ATC141028: Report of the Portfolio Committee on Trade and Industry on the implementation of the Industrial Policy Action Plan with specific reference to the state of the manufacturing sector, dated 28 October 2014.

Report of the Portfolio Committee on Trade and Industry on the implementation of the Industrial Policy Action Plan with specific reference to the state of the manufacturing sector, dated 28 October 2014.

The Portfolio Committee on Trade and Industry having considered the “Report of the Portfolio Committee of Trade and Industry on the implementation of the Industrial Policy Action Plan with specific reference to the state of the manufacturing sector” and recognising the work done by the committee in the Fourth Parliament, reports as follows:

1. Introduction

“The promotion of a more labour-absorbing industrial strategy with the emphasis on traceable labour absorbing goods and services and economic linkages to promote job creation” is the cornerstone of the National Industrial Policy Framework (NIPF). Government recognised that a revised Industrial Policy Action Plan (IPAP2) could be the catalyst that would set the country on a new path of industrialisation. The IPAP2 reflects government’s objectives of stimulating long-term industrialisation and industrial diversification beyond the current reliance on commodities and non-tradable services. The focus has been on addressing overarching areas, as well as targeting specific productive sectors in the economy, particularly those with high employment and/or economic growth potential that could promote the local manufacturing of value-added products for both domestic and export markets.

South Africa has a well-developed and diverse manufacturing sector with some subsectors being more developed than others . This includes subsectors ranging from the manufacturing of food, beverages and tobacco; clothing and textiles; petroleum, chemicals, rubber and plastic products; metals, metal products, machinery and equipment; and transport equipment among others. This sector contributes greatly to international trade in terms of exports of both finished and semi-finished products. The manufacturing sector is the country’s priority sector. It is the second largest sector contributing approximately 15% to South Africa’s total GDP and 12.7% to employment during the fourth quarter of 2012.

The manufacturing sector is also critical as it creates upstream and downstream linkages. On the one hand, it requires a number of inputs and services to produce goods; while, on the other hand, its goods may feed into other manufacturing processes and/or be consumed locally or be exported. It may also lead to the demand for other related services. These linkages are also known as the multiplier effect.

1.1 Purpose

The purpose of this report is for the Portfolio Committee on Trade and Industry to highlight its findings and make recommendations regarding its:

· Consideration of the progress report on the implementation of the 2011/12 IPAP2,

· Public hearings conducted in November 2012 on the challenges and constraints experienced by the manufacturing sector,

· Colloquium which was held on 6 March 2013, which focused on the impact of the continual increases in administered prices on the manufacturing sector and the measures to mitigate against its impact on the country’s manufacturing sector, and

· Subsequent engagements with the National Cleaner Production Centre and BHP Billiton.

1.2 Process

In line with its oversight responsibility, the Committee has received regular updates on the implementation of IPAP since August 2009. Each year, the Committee focussed on different IPAP-related issues, beginning with the cost of steel as an essential input to industrialisation then infrastructure broadly. In 2012, the Committee focussed on the constraints posed by high and rising electricity, ports and other administered prices on the manufacturing sector and IPAP2, as well as the critical need for beneficiation. This included a consideration of current measures that had not been implemented and measures that may require legislative action.

The Committee invited the following economists to engage it on matters related to the manufacturing sector and IPAP2 during its public hearings:

· Dr Simon Roberts on the state of the economy and the impact of electricity on manufacturing, and

· Professor Ben Turok (MP) on beneficiation.

The following public institutions were also invited to comment on the impact of administered prices on the manufacturing sector:

· The Department of Trade and Industry (DTI),

· The Department of Public Enterprises (DPE),

· The South African Local Government Association (SALGA),

· The National Electricity Regulator of South Africa (NERSA),

· Eskom,

· The Transnet National Ports Authority (TNPA), and

· The Ports Regulator.

The South African Maritime Safety Authority specifically commented on the potential and opportunities for the maritime industry in relation to industrial development with specific focus on the boat-building industry.

Furthermore, other stakeholders and companies that were sensitive to changes in electricity tariffs were invited to the public hearings, including:

· The Manufacturing Circle,

· The Energy Intensive User Group of Southern Africa (EIUG),

· Free State Gold Fields Chamber of Commerce (FSCC),

· The National Foundry Technology Network (NFTN),

· Silicon Technology,

· Scaw Metals Group,

· Nutripharm ,

· The Apparel Manufacturers of South Africa (AMSA),

· The Eastern Cape Socio Economic Consultative Council (ECSECC),

· Ekurhuleni Metropolitan Municipality,

· The National Association of Automobile Manufacturers of South Africa ( Naamsa ),

· The National Association of Automobile Component and Allied Manufacturers ( Naacam ),

· The Ford Motor Company of South Africa, and

· Shatterprufe .

Subsequent to the public hearings, the Committee decided to schedule a colloquium on the impact of administered prices on the manufacturing sector, with specific reference to high electricity prices and port tariffs on 6 March 2013. The following key stakeholders were invited to engage the Committee on possible short and medium term solutions:

· The DTI,

· The Department of Energy,

· SALGA,

· Eskom,

· NERSA, and

· The TNPA.

Further engagements were scheduled to address the challenges relating to the promotion of energy efficiency as an instrument to foster industrial efficiency and competitiveness, the pricing arrangements with suppliers of electricity, as well as on beneficiation and the challenges associated with it. The following stakeholders were invited in this regard:

· The National Cleaner Production Centre,

· Mr Andreas Künne , from the German Embassy, and

· BHP Billiton South Africa .

2. Economic Context

The global recession of 2008 had a negative impact on the manufacturing sector which led to massive job losses in the sector. The recent Purchasing Managers’ Index registered a three year low indicating declining business confidence and a contraction in the manufacturing sector. Furthermore, recent data indicates a sharp rise in imports which is at the expense of jobs with exports moving on a flat trajectory.

High administered prices, such as electricity tariffs and port charges, have further contributed to South Africa’s relative lack of competitiveness and have led to the loss of many small entrepreneurial businesses, especially in the manufacturing sector, which resulted in the retrenchment of thousands of workers . While some of South Africa’s trading partners have reportedly reduced their industrial electricity rates, South Africa has been increasing its electricity tariffs.

Currently, South Africa’s growth remains driven by credit-fuelled non-tradable sectors while the tradable export sectors are languishing. This combination of events, as well as other domestic inefficiencies, represent a real threat to the manufacturing sector and have exacerbated the expansion of the import market which has created an entrenched external imbalance reflected in the large current account deficit.

Furthermore, South Africa’s continued exports of its mineral resources with minimal beneficiation will further undermine the manufacturing sector. Currently, raw ore is exported with no or limited local processing. This results in developmental linkages and broader manufacturing capabilities, such as research and training, being undermined.

The primary sector can play a lead role in enabling South Africa’s comparative advantage. In this regard, the conversion of South Africa’s mineral endowment through beneficiation has been purported to facilitate socio-economic development. The development of local beneficiation capabilities would be supported through incentives. This use of South Africa’s natural resources and the supporting incentives offered should assist in the domestic industry’s global competitiveness and can lead to increased job creation and retention.

In addition, the IPAP2 emphasises the need to attract investment into the manufacturing sector to reverse the declining trend in the sector and to ensure an increase in employment creation. Value-adding sectors which create the highest opportunities for employment are being earmarked.

3. Issues emerging from the public hearings

There was an overall concern regarding the South African manufacturing sector’s ability to maintain its competitiveness. There was a perception that there were general challenges to attract future investment, from especially multinationals, as South Africa was facing several administered price hikes as well as skills shortages, low productivity levels and the perceived restrictive labour environment made it relatively uncompetitive compared to other developing countries.

In particular, the following issues emerged from the public hearings held in November 2012:

3.1 Electricity tariffs

A number of issues arose in relation to electricity tariffs, namely that:

a. There was a perceived negative impact due to Eskom’s transition to a cost-reflective pricing regime on the economy despite Eskom’s efforts to increase tariffs at a lower rate than initially indicated.

b. The lack of infrastructure investment in prior years has led to aged infrastructure, which if not adequately maintained and replaced, could lead to energy supply constraints in the near future.

c. There were other production factors, including the cost of coal which has been increasing significantly above inflation, which has been increasing the cost of producing electricity.

d. The widening differential between Eskom and municipal electricity tariffs was a concern for industrial users who were unable to select their service provider.

e. The current and future municipal tariffs could threaten the viability of the manufacturing sector, particularly for energy-intensive industries.

f. There was a need for all energy consumers to shift towards more energy efficient usage.

g. Whether the negotiated pricing agreement existing between BHP Billiton and Eskom is available to other stakeholders in the manufacturing sector.

3.2 Port tariffs

The following issues were raised in relation to port tariffs:

a. According to the TNPA, the lack of infrastructure investment contributed to the deterioration of port facilities. Therefore, port infrastructure required to be upgraded, which would be partially funded through higher port tariffs.

b. High port tariffs have increased the costs of transporting both exports and imports which could contribute to the decline in the competitiveness of the manufacturing sector.

3.3 Status of local procurement

Stakeholders raised the following concerns in relation to local procurement:

a. Investment by local suppliers was limited due to uncertainty regarding future, particularly long-term, local procurement possibilities.

b. Local investors were reluctant to obtain the necessary international quality assurance certification to qualify to be included in multinationals’ global value chains because of the time and effort required to achieve certification.

c. Where the promotion of black suppliers is imperative, the DPE and other stakeholders had raised the need for ongoing direct support as a constraint to ensuring the delivery of quality products that are delivered on time.

3.4 Beneficiation

In terms of beneficiation, the key issues emerging were that:

a. If South Africa continues to export its “ unbeneficiated ” mineral resources and import the final, beneficiated products, it could further undermine the manufacturing sector. This trend would result in the loss or decline of other developmental linkages and broader manufacturing capabilities, such as research and training.

b. The promotion of an interface which benefits the national interest is essential. This should include (i) pricing arrangements between the mining and manufacturing sectors, (ii) limited protectionist arrangements, (iii) skills development, (iv) positive procurement measures that favour domestic industry and (v) clear taxation policies that would encourage localisation.

c. The implementation of the provision in the Minerals and Petroleum Resources Development Act, namely section 26(3), that requires any person who intends to beneficiate any mineral mined in the Republic of South Africa outside the Republic may only do so after written notice and in consultation with the Minister could assist in facilitating local beneficiation.

d. The necessary skills required to successfully implement a beneficiation strategy, which would result in job creation and the re-industrialisation of South Africa.

The availability of competitively priced electricity, for the production of beneficiated goods is paramount. In the 1990s, Eskom had extensive excess generating capacity. This led to contracts being signed with high industrial energy users to ensure that excess capacity was utilised for economic development rather than wasted.

However, the Committee was concerned about the rationale behind entering into new contracts in 2003/4, while it was known that future supply of electricity would be constrained. The Committee was of the view that failure to supply electricity at a rate that supported industrialisation could derail the productive capacity of the economy and that government had a responsibility to secure the supply of energy.

Industry concurred that the supply of electricity underpins industrialisation. The supply of energy should be cost effective to ensure South Africa’s competiveness, particularly for beneficiation of minerals which is energy intensive. The Committee was of the view that the supply of energy should be at a developmental price to benefit all stakeholders.

4. Colloquium on the impact of administered prices on the manufacturing sector in South Africa

The DTI had identified high electricity tariffs and port tariffs as the key factors that impact negatively on competitiveness and the viability of the manufacturing sector. The DTI asserted that South Africa has amongst the highest port tariffs in the world. The cost of transport is further compounded by significant port inefficiencies. This represents a significant constraint to the export of value-added tradable manufactured goods and the import of inputs.

In an economy with a growing demand for affordable electricity and an increasingly costly supply of electricity, finding alternatives to better mitigate the impact of increasing prices particularly on the manufacturing sector is critical. However, there is minimal flexibility in factors determining the cost of electricity, whose prices are also tending to increase.

The colloquium therefore was an attempt to find short-term solutions to stem the further decline of the manufacturing sector by seeking alternative measures to mitigate against the impact of increasing electricity and port tariffs.

4.1 Electricity tariffs

4.1.1 Department of Energy

The energy sector’s objectives as outlined in the White Paper published in 1998 require that the provision of electricity should (i) be equitable taking into account the needs of the lower income group, (ii) be effective and competitive in the provision of reasonable priced power to all sectors of the economy, and (iii) facilitate participation of the private sector in power generation. These are the factors that should be taken account of when developing an electricity pricing strategy.

The Department of Energy acknowledged that the energy sector was facing a number of challenges in that the current electricity production capacity should expand by two thirds, and Eskom’s infrastructure backlog should be addressed. Although there was no disagreement that Eskom’s infrastructure build programme must be funded, there is a concern regarding whether this should be through tariff increases or borrowing.

The current approach of using tariffs to address these challenges comes at a significant cost to consumers. However, a balance must be found to ensure the acceleration of development within the energy sector, maintain the competitiveness of the industry, and achieve a reasonable tariff. One of the factors that could lower the pressure on Eskom is the efficient use of electricity. Inefficient electricity usage would have a negative impact on price and could lead to load shedding.

Three main areas of concerns remain, namely the cost of the Eskom build programme and how it will be funded, the efficient use of energy and where energy should be sourced from. The DOE was of the view that various supply options should be considered in order to achieve the best economic outcome as well as an affordable price for the supplier and the consumer. The burden to the fiscus should be limited which makes the financial viability of the electricity sector paramount.

4.1.2 Department of Trade and Industry

Increased competitiveness within our manufacturing sector is critical for the development of the South African economy. According to the DTI, the IPAP has improved competitiveness within the automotive sector, as the KPMG survey [1] rated South Africa as the fifth best destination globally for automotive production. This placed South Africa ahead of some developed and emerging economies which illustrate our ability to become globally competitive. This competitiveness is being negated by our micro environment (electricity and port tariffs) and our macro environment (interest rates and an overvalued currency). Therefore, administered prices are a critical element that could either stimulate or impede the development of the manufacturing sector.

The protracted global recession has led to decreased demand from our traditional trading partners and together with the escalating administered prices contributed to the contraction within the manufacturing sector. The result thereof is a decline in job creation, exports and investment in the productive sector of the economy.

Industrial policy requires inter-departmental coordination and cooperation with sector specific policies and interventions to have a significant impact. Therefore, despite the DTI’s rigorous implementation of sector specific policies and interventions that fall within its mandate, the industrial policy can be adversely affected by other line departments’ policies and interventions due to a lack of understanding of their impact on the re-industrialisation of South Africa. Electricity and port tariff setting and regulation are neither functions nor core competencies of the DTI but these policy decisions have a profound impact on industrial development.

The supply of affordable electricity to the manufacturing sector is essential for the re-industrialisation of the South African economy. The DTI, as well as the Committee, is of the view that the significant electricity tariffs disparities existing between Eskom and especially among municipalities contribute to the decline of the manufacturing sector. The Committee is concerned that the impact of high electricity tariffs could lead to further job losses and increasing poverty which contradicts government’s national objectives.

4.1.3 Eskom

Eskom, in its presentation, informed the Committee that empirical studies have shown that sectors likely to suffer from a price increase are mining and manufacturing. Although this may be the case, Eskom is of the view that there is considerable variation in the vulnerability of different sub-industries and firms within this very diverse sector. According to Eskom, industry is more concerned with securing a steady supply of electricity rather than the price. The manufacturing sector is too diverse to make generalisations about the vulnerability of the sector to rising electricity prices. This perception raised serious concerns with the Committee as inputs from stakeholders during the public hearings held in 2012 suggested that the continuous rise in electricity tariffs has a severe impact on the viability of their operations.

There is significant scope for energy efficiency gains especially in the non-metallic mines, mining and quarrying, agriculture, paper and basic metals sectors. If South Africa were to remain competitive relative to its OECD counterparts improvements in energy efficiency is critical.

4.1.4 National Energy Regulator of South Africa

NERSA is the official energy regulator of South Africa, established in terms of the National Energy Regulator Act (No 40 of 2004). In its mandate, NERSA is guided by the following legislation, the Electricity Regulation Act (No 4 of 2006), the Gas Act (No 48 of 2001) and the Petroleum Principles Act (No 60 of 2003). In terms of electricity, NERSA is guided by the Electricity Pricing Policy (EPP) and the Electricity Regulations on New Generation Capacity.

NERSA is responsible for issuing licences to electricity suppliers, setting tariffs, determining conditions of supply and demand, monitoring compliance with licence conditions, investigating complaints, and acquiring and safeguarding industry information. NERSA reported that Eskom had applied for a 16% increase in electricity tariffs for the next five years from 2013. However, after careful consideration of public comments from the public hearings on Eskom’s application, NERSA decided to recommend an 8% increase rather than the 16% increase request. NERSA cited unaffordability to the public, as its reason for declining the 16% tariff increase request.

4.1.5 South African Local Government Association

SALGA informed the Committee that an important principle around electricity tariff design is ensuring that tariffs are adequately priced to ensure total cost recovery of the utility. Currently, there are 189 utilities with unique electricity tariff designs. This was in terms of the financial requirement relating to their cost structure, sale volumes and types, and cost of networks of distributors, and the varying socio-economic requirements of a particular area of distribution.

Furthermore, municipalities purchase electricity from Eskom transmission at prices comparable to what Eskom offers its direct customers with similar user patterns. This occurs despite the fact that Eskom operates under separate distributing licensing conditions. This current practice necessitates that municipality’s electricity tariffs will always be higher than what Eskom’s direct customers receive.

According to SALGA, municipalities’ funding partly comes from services, with consumers supplied by municipalities contributing to socio-economic development by contributing to the general electricity grid account. Consumers supplied by Eskom do not contribute to socio-economic development and consumers supplied by municipalities cross-subsidise low income households also in areas supplied by Eskom. .

It appears that municipalities are reliant on electricity income therefore no incentive exists to promote energy efficiency, as this would impact negatively on its revenue. Submissions by stakeholders concur with this view that municipal electricity tariffs are a contributing factor to the decline in the manufacturing sector, but that discussion on the funding model for municipalities is essential. All role-players must work together to mitigate against the effect of rising prices on consumers, especially manufacturers. The current unemployment rate is of great concern to the Committee and this is being exacerbated by a decline in the manufacturing sector which is a major contributor to employment.

A further concern for the Committee, as well as the DTI, is that more cost increases by municipalities would jeopardise the re-industrialisation initiative. The current monopolies, like Eskom and the municipalities, in the absence of competition, must be regulated and keep prices below inflation.

4.1.6 National Cleaner Production Centre

IPAP2 sets out government’s industrial policy and implementation plans to create critical platforms that are used as a basis for scaling up key strategic sectors. The improvement of the resource efficiency of existing industries by building their productive capacity in partnership with stakeholders is critical for industrial development, especially when faced with resource scarcity and consequent, rising prices. One of the mandates of the National Cleaner Production Centre (NCPC), located within the DTI, is to promote energy efficiency as an instrument to foster industrial efficiency and competitiveness. The NCPC informed the Committee that in collaboration with the CSIR it is developing mechanisms to ensure that industry focuses on energy and resource efficiency as well as on cleaner production.

The NCPC’s current focus is on energy efficiency, waste management, water efficiency and on industry’s response to the challenge of climate change. The NCPC adopted the Resource Efficiency and Cleaner Production (RECP) programme to enhance the manufacturing industry’s competitiveness through the use of renewable energy; and water, materials and energy efficiency mechanisms. This contributes to industrial development, localisation, economic growth and job creation. The RECP attempts to mitigate against the decline in the manufacturing sector specifically in IPAP2 aligned priority sectors, such as clothing and textile, agro-processing, chemicals, automotives, pulp and paper, metals and engineering, tourism and hospitality, the built environment and mining sectors.

The associated benefits to industry are the reduction in cost of doing business through reduced wastage of energy, water and materials among other things. This contributes to a competitive manufacturing industry which is resource efficient, increases market access, growth and sustainability of businesses, as well job retention and creation.

The Industrial Energy Efficiency (IEE) Improvement Project was introduced in 2010 to increase efficiency in the targeted industrial sector. This was expected to alleviate the country’s acute power shortage while simultaneously improving productivity, competitiveness and reducing CO ₂ omissions. The IEE project is a collaborative initiative between the South African Government (represented by the DTI and the Department of Energy), the Government of Switzerland, and the United Kingdom Department for International Development. The IEE project runs for four years and will contribute to the sustainable transformation of industrial energy usage. This will be achieved through the support for local industries such as automotive, agro-processing, chemicals and liquid fuels, metals and engineering, and mining sectors in their efforts to reduce cost, increase profitability and minimise their carbon footprint through the introduction of sustainable energy management practices. At the completion of the four year period, the IEE project will be integrated with the NCPC to ensure the continuation of its output.

The NCPC informed the Committee that the IEE project objective is to stimulate the demand for energy efficiency service within the current policy framework for implementing and monitoring industrial energy efficiency in South Africa. This could be achieved through increased public awareness, energy audits and demonstration projects. The NCPC also informed the Committee that the National Energy Efficiency Strategy (NEES) gazetted in November 2012 will undergo a second review process. This will guide energy efficiency practices in South Africa.

The project also aims to improve local capacity through training in energy management systems ( EnMS ) implementation as energy efficiency can be achieved at minimal costs through changes in energy management. South Africa adopted the international energy standards in 2011 as SANS/ISO5001. This provides a system which enables organisations to take a systematic approach towards achieving continual improvement of energy performance, energy efficiency and energy conservation. Furthermore, the project objectives include the creation of a cadre of qualified industrial energy management systems and systems optimisation (ESO) experts to provide the necessary resources to industry and the country. The NCPC informed the Committee that as a result of the training programme offered the first group of seven South African-based large industrial companies started the EnMS and ESO implementation which includes companies such as Toyota, ArcelorMittal and SAB Miller.

4.1.7 Engagement with BHP Billiton

The impact of administered prices on the productive sectors of the economy, its potential impediment to the promotion of industrialisation and beneficiation, as well as the creation of jobs, are critical factors for the Committee’s consideration. BHP Billiton, as a major player within the platinum group metals (PMG) sector producing aluminium among other products, had been invited to engage the Committee on the impact of administered prices on beneficiation and the strategic importance of industrialisation, as aluminium was an important input into the manufacturing sector .

The Committee expressed a strong opinion that it did not intend to comment on the recent decision by the Supreme Court of Appeal regarding the negotiated pricing agreement with Eskom but would focus on the impact of administered prices on BHP Billiton’s operations and their contribution to downstream economic activity. The Committee was of the view that companies enjoying a competitive price advantage must also utilise this to contribute to the strategic objectives of job creation, skills development and economic growth.

BHP Billiton informed the Committee that, since the early 1970s, it had responded to investment incentives and encouragement by Government to promote development of the economy and contribute to the industrialisation of South Africa leading to job creation. Furthermore, it constructed the Hillside aluminium smelter in 1996 and expanded the Bayside aluminium smelter at Richards Bay in 2003 with the provision of excess electricity by Eskom.

In addition, it supports government’s beneficiation strategy through the investment of R1 billion to build the M14 manganese furnace, which has been designed to reduce emissions. This is the largest new investment in the manganese industry and supports government’s initiative of proliferating beneficiation in South Africa. BHP Billiton informed the Committee that it actively contributes towards the beneficiation strategy of the government.

The Committee welcomed the investments as the export of raw minerals undermines government’s industrialisation objectives. The Committee was of the view that the IPAP calls for a shift in mineral development towards investment to maximise long-term growth beneficiation projects, enhancing the value of exports, increasing local content and the creation of sustainable jobs. The Committee also welcomed BHP Billiton’s focus on more energy efficient production processes but were of the opinion that the mining industry should contribute more to job creation and the development of the necessary skills required by the economy.

The Committee enquired whether BHP Billiton contributed to institutions of higher learning, especially the historical disadvantage institutions, financially to ensure that the requisite skills were maintained and developed. This would assist in preventing a skills shortage at a critical phase of the country’s industrial development or the loss of existing skills, as the current group of engineers near retirement. The Committee probed whether BHP Billiton had a plan to address the skills shortage and to ensure skills transfer. Furthermore, the Committee enquired whether they have a similar arrangement with the Ports Authority to ensure the export of beneficiated goods at a competitive price.

4.1.8 Proposals in mitigating against the impact of high administered prices

In order to address the dual challenge of high electricity and port tariffs, stakeholders put forward short-term policy options for consideration to mitigate the impact of high administered prices on the manufacturing sector. These proposals are captured below.

The DTI proposed that:

· The Manufacturing and Competiveness Enhancement Programme (MCEP) should be strengthened through an increase in the capex “cap” for energy efficiency projects and/or an increase in the matching grant formula with the DTI’s contribution increasing.

· There should be increased support offered to the NCPC in both energy audit implementation under the MCEP and in training private sector energy auditors.

· An amendment to the 12i incentive should be made to upscale support for cleaner production and energy-efficient project development and implementation.

· There was a need for an appropriate strategic approach and institutional location to scale up and expedite implementation of Eskom’s Integrated Demand Management (IDM) with an explicit prioritisation of the most vulnerable and strategic industrial sectors.

· Rolling out and localisation of Smart Grid and Smart Metering technology was an urgent priority, with conditional localisation components through designation to improve efficiency and billing systems.

· SALGA; Metros and Municipalities with significant numbers of vulnerable and strategic sectors should be engaged to encourage a coordinated approach to assist these sectors and to encourage moderation of municipal tariff increases under the current circumstances.

Eskom proposed that an inter-governmental task team should be established to:

· Identify and develop measures to protect specific sectors of the economy in line with the National Development Plan and IPAP. The sectors identified should include sectors where South Africa already have a competitive and strategic advantage; for example, the platinum, ferrochrome and ferromanganese sectors.

· Develop measures that would align municipal tariffs and Eskom tariffs that would level the playing field in the manufacturing sector. This should be done by ensuring that there is sufficient fiscal support for the municipalities to maintain infrastructure and to support other social services.

· Develop a national cross-subsidy framework in line with Government’s economic policy. The policy must include the funding of subsidies and criteria for subsidisation of municipal services.

NERSA articulated concerns regarding the price of electricity and its adverse impact on the industry as well as on households. In this regard, NERSA proposed that a new funding model for municipalities needs to be developed, as the current model places increasing reliance on revenue generated from electricity.

The price of municipal provided electricity comprises of two components, namely the price from Eskom (actual electricity price) and the additional amount added by municipalities (service charge). The electricity that is being provided by Eskom is provided on a cost reflective basis; while service charges are the costs of providing electricity to the final consumers, such as wages and maintenance of the infrastructure. The Eskom component is too rigid for municipalities and forms the bulk of the cost. However, the municipal service costs vary from municipality to municipality as a result of factors such as:

a) The location of the electricity consumer in relation to the location of a power station. The larger the distance between a consumer and a power station or between one consumer and another, the higher the cost of providing electricity to those consumers.

b) The periods in which electricity is used (peak periods are more costly than other periods), using electricity at certain times requires more resources than would have been the case at other times when there is less pressure on the infrastructure that is used to provide electricity.

c) The size of demand, as higher demand services are tailored to the needs of the individual therefore are more expensive.

4.2 Port tariffs

Currently the tariffs for the import of bulk commodities, primary commodities and of manufactured goods are priced below those required for exports of tradable goods. This contradicts government policies which support the export of manufactured goods for greater economic benefits. These policies require that these manufactured goods should be price competitive. Therefore, other policies, such as those related to port tariffs, should facilitate trade by promoting the price competitiveness of more highly beneficiated exports rather than exports of raw materials.

According to Transnet, the strategy that has been used to determine port tariffs was formulated in 2002. This strategy was outdated and stakeholders had voiced their concerns with regard to this strategy. Among the concerns from the ports regulator, the DPE, cargo owners, shipping lines and terminal operators were that:

· The tariffs were subjective, unjustified, and do not promote efficient operation of ports,

· The port tariffs were not aligned to their influence in the South Africa economy and there was a lack of transparency in port tariffs,

· Given the services provided, the port tariffs were too high, and

· The lease agreements were not being enforced by the port authority.

According to Transnet, a new strategy has been developed to address the concerns of the stakeholders. This strategy is aimed at ensuring that:

· There are set rules that will allow efficient regulation and oversight of the ports,

· Cargo charges are in favour of highly manufactured South African exports,

· Cargo charges are reduced to support South Africa’s global competitiveness, and

· Transnet becomes a reliable business partner in doing business with the leases; this will result in longer term investment planning.

The Committee, as well as the DTI, welcomed Transnet’s proposals with respect to tariff restructuring as well as its Beneficiation Promotion Strategy. In engagements with the TNPA with regards to port tariffs, Transnet acknowledged that some of the stakeholders had concerns, among which the high port tariffs was the most prominent. Currently, Transnet’s tariff structure is shared between shipping lines, cargo owners and tenants on a 20%, 61% and 19% basis respectively. In its proposed alternative strategy, Transnet is set to restructure tariffs. The new proposed tariff structure will be shared between shipping lines, cargo owners and tenants on a 21%, 46% and 33% basis respectively. The proposal is aimed at ensuring that tariffs are aligned to international standards and increasing South Africa’s competitiveness with other international markets.

Transnet also proposed the Beneficiation Promotion Programme. It seeks to promote increased beneficiation of goods, labour-intensive sectors, economic growth, and improvements in the competitiveness of South Africa’s metals sector and attract investments instead of the exportation of raw materials. This programme has been formulated in line with the IPAP, the National Development Plan, the Beneficiation Strategy for the Mineral Industry and the Department of Trade and Industry’s Metals Sector Strategy.

Through this programme, Transnet proposes that cargo charges for labour-intensive products and value-added products are reduced according to the various stages of beneficiation. The most beneficiated products would therefore pay the lowest cargo charge. This will promote local beneficiation.

Although the Committee welcomed the proposals presented by TNPA regarding the reduction of port charges, it was concerned that it appears that the cost was being shifted. The proposal with respect to the beneficiation programme, although still under discussion, where imports would cross-subsidise exports, with potentially up to 80% discount for vehicle exports was also welcomed.

The Committee welcomed the support for local manufacturing and beneficiation through the lowering of port tariffs. At present, government is subsiding the mining sector through the current port tariff structure at the expense of other sectors such as manufacturing and agriculture, sectors that have contributed the most jobs.

In response to a question whether South African ports would be more efficient if cities or regional authorities managed these, the TNPA was of the view that it is difficult to compare South African ports with their international counterparts, as Transnet is not subsidised by provincial or national government. This was due to the different institutional arrangements used globally, where some ports are being subsidised to lower costs.

5. Conclusion

Having considered the inputs from stakeholders during the public hearings in November 2012, the colloquium held on 6 March 2013 and subsequent meetings, the Committee has reached the following conclusions:

5.1 IPAP is intended as an instrument to align the line departments in support of the country’s accelerated industrial objective. In spite of existing fora to promote co-ordination among these line departments, it appears that a disjuncture in policy alignment and coordination among these different departments and state owned entities associated with administered prices remains, contributing to the uncertainty and challenges faced by the manufacturing sector. Thus, negatively impacting on government’s priorities of job creation and economic growth.

5.2 High electricity and port tariffs have contributed to the decline in the competitiveness of the manufacturing sector therefore finding a solution to high administered prices is essential.

5.3 All factors associated with the determination of administered prices must be investigated so as to ensure that the determination of these prices is evidence based, and to stem the decline of the manufacturing sector as well as reducing the negative impact on SMMEs.

5.4 The current legislative and regulatory environment must be reviewed to curtail the power of state monopolies in the determination of administered prices to ensure a developmental pricing regime aligned to the strategic objectives of government.

5.5 NEDLAC as an institution should be more effective and should consider investigating the impact of high administered prices, skills shortages, low productivity levels and the perceived restrictive labour environment on the manufacturing sector and the economy as a whole.

5.6 An engagement between National Treasury and the Department of Co-operative Governance is critical to discuss the funding of local governments, as well as the extent to which municipalities are charging exorbitant electricity surcharges to raise revenue. The Committee may consider holding a colloquium with the relevant stakeholders to find a solution to this problem.

5.7 Strategic and appropriate skills are required to grow domestic industrial capabilities; however, currently a misalignment of skills produced by institutions of higher learning and those required by industry exists. The committee is of the view that large manufacturing and mining companies should, in conjunction with institutions of higher learning, avail and expand their training facilities to smaller manufacturing enterprises to develop these skills and close the skills gap.

5.8 The committee acknowledges that although the focus was on administered prices, specifically electricity and port charges, other input costs also impact negatively on the manufacturing sector.

5.9 The necessary regulatory environment and a developmental pricing regime should be created to encourage the beneficiation of its mineral resources and other primary products.

6. Acknowledgements

The Committee would like to than k all participants for their valuable contributions. The Committee also wishes to thank its Committee support staff in particular the Committee Secretary, Mr A Hermans, the Content Advisor, Ms M Herling , and the Researcher, Ms Z Madalane , 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. The committee appreciate the contribution and co-operation from the DTI during this process.

7. Recommendations

Informed by its deliberations, the Committee recommends that the House requests that:

7.1 The Minister of Trade and Industry, in consultation with other Ministries, should consider the formation of a cost reduction committee to co-ordinate efforts across departments and state owned entities to reduce administered prices. This committee should include the Ministers of Trade and Industry, of Public Enterprises, of Energy, of Transport and of Finance, as well as the Chief Executive Officers of Eskom, of Transnet and of SALGA.

Report to be considered.