audit and the audit committee.

· The filling of 40 per cent of positions in the new approved structure

However, the following areas of concern remained:

· Inadequate skills levels of staff and low spending in terms of training and development. The NCC reported that its executive committee had made a strategic decision to reallocate funds budgeted for training and development as the more critical training needed was related to the mandate of the Act and the functions that staff had to perform. Due to the inability to find an appropriate service provider, the NCC relied on weekly in-house training.

· Alignment of the projected budget line items, and planned activities to meet the NCC’s strategic objectives.

3.3. National Lotteries Board

The NLB is funded from proceeds from the National Lottery which are allocated to the National Lotteries Distribution Trust Fund and thus does not receive an allocation from the Trade and Industry Budget Vote. In this regard, one of its responsibilities is administering this Trust Fund and disbursing funds to successful grant applicants as determined by the distributing agencies.

During its presentation, the NLB highlighted core improvements it has made to address challenges related to fraudulent grant applications to comply with the Public Finance Management Act and National Treasury regulations and to ensure accountable and transparent use of these funds. These have included an enhanced verification process and the use of legal secretaries to advise adjudication panels. It has also implemented a mechanism to provide feedback and assistance to non-compliant organisations.

At the end of December 2013, the National Lottery sales have been lower than the 2012/13 third quarter sales (R3.4 billion on 31 December 2013 compared to R3.5 billion on 31 December 2012). This has resulted in R30 million decline in the National Lottery’s 34 per cent contribution to the Trust Fund. The three distributing agencies received 14 887 applications between November 2012 and April 2013, of which 8 087 applications were completed. The NLB was of the view that the demand for grants appears to be exceeding the available resources. Thus far, R1.7 billion of the available R2 billion budget had been allocated to 3 033 organisations.

The NLB was still in the process of addressing the findings raised by the Office of the Auditor-General.

At the end of December 2013, the NLB was having a deficit of R616.4 million compared to a surplus at the same period in 2012. This is mainly due to a significant increase in the allocation of grants.

Figure 4: National Lotteries Distribution Trust Fund's Revenue and Expenditure as at 31 December 2013 (R’000)

	December 2013	December 2012	Variance from 2012 to 2013
Weekly gaming sales	1 164 703	1 194 852	30 149
Other	-	-	-
Revenue	1 164 703	1 194 852	30 149
Allocation of grants	1 853 322	1 081 725	771 597
Grant to NLB	121 210	85 768	35 442
Other operating expenses	34	25	9
Operating expenses	1 974 566	1 167 518	807 048
Finance Income	193 494	212 950	(19 456)
Surplus/(Deficit)	(616 369)	212 284	(856 653)

Source: NLB 2013/14 Third Quarter Report

4. Budget Vote 2014/15

The Department of Trade and Industry’s expenditure has been increased by 3.4 per cent from the 2013/14 financial year to the 2014/15 financial year. In the 2014/15 financial year, expenditure is expected to be R9.8 billion. However, this is in effect a real decrease once the effects of inflation are considered.

In terms of allocations to various divisions, the Incentive Development and Administration Programme/Division was allocated the largest share of the budget (R5.5 billion or 56.3 per cent of the total budget allocation). The second largest share was allocated to the Industrial Development Programme/Division (R1.8 billion or 18.3 per cent of the total budget allocation) followed by the Broadening Participation Programme/Division with a share of R1mbllion or 10.2 per cent of the total budget allocation. These three programmes combined constituted 84.8 per cent of the total budget allocation while the remaining four programmes shared 16.2 per cent of the total budget allocation.

The three programmes receiving significant increases were Trade and Investment South Africa (11.9 per cent), Industrial Development (11.2 per cent) and Consumer and Corporate Regulation (8.2 per cent).

Figure 5: Vote 36 – Budget allocation by programme

Programme R million	Adjusted appropriation 2013/14	Budget allocation 2014/15	Budget share (%) 2014/15	% growth 2013/14-2014/15
Administration	725.9	706.9	7.2	-2.6
International Trade and Economic Development	141.6	147.2	1.5	4.0
Broadening Participation	1 010.3	1 005.8	10.2	-0.4
Industrial Development	1 616.2	1 796.8	18.3	11.2
Consumer and Corporate Regulation	256.2	277.3	2.8	8.2
Incentive Development and Administration	5 443.1	5 540.3	56.3	1.8
Trade and Investment South Africa	322.2	360.7	3.7	11.9
Total	9 515.6	9 835.0	100	3.4

Source: National Treasury, 2014 Estimates of National Expenditure

The following allocations were made in the 2014 Estimates of National Expenditure in alignment with the committee’s 2013 BRRR recommendations:

· The Consumer and Corporate Regulation Department’s allocation for transfers to its entities increased from R179.4 million in 2013/14 to R200.5 million in 2014/15 (11.8 per cent increase).

· The National Consumer Commission’s allocation increased from R44.5 million in 2013/14 to R53.4 million in 2014/15 (20 per cent increase).

· The allocation to the National Credit Regulator increased from R60.7 million in 2013/14 to R63.8 million in 2014/15 (5.1 per cent increase).

· No allocations were made for new entities to be established. However, this is expected to occur during the 2014 Medium-term Budget Policy Statement process.

· The Export Credit Insurance Corporation’s Interest Make-Up Scheme received an increased allocation from R73.3 million in 2013/14 to R110.4 million in 2014/15 (50.6 per cent increase). However, inadequate funding in the outer year of the MTEF has resulted in a request for further recapitalisation of the Scheme.

5. Conclusion

Given the critical nature of the National Consumer Commission’s mandate, the committee is of the opinion that vigorous, continuous quarterly oversight over the work of the NCC is important to ensure that this entity becomes fully operational. The NCC should reach a stage where its internal systems can effectively and efficiently address consumer protection related complaints but is also able to pro-actively regulate the industry. Furthermore, an almost 60 per cent vacancy rate is unacceptable and every effort should be made to fill critical vacant positions in the NCC’s organisational structure. This should be accompanied by the provision of adequate training.

The committee has found that given the nature of some of the DTI’s work, which do not have tangible short-term outputs, it is difficult to determine whether the DTI has used its resources in an efficient manner to meet its strategic objectives and whether this spending was effective, as required by the Money Bills Amendment Procedure and Related Matters Act. This challenge has been exacerbated by the Parliamentary Budget Office not being functional to provide guidance on the matter. The committee looks forward to a fully operational Budget Office, which will substantively contribute to the budgetary support the committee requires to undertake this process.

The committee wishes to express its appreciation for the co-operation of the Minister and the DTI in supporting the committee in the BRRR process. The committee also wishes to thank its committee support staff in particular the content advisor, Ms M Herling, the committee secretary, Mr A Hermans, the researcher, Ms Z Madalane, and the committee assistant, Mr D Woodington, for their professional support and conscientious commitment to their work. The Chairperson thanks all Members of the committee for their active participation during the process of engagement and deliberations and their constructive recommendations made in this report.