ATC141027: Budgetary Review and Recommendation Report of the Portfolio Committee on Trade and Industry, dated 24 October 2014

Trade and Industry

Budgetary Review and Recommendation Report of the Portfolio Committee on Trade and Industry, dated 24 October 2014

The Portfolio Committee on Trade and Industry, having assessed the service delivery performance of the Department of Trade and Industry, against its mandate and allocated resources, in particular the financial resources for the 1 April 2013 to 30 September 2014, reports as follows:

1. Introduction

The aim of the Department of Trade and Industry ( DTI ) to lead and facilitate access to sustainable economic activity and employment for all South Africans is on track in its core objectives. An inclusive economy using the instruments of broad-based black economic participation, preferential domestic procurement and a trade policy that implements global and regional relations has been effectively implemented during this budget review period. However, outstanding issues such as the realisation of black industrialists, a more robust regulatory framework that is more effective with the linkages between localisation and public procurement remain and calls for stronger enforcement measures as well as the pursuit of more compelling persuasion.

· The essential purpose of the Budget Review and Recommendation (BRR) Report, which takes into account the Medium-term Expenditure Framework (MTEF), is to evaluate the allocative efficiency implemented by the DTI and how effective its performance has been in achieving its stated objectives. This BRR Report is a significant milestone after 20 years of a democratic government.

· The DTI has evolved from the twin mandates of the former Ministries of General Services and of Finance and Trade and Industry to a department with an architecture now more focussed on its primary mandate of industrialisation and broadening participation underpinned by trade and supported by a robust regulatory framework. Although President Jacob Gedleyihlekisa Zuma has proclaimed a Ministry of Small Business, the Department of Small Business Development coexists in the DTI budget on Vote 36. A separate budget vote for the new Department will be established in the 2015/16 financial year.

· The recognition of the structural economic challenges called for a decisive break with the past of jobless economic growth to an employment generating economy and from an economy characterised by exclusion to an inclusive and equitable economy which is directed at eliminating poverty.

1.1. Description of the core functions of the Department

The DTI’s key strategy is the implementation of the Industrial Policy Action Plan (IPAP), within the framework of the National Industrial Policy Framework. This serves to drive domestic, regional and international trade and investment to create sustainable jobs. The DTI’s key priorities are derived from the IPAP and the central theme is to facilitate labour-absorption through the reindustrialisation of the manufacturing sector. This is supported by incentives for new and expanding manufacturers, initiatives to improve productivity or competitiveness and export promotion of locally produced goods.

The development of an enabling environment for business and manufacturers to operate effectively and efficiently to enable job creation and economic development is another key priority for the Department. The creation of regulatory frameworks related to company and intellectual property legislation and consumer protection provide market certainty and thus support IPAP.

Furthermore, the DTI is responsible for improving trade and investment relations and supporting deeper regional integration in Africa.

In addition, the DTI drives the national broad-based black economic empowerment regulatory framework as well as other interventions that promote the economic participation of vulnerable and previously disadvantaged individuals. In this regard, the DTI has supported the development of small, medium and micro enterprises (SMMEs) and co-operatives.

In terms of its core functions, the DTI is responsible for overseeing 14 entities and administering 45 Acts [1] . Its agencies are:

· Companies and Intellectual Property Commission (CIPC)

· Companies Tribunal (CT)

· Export Credit Insurance Corporation of South Africa (ECIC)

· National Consumer Commission (NCC)

· National Consumer Tribunal (NCT)

· National Credit Regulator (NCR)

· National Empowerment Fund (NEF)

· National Gambling Board (NGB)

· National Lotteries Board (NLB)

· National Metrology Institute of South Africa (NMISA)

· National Regulator for Compulsory Specifications (NRCS)

· Small Enterprise Development Agency (SEDA)

· South African Bureau of Standards (SABS)

· South African National Accreditation System (SANAS)

It should be noted that subsequent to the recent election, the President announced the creation of a new Department of Small Business Development [2] . Therefore, a portion of the DTI’s mandate and legislation related to the development of SMMEs and co-operatives was transferred to the new department, as well as the SEDA. The Department was established by Presidential Proclamation on 8 July 2014 and a Memorandum of Understanding with the DTI governs its portion of the budget and the management thereof until its governance structures are functional.

Furthermore, the DTI has a close, collaborative relationship with the Economic Development Department (EDD), particularly related to the functioning of the Industrial Development Corporation (IDC), the International Trade Administration Commission of South Africa (ITAC) and the Small Enterprise Finance Agency (SEFA) (formerly Khula Finance Ltd, the South African Micro-finance Apex Fund and the IDC’s small enterprises support section). These entities were shifted from the DTI to EDD in 2009. EDD is responsible for their administrative oversight, while the entities still support and/or are responsible for fulfilling parts of the DTI’s mandate in terms of industrial development, implementation of trade agreements and broadening economic participation respectively.

1.2. Mandate of the committee

Section 5 of the Money Bills Amendment Procedure and Related Matters Act (No. 9 of 2009) 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 BRR Report. The overarching purpose of the BRR Report is for the committee to make recommendations on the forward use of resources to address the implementation of policy priorities and services, as the relevant department may require additional, reduced or re-configured resources to achieve these priorities and services. This Act gives effect to Parliament’s constitutional powers to amend the budget in line with the fiscal framework.

The BRR Report process enables the committee to exercise its 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 becoming fully functional, the committee was unable to exercise its full powers on providing detailed budgetary recommendations. 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.

1.3. Purpose of the BRR Report

The purpose of this report is to analyse the financial and non-financial performance of the DTI, and identified entities, against predetermined objectives to inform recommendations for the forward-looking budget for the DTI and its entities. This report attempts to provide an assessment of the financial and non-financial performance of the DTI and identified entities for the 2013 /1 4 financial year, and the first six months of the 2014 /1 5 financial year (from 1 April 2013 to 30 September 2014) within the context of the three-year MTEF .

The budget is informed by the national policy priorities as outlined in the State of the Nation Address (SONA) . It is driven by the policy commitment to inclusive economic growth to attain social cohesion and job creation.

1.4. Method

The committee met with the Auditor General on 10 September 2014 to discuss its mandate in relation to the work of the Department. From this engagement, it was decided that the Auditor General would submit the results of the 2013/14 audit outcomes and the key findings by mid-October since the results were not available at the time of the meeting. The committee was then briefed by the DTI on its 2013/14 annual report and 2014/15 first quarter performance on 12 September 2014.

For the period under review, the committee had also been monitoring the performance of the Companies and Intellectual Property Commission, the National Consumer Commission, and the National Credit Regulator on an on-going basis. The committee considered the development of these entities vital to the economy and consumers. It also identified the National Gambling Board and the National Regulator for Compulsory Specifications for the annual report process. In this regard, the committee held meetings with these five entities to engage on their 2013/14 Annual Reports and their 2014/15 first quarter reports on 16 and 19 September and 14 October 2014.

One of the key limitations of the report was that not all 14 of the DTI’s entities’ annual reports and quarterly spending trends were monitored over the 18 month period. Therefore, there was a reliance on the DTI and the Auditor General to highlight challenges experienced by the other nine entities. However, all entities, with the exception of the NRCS, received unqualified audit opinions.

In addition, due to the timing of the BRR Report, verified second quarter financial and non-financial information was not available. The key challenge was that the DTI and its entities were still in the process of verifying the non-financial information, which is due at the end of October each year in compliance with Treasury regulations. Therefore, the report has only captured performance up to the first quarter of the 2014/15 financial year.

1.5. Outline of the contents of the Report

This BRR Report consists of eight sections. Section 1 briefly provides an overview of the DTI’s core functions, the mandate of the committee, the purpose of this report and the method followed in preparing this report, as well as the limitations of the Report.

Section 2 sets out the key policy focus areas for the DTI. This includes an overview of the relevant national priorities which the DTI contributes to, as well the DTI’s strategic objectives, outcome-orientated goals and key measurable objectives.

Section 3 provides a summary of the key financial and performance recommendations of the committee as captured in its previous BRR Report and its 2014/15 Budget Report. Where available, the Minister of Finance’s responses to these recommendations, as prescribed by the Money Bills Amendment Procedure and Related Matters Act are captured.

Section 4 assesses the DTI’s financial and non-financial performance against its vote allocation from 1 April 2013 to 30 June 2014. Firstly, it provides an overview and assessment of the DTI’s service delivery. Secondly, the available human resources are discussed. Thirdly, it considers the 2013/14 budget vote allocation in terms of the economic classification and per programme. It also assesses the actual total and programme expenditure for the period ending 31 March 2014, as well as the audit findings. This is followed by a comparison of the DTI’s budgeted and actual expenditure as at 30 June 2014. Fourthly, the report discusses key issues raised by the committee during deliberations with the DTI.

Section 5 discusses the five entities identified by the committee for oversight during this BRR reporting process in terms of their mandates, strategic objectives and core issues previously identified by the committee. In addition, their financial and non-financial performance and their additional forward-looking budgetary and/or performance requirements are assessed.

Section 6 provides the committee’s concluding remarks followed by a note of appreciation in Section 7. The report then closes with the committee’s recommendations for the National Assembly’s approval in Section 8.

2. Overview of the key relevant policy focus areas

In the annual SONA held in February this year, the President reaffirmed government’s commitment to implement the National Development Plan (NDP) as the country’s plan to eradicate poverty, increase employment and reduce inequality by the year 2030. The President’s first SONA of the fifth democratic Parliament reemphasised the areas of importance in the NDP which aims to address the reduction of poverty, the creation of decent work, and the acceleration of economic growth. [3]

In his post-election SONA address, the President highlighted five priorities, namely (i) education, (ii) health, (iii) the fight against crime and corruption, (iv) rural development and land reform, and (v) creating decent work. [4] The DTI’s mandate mainly relates to the latter priority of creating decent work. Table 1 provides the linkages between highlights extracted from the post-election 2014 State of the Nation Address and the DTI’s strategic objectives under which these points will be implemented.

Table 1 : Linkages between the State of the Nation Address and the DTI’s strategic objectives

DTI’s Strategic Objectives [5]

Highlights from the State of the Nation Address [6]

Facilitate transformation of the economy to promote industrial development, investment, competitiveness and employment creation

• "....Promote local procurement and increase domestic production by having the state buy 75% of goods and services from South African producers."

• "...Promote regional economic development and industrialisation, through the creation of Special Economic Zones around the country."

• "...Provide incentives, to support the competitiveness of the auto, clothing, leather, footwear and textile industries, which are labour intensive."

Facilitate broad-based economic participation through targeted interventions to achieve more inclusive growth

• "…Implementation of the amended Broad-based Black Economic Empowerment Act ... in order to transform the ownership, management and control of the economy."

Build mutually beneficial regional and global relations to advance South Africa’s trade, industrial policy and economic development objectives

• “…Champion broader regional integration through the Southern African Customs Union, SADC and the envisaged Tripartite Free Trade Area that spans Eastern and Southern Africa.”

• “…Promote South-South cooperation by utilising membership and engagements with formations and groupings of the South.”

• “…Deepen economic development, trade, and investment partnerships with the BRICS [7] through the work of the BRICS Contact Group for Economic and Trade Issues.”

Source: Madalane (2014)

The President also highlighted the low level of private sector investment and interrupted energy supply as key constraints to economic growth. The committee welcomes the inter-ministerial task team established to deal with the current challenges that the current energy supply poses to economic growth.

The DTI is committed to the development of an enabling environment to create decent work. Therefore, the DTI has identified a number of policy tools such as promoting local procurement, attracting investment through incentive-based programmes such as the Special Economic Zones, and providing incentives for domestic production in specific labour-absorbing sectors.

There have not been any shifts or changes in priorities for the Department from the 2013 SONA to the two 2014 SONAs. In the 2013 SONA, priority areas were broadening economic participation, industrial development, and international trade relations. These were also highlighted in both 2014 SONAs. However, the President announced in his post-election SONA that government would be establishing a Small Business Development Department which will take over certain functions of the DTI.

2.1. Strategic plans of the Department

The strategic objectives of the DTI are to:

· “Facilitate transformation of the economy to promote industrial development, investment, competitiveness, and employment creation;

· Build mutually beneficial regional and global relations to advance South Africa’s trade, industrial policy and economic development objectives;

· Facilitate broad-based economic participation through targeted interventions to achieve more inclusive growth;

· Create a fair regulatory environment that enables investment, trade and enterprise development in an equitable and socially responsible manner; and

· Promote a professional, ethical, dynamic, competitive and customer-focused working environment that ensures effective and efficient service delivery.” [8]

It is required that all government departments align their strategic objectives to the national priorities/government outcomes. Figure 1 provides a representation of the DTI’s strategic objectives for the 2013/14 financial year as they relate to the national priorities.

There were no changes in terms of the strategic objectives and goals in the 2014/15 financial year.


Figure 1 : Linkages between the DTI’s strategic goals, government outcomes and the 2013/14 allocated budget

Source: Department of Trade and Industry (2013d: 22)

2.2. Measurable objectives of the Department

The DTI in its strategic plan had listed key interventions that were aimed at addressing the challenges faced by the country. Particularly for the 2013/14 financial year, interventions were aimed at tackling the challenges of high unemployment and the impacts of the global economic crisis. The DTI aimed to tackle this challenge through sector-specific support programmes, such as the agro-processing; automotive; clothing, textiles and leather and footwear; and business process services sectors. [9] These sectors are concentrated in the manufacturing and business services sectors, and they form the backbone of employment in the country.

For the 2013/14 financial year, the Department had planned to continue creating an enabling environment to re-industrialise the country, as industrialisation is viewed as a tool through which South Africa can create jobs and stimulate economic growth. Industrialisation is mainly supported by the DTI through the IPAP. The key planned interventions were as follows [10] :

· Upscale industrial policy by tabling the annual rolling IPAP to Cabinet and produce quarterly implementation reports.

· Develop three sector-specific action plans developed to influence and respond to the changing economic environment to enhance manufacturing potential.

· Complete and submit designation templates to the National Treasury for 2 subsectors/sectors for local procurement.

· Undertake two key research projects to facilitate development of interventions to expand value-added activities in existing and new sectors of the economy including beneficiation.

· Special Economic Zone (SEZ) policy and Bill approved by Cabinet and endorsed by Parliament.

· Enhance technological competencies by supporting 1 350 students and 700 researchers via the Technology and Human Resources for Industry (THRIP).

· Implement the Support Programme Industrial Innovation (SPII) by supporting 20 new projects valued at R43 million.

· Implement the Tool-making apprentice programme - Support 385 students enrolled for the tool making apprentice programme.

· Implement the Industrial upgrading programme - Support 220 workers trained through the industrial upgrading programme.

· Support 940 enterprises approved to participate in the Export Marketing and Investment Assistance (EMIA) scheme.

· Support 40 companies supported through the Workplace Challenge Programme (WCP).

Broadening Participation also forms part of the DTI’s mandate. Through its Broadening Participation Division, the DTI aims to create opportunities in which black South Africans and women can participate more in economic activities. In terms of Broadening Participation, the key interventions were to [11] :

· Finalise and implement Informal Sector Strategy.

· Finalise and implement Youth Enterprise Development Strategy (YEDS).

· Obtain approval for the revised Broad-based Black Economic Empowerment (B-BBEE) Codes of Good Practice.

· Revise the National Strategic Framework on Gender and Women Empowerment.

· Obtain approval of the business case for the establishment of the Co-operative Tribunal as well as the Co-operatives Development Agency and phase-in implementation of the amended Co-operatives Development Act.

The third part of the DTI’s mandate is Trade, Investment and Exports. Key intervention in terms of trade for the 2013/14 financial year were to [12] :

· Increase manufactured exports under Export Marketing and Investment Assistance (EMIA) by increasing the value of exports to R900 million.

· Facilitate investment in targeted sectors to the value of R50 billion within the investment pipeline.

· Conclude trade negotiations with regards to the Economic Partnership Agreement (EPA) with the European Union (EU), Southern African Customs Union (SACU) India Preferential Trade Agreement (PTA), and Southern African Development Community (SADC) - East African Community (EAC) – Common Market For Eastern and Southern Africa (COMESA) FTA (also known as the Tripartite-Free Trade Agreement (T-FTA)).

· Implement African regional development programme in five priority development areas in SACU, SADC FTA and in Spatial Development Initiatives (SDI) infrastructure projects.

3. Summary of previous key financial and performance recommendations of committee

3.1. 2013/14 BRRR recommendations [13]

The committee recommended the following in relation to key areas of financial and non-financial performance:

· The Minister should ensure that the Co-operative Development Agency, the Broad-Based Black Economic Empowerment Commission, the Co-operative Tribunal, the National Trust Fund on Indigenous Knowledge, and the National Council on Indigenous Knowledge are adequately funded for the 2014/15 financial years and over the MTEF period to ensure that these bodies are able to fulfil their mandates.

· The Minister should consider the recapitalisation requests of the Export Credit and Insurance Corporation and the National Empowerment Fund in order for these institutions to fulfil their mandate 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.

· The Minister should ensure that government designated procurement products comply with the relevant national standards.

· Consider ensuring a real increase in the allocation to the Consumer and Corporate Regulation programme to ensure adequate support to its regulatory entities.

The Minister of Finance had responded that the National Treasury was working with the DTI to address funding requirements on a case-by-case basis. The DTI had reprioritised and revised its allocations to the NCR and NCC over the 2014 MTEF period. [14] At that stage, the Minister of Finance had not responded to the recommendations in relation to the funding of the new entities.

3.2. 2014/15 Committee Budget Report [15]

The committee had recommended that the Minister should consider:

· Additional funding for the Consumer and Corporate Regulation Programme’s allocation for its regulatory bodies to fulfil their mandates in the outer years of the MTEF.

· Increasing the budget for the Trade Investment South Africa Programme to ensure an adequate presence in strategic foreign missions in the outer years of the MTEF.

4. Overview and assessment of the department’s financial and NOn-financial performance

4.1. 2013/14 Non-financial performance

The Department’s work is divided into five thematic areas. These areas are (i) Industrial Development; (ii) Trade, Investment and Exports; (iii) Broadening Participation; (iv) Regulation and (v) Administration. This section gives a comparison of the Department’s key interventions for the financial year under review and the performance of the Department against those key interventions for the first four thematic areas.

4.1.1. Industrial Development

Industrial Development relates to the development of policies and strategies that promote sector competitiveness, economic growth, job creation and the provision of efficiently administered support measures. Key interventions for the 2013/14 financial year, as referred to in the Annual Performance Plan, are listed in Table 2 . The performance side of the table shows the DTI’s performance as per the 2013/14 Annual Report in achieving the key interventions.

Table 2 : Key interventions and performance for Industrial Development

Key Interventions

Performance

Upscale industrial policy by tabling the annual rolling IPAP to Cabinet and produce quarterly implementation reports

New iteration of the annual rolling IPAP 2013/14- 2015/16 approved by Cabinet in March 2014

3 sector-specific action plans developed to influence and respond to the changing economic environment to enhance manufacturing potential

The 4 sector-specific action plans developed were:

• Nuclear Localisation and Industrialisation Strategy and Action Plan

• Yellow Metal Strategy and Action Plan

• Music Strategy and Action Plan

• TV Strategy and Action Plan

Complete and submit designation templates to the National Treasury for 2 subsectors/sectors for local procurement

5 Designation Reports completed and submitted including the designation of cables, solar water heaters, valves and boats and electricity meters

2 key research projects will be undertaken to facilitate development of interventions to expand value-added activities in existing and new sectors of the economy including beneficiation

The 4 key research projects undertaken were:

• Wind Energy Localisation Roadmap

• Development of a Ports Industry Promotion Strategy

• SAA wide body fleet procurement process

• Beneficiation in key value chains in a selected group of minerals

Finalisation and Implementation of the SEZ Act (No.16 of 2014): SEZ Policy and Bill approved by Cabinet and endorsed by Parliament

SEZ Policy was adopted by Cabinet in 2013 and the Bill was passed by the two Houses of Parliament by March 2014 and assented to by the President.

Enhance technological competencies by supporting 1 350 students and 700 researchers via the THRIP

1 548 students supported under THRIP funding and 1 047 researchers approved for THRIP funding

SPII implemented by supporting 20 new projects valued at R43 million

31 projects valued at R75.9 million were supported (funds were freed to support new projects)

Tool-making apprentice programme – Support 385 students enrolled for the tool making apprentice programme

1 022 students enrolled in tool-making apprentice programme

Industrial upgrading programme – Support 220 workers trained through the industrial upgrading programme

400 workers trained through the industrial skills upgrading programme

940 enterprises approved to participate in the EMIA scheme

1 835 enterprises were supported through the EMIA scheme

51 companies supported through the WCP

322 companies supported as a result of R5 million sourced to enhance the Programme

Source: DTI (2014b)

The achievement of targets as depicted in the table above contributes to the advancement of the South African economy by stimulating increased industrial outputs.

4.1.2. Trade, Investment and Exports

This thematic area is responsible for the strengthening of trade and investment links with key economies and fostering African development, including through regional and continental integration and development co-operation in line with the New Partnership for Africa’s Development (NEPAD). Key interventions for the 2013/14 financial year as identified in the DTI’s Annual Performance Plan and the related performance are listed in Table 3 .

Table 3 : Key interventions and performance for Trade, Investment and Exports

Key Interventions

Performance

Africa regional development programme implementation: Progress report to be produced on implementation of agreed programme and projects for priority development areas in SACU, SADC FTA and SDI infrastructure projects

Status reports produced

Conclusion of EPA trade negotiations with the EU, SACU-India PTA, T-FTA: Status report to be produced on progress towards conclusion of trade negotiations

Progress reports produced

Increase manufactured exports under EMIA by increasing the value of exports to R900 million

R3.4 billion exports – Target exceeded due to high export sales from projects in new high-growth markets identified including Indonesia, Thailand, Turkey, Nigeria, Angola, Mozambique Tanzania and Ghana as well as BRIC .

Investment facilitation in targeted sectors – R50 billion

R60.5 billion – Target exceeded due to a large number of renewable energy projects that have reached financial closure in terms of the Renewable Energy Independent Power Producer Procurement (REIPPP) Programme .

Source: DTI (2014b)

4.1.3. Broadening Participation

Broadening Participation is concerned with the development of interventions and strategies that are aimed at promoting enterprise growth, empowerment and equity. Key interventions and performance for the 2013/14 financial year are listed below (see Table 4 ).

Table 4 : Key interventions and performance for Broadening Participation

Key Interventions

Performance

Disburse R119 million to SEDA for the establishment of new incubators and support of existing incubators; and support of SMMEs

R123 million disbursed to support SMMEs – Target was exceeded as a result of a virement from the Incentive Development and Administration Programme to the Broadening Participation Programme.

Performance monitoring reports on SEDA Technology Programme to be produced

Monitoring and performance reports produced

Approval of business case for the establishment of the Co-operative Development Agency and phased-in implementation thereof

Business case approved by Minister, National Treasury and DPSA

A phased-in implementation plan has been initiated by developing a draft staff migration plan and organisational structure

Approval of business case for the establishment of the Co-operative Tribunal and phased-in implementation thereof

Business case approved by Minister, National Treasury and DPSA

Phased-in implementation has commenced and a draft structure is in place.

Revised draft National Strategic Framework on Gender and Women Empowerment

Revised draft National Strategic Framework on Gender and Women Empowerment

Isivande Women Fund – Approve 18 new projects

During the 2013/14 financial year, the actual projects approved were 16. The poor quality of applications resulted in targets not being met.

Approval of Broad-Based Black Economic Empowerment Amendment Act

B-BBEE Amendment Bill assented to by the President

Approval of revised B-BBEE Codes of Good Practice

The B-BBEE Codes of Good Practice were approved by the Minister and published for implementation in 2015

1 560 enterprises approved for Black Business Supplier Development Programme (BBSDP)

1 066 enterprises approved

Finalisation and implementation of Informal Sector Strategy

The National Informal Business Upliftment Strategy (NIBUS) was adopted by Cabinet and launched by Minister in March 2014.

Finalisation and implementation of YEDS

YEDS approved and launched by the Minister in November 2013.

Supported companies through the WCP: support 40 new enterprises

322 enterprises supported due to additional funding of R5 million being sourced to enhance the Programme.

Source: DTI (2014b)

4.1.4. Regulation

Regulation involves the development and implementation of coherent, predictable and transparent regulatory solutions that facilitate easy access to redress, and efficient regulatory services for economic citizens. This occurs by developing policies, bills and regulations to enforce fair business practices and conducting impact assessments of regulation on business and other economic citizens.

Table 5 : Key interventions and performance for Regulation

Key Interventions

Performance

Two Regulatory Impact Assessment (RIA) Reports with recommendations for approval on Liquor and Gambling

Liquor: A RIA was finalised to incorporate the new policy

Gambling: A draft RIA report was produced.

Two policies for approval on Intellectual Property and Gambling

3 Policies developed for approval for gambling, liquor and intellectual property.

Four Bills for approval on National Credit Act, Lottery, Liquor and Business Acts

4 Bills developed for approval:

• National Credit Amendment Bill to be assented by President.

• Lotteries Amendment Bill assented.

• Licensing of Business Bill done and referred back for consultation and establishment of Task Team by Minister

• Liquor Amendment Bill developed, however not approved yet.

Two regulations for publication

• 2014 African Championship of Nations Liquor Amendment Regulations developed and published

• Regulations for Protected Event status and Prohibited Marks (liquor) developed and published

• Labelling of Meat Regulations developed and published

Source: DTI (2014b)

4.2. Non-financial performance as at 30 June 2014

The DTI highlighted a number of key achievements as at 30 June 2014. The key achievements are listed in the sections below in terms of the Department’s thematic areas. [16]

4.2.1. Industrial Development

· IPAP 2014/15 – 2016/17 was launched in April 2014.

· Legal Metrology Act (No. 9 of 2014) was assented to by the President in May 2014 but is not yet enacted as it requires a Presidential proclamation in the Government Gazette.

· Two instruction notes for the designation of Rail Rolling Stock and Solar Water Heaters were amended and re-published by National Treasury in June 2014. Local content verification of Solar Water Heaters was finalised by the SABS.

· Development of draft Manufacturing Support Guidelines for newly-established projects under the Manufacturing Competitiveness Enhancement Programme (MCEP) is in progress.

· Medium and Heavy Commercial Vehicles Automotive Investment Scheme (MHCV-AIS) guidelines was launched for public comment.

4.2.2. Trade, Investment and Exports

· The Promotion and Protection of Investment Bill was amended incorporating comments from the public consultation process.

· Led the South African delegation to the sixth BRICS Contact Group for Economic and Trade Issues (CGETI) meeting held in May 2014 in Brasilia, Brazil.

· Updated status report on EPA negotiations to inform the stalled review of the SACU–European Free Trade Association (EFTA) agreement.

· Draft EPA Tariff Schedules completed and submitted for verification to the South African Revenue Service (SARS).

· Notice of termination of Bilateral Investment Treaties (BITs) given to Sweden and Finland. Agreement reached with Argentina and Cuba to mutually terminate BITs.

· Facilitated exports to the value of R1.4 billion.

· Achieved R14.2 billion investment pipeline in large renewable and manufacturing projects.

4.2.3. Broadening Participation

· The terms of reference for the Black Industrialist Incentive has been developed and adopted.

· Supported 92 projects under the Co-operatives Incentive Scheme (CIS) incentive.

· Supported 280 projects under the BBSDP incentive.

· Five pre-feasibility studies for proposed SEZs have been finalized, namely for: (i) Rustenburg Platinum Hub in North West, (ii) Musina Logistic Hub and (iii) Tubatse Platinum Hub in Limpopo, (iv) Upington Solar corridor in Northern Cape and (v) Harrismith Agro-processing Hub in Free State).

· Additional three draft pre-feasibility reports have been developed for Wild Coast Agro-processing Hub in Eastern Cape, Nkomazi Agro-processing and Logistic Hub in Mpumalanga and Atlantis Renewable Energy Hub in Western Cape.

4.2.4. Consumer and Corporate Regulation

· Draft regulations for the National Credit Amendment Act (No. 19 of 2014) produced.

· The Intellectual Property Laws Amendment Act (No. 28 of 2013) enacted, with amendments focusing primarily on the protection of indigenous knowledge as well as the process to establish the council and trust.

· RIA on Gambling conducted and a report finalised.

4.3. Human Resources

The DTI had employed a total of 1 286 people as at the end of the 2013/14 financial year. A total of 133 posts were vacant given the total approved posts of 1 149. The 133 vacant posts translate to a vacancy rate of 9.4 per cent.

Table 6 : Employment statistics as at end March 2014

Total posts

1 419

Filled posts

1 286

Additional employees to the establishment

286

Vacancies

133

Vacancy rate (% of total available posts)

9.4

Black employees (% of total employees)

91.2

Female Employees (% of total employees)

58.1

Employees with disabilities (% of total employees)

2.7

Source: DTI (2014b)

The demographics of the staff complement was 91.2 per cent black employees. Female employees accounted for 58.1 per cent of total employees while people with disabilities accounted for 2.7 per cent.

4.4. Overview of Vote allocation and spending (2009/10 - 2014/15)

4.4.1. Overview of the Budget Allocation 2013/14

The Department of Trade and Industry’s budget was divided among its seven programmes/divisions. The Divisions were [17] :

· Administration

· International Trade and Economic Development

· Broadening Participation

· Industrial Development: Policy Development

· Consumer and Corporate Regulation

· Incentive Development: Incentive Administration

· Trade and Investment South Africa

The Department’s budget has increased from R8.35 billion in 2012/13 to R9.57 billion in 2013/14 financial year, a real increase of 8.55 per cent. The Department of Trade and Industry’s expenditure has been on an upward trend since the 2011/12 financial year increasing from R6.8 billion and to R8.3 billion in the 2012/13 financial year. In the 2013/14 financial year, expenditure is expected to be R9.6 billion. The Department’s expenditure is forecast to reach R11.4 billion by the 2015/16 financial year.

The Department’s budget is centred on the implementation of policies, strategies, programmes and incentives aimed at promoting industrial development and broadening participation in the economy. These were implemented through the Incentive Development: Incentive Administration and the Industrial Development: Policy Development programmes, which use the bulk of the Department’s allocation over the medium term. For the 2013/14 financial year, this was R5.5 billion for the Incentive Development: Incentive Administration Division (57.5 per cent of the total budget) and R1.6 billion for the Industrial Development: Policy Development Division (16.7 per cent of the total budget).

Furthermore, the budget was allocated to the Broadening Participation Division (R 968.3 million), the Administration Division (R 690.1 million), the Trade and Investment South Africa Division (R369.7 million), Consumer and Corporate Regulation Division (R256.2 million) and International Trade and Economic Development Division (R138.6 million).

In terms of the economic classification, the majority of the DTI’s budget (84.2 per cent) consisted of transfers to businesses or to its entities, compared to 82.2 per cent in the 2012/13 financial year. The DTI’s transfers also grew in real terms by 11.2 per cent since 2012/13. The DTI has decreased its budget share allocated to current payments from 17 per cent in 2012/13 to 15.6 per cent in 2013/14. This share has increasingly been dominated by compensation to employees (R854.2 million in 2013/14, which grew in real terms by 9.9 per cent). However, payments on goods and services declined in real terms by 11.8 per cent since 2012/13.

4.4.2. Overview of spending (2010/11 - 2014/15)

The Department of Trade and Industry’s expenditure has been increased by an average annual growth rate of 17.7 per cent between the 2010/11 and the 2013/14 financial years. In the 2010/11 financial year, expenditure declined from R5.9 billion in 2009/10 to R5.8 billion. However, expenditure has been on an upward trend since the 2011/12 financial year increasing from R6.8 billion to R8.3 billion in the 2012/13 financial year. In the 2013/14 financial year, expenditure was at R9.4 billion. The Department’s expenditure is forecast to reach R10.9 billion by the 2015/16 financial year.

Table 7 : Audited and estimated expenditure per programme from the 2010/11 to 2015/16 financial years

Programme

(R millions)

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

Audited

Audited

Audited

Main

Adjusted

Audited

Main

Estimates

Administration

480.0

639.4

705.4

690.1

725.9

700.4

706.9

730.7

International Trade and Economic Development

106.9

132.9

132.7

138.6

141.6

139.6

147.2

154.8

Broadening Participation

798.1

887.5

929.7

968.3

1 010.3

999.8

1 005.8

1 060.2

Industrial Development: Policy Development

1 172.6

1 328.7

1 521.1

1 606.5

1 596.7

1 575.6

1 796.8

2 078.5

Consumer and Corporate Regulation

145.0

218.6

223.6

256.2

256.2

256.7

277.3

286.9

Industrial Development: Incentive Administration

2 793.0

3 283.5

4 514.6

5 543.1

5 443.1

5 361.3

5 540.3

6 246.5

Trade and Investment South Africa

301.1

310.4

259.4

369.7

341.7

347.0

360.7

370.1

Total

5 796.7

6 801.0

8 286.4

9 572.6

9 515.6

9 380.3

9 835.0

10 927.7

Source: National Treasury (2013) and (2014c) and DTI (2014b)

For the 2013/14 financial year, the Departmental budget was R9.5 billion; however, the Department’s expenditure fell short of this budget by 1.4 per cent amounting to expenditure of approximately R9.4 billion. At a programme level, there was under spending on all programmes, however, the most significant under spending were in the International Trade and Economic Development Division (4.6 per cent), the Administration Division (3.2 per cent) and the Industrial Development: Incentive Administration Division (1.5 per cent).

Table 8 : Actual versus budgeted expenditure for the 2013/14 financial year

Programme

(R’000)

Revised Budget 2013/14

Expenditure

Variance

Variance

(%)

Administration

724 139

700 370

23 769

3.28

International Trade and Economic Development

146 339

139 566

6 773

4.63%

Broadening Participation

1 006 282

999 833

6 449

0.64%

Industrial Development: Policy Development

1 590 453

1 575 586

14 867

0.93%

Consumer and Corporate Regulation

258 146

256 689

1 457

0.56%

Industrial Development: Incentive Administration

5 440 720

5 361 292

79 428

1.46%

Trade and Investment South Africa

349 501

346 951

2 550

0.73%

Total

9 515 580

9 380 287

135 293

1.42%

Source: DTI (2014b)

4.4.2.1. Expenditure on Administration

There was under spending of R23.7 million in the Administration Division. This was a result of:

· Under-spending on compensation of employees due to 47 posts being vacant out of an establishment of 480. In addition, there were delays in the implementation of re-evaluation of posts.

· Under-spending on goods and services was as a result of ongoing engagements with the Department of Public Works on planned projects for office accommodation. There have also been savings in certain areas as a result of cost-containment measures, for example on air travel.

· Computer equipment that could not be procured as planned pending the filling of vacant posts.

4.4.2.2. International Trade and Economic Development

An under spending of R14.9 million occurred as a result of:

· Under-spending on goods and services due to outstanding foreign mission accounts. There have also been savings in certain areas as a result of cost-containment measures, for example on air travel.

· Under-spending on transfers and subsidies was due to exchange-rate fluctuations on payments to the World Trade Organisation and the Organisation for the Prohibition of Chemical Weapons.

4.4.2.3. Industrial Development: Incentive Administration

· The under-spending occurred largely on business and advisory consultants as well as venues and facilities, catering and travel due to the implementation of cost-containment measures.

· Under-spending of R58.6 million under the MCEP is due to the cancellation of projects. These cancellations were due to clients not being able to secure investments to qualify for MCEP incentives.

· The under-spending of R17 million on payment for capital assets was due to delays in appointing a vendor for the delivery of IEMS.

Table 9 : Economic classification of expenditure for the 2013/14 financial year

Programme

(R’000)

Revised Budget 2013/13

Expenditure

Variance

Variance (%)

Compensation of employees

799 139

789 346

9 793

1.23%

Goods and services

718 808

690 354

28 454

3.96%

Payments for financial assets

1 219

1 164

55

4.51%

Capital assets

39 961

18 655

21 306

53.32%

Transfer payments

7 956 453

7 880 816

75 637

0.95%

Total

9 515 580

9 380 335

135 245

1.42%

Source: DTI (2014b)

4.4.2.4. Reasons for under spending

On compensation of employees was due to 133 posts (9.4 per cent) being vacant out of an establishment of 1 419 posts as well as the delays in the implementation of the re-evaluation of posts resolution.

On goods and services, under spending was as a result of ongoing engagements with the Department of Public Works on planned projects for office accommodation. In addition, there was under-spending on business and advisory consultants as well as venues and facilities, catering and travel due to the implementation of cost-containment measures.

Under-spending of R58.6 million under the MCEP was as a result of the cancellation of projects. These cancellations were due to clients not being able to secure investments to qualify for the MCEP incentives.

Transfers to foreign governments and international organisations were lower than anticipated due to exchange-rate fluctuations on payments to the World Trade Organisation, the Organisation for the Prohibition of Chemical Weapons and the United Nations Industrial Development Organisation (UNIDO).

Funds earmarked for Proudly South Africa were not disbursed as projected.

Payment of bursaries to non-DTI employees was delayed due to the late receipt of invoices.

The under-spending on capital assets was due to computer equipment that could not be procured as planned pending the filling of vacant posts and delays in the appointment of a vendor for the delivery of the integrated electronic management system.

In terms of payments for financial assets, funds projected for payments for financial assets were not fully utilised as planned.

4.4.3. Audit opinion

4.4.3.1. Five year audit trends

Over the 2008/09 and 2012/13 period, the Department has had unqualified audit reports with findings. Observations by the Auditor General in previous financial years included: material losses, issues with performance indicators, compliance with regulation, and irregular expenditure.

For the 2012/13 financial year, the Auditor General noted that the Department’s entities have had a record of good governance and financial management. However; newly-established entities have had a number of challenges with regards to their governance and financial management systems. According to the Auditor General, close monitoring, by the Department, of its entities was necessary.

For the 2012/13 financial year, the Auditor General’s report raised the following issues: material losses, compliance with certain regulations, and irregular expenditure.

4.4.3.2. 2013/14 Financial audit performance

The DTI received an unqualified audit opinion from the Auditor General. [18] . However, the Auditor General noted the following concerns which relate to Regulatory Requirements, in particular Compliance with legislation:

· Expenditure management : “Effective steps were not taken to prevent irregular expenditure, as required by section 38(1)(c)(ii) of the Public Finance Management Act [19] and Treasury Regulation 9.1.1”.

· Leadership : “Leadership did not exercise effective oversight with regard to performance reporting and related internal controls”.

· Financial and performance management : “Management did not prepare, in certain instances, an accurate and complete annual performance report that is supported and evidenced by reliable information. Management did not have adequate preventative and detective controls in place to ensure compliance with laws and regulations relating to supply chain management”. [20]

4.5. Financial performance as at 30 June 2014

The DTI’s budget for the 2014/15 financial year is R9.83 billion, a real decrease of 2.7 per cent from the previous financial year’s budget.

Approximately 56 per cent of the budget will go towards the Incentive Development and Administration Division [21] , 18 per cent to the Industrial Development Division and 10 per cent to the Broadening Participation Division.

Table 10 : 2014/15 First quarter expenditure by programme

Programme

(R’000)

Revised Budget 2014/15

1 st Quarter

Available budget (%)

Cash Flow projections

Expenditure

Variance (%)

Administration

708 246

184 925

142 652

22.9

79.9

International Trade and Economic Development

147 197

33 746

29 091

13.8

80.2

Broadening Participation

1 004 477

273 452

256 921

6.1

74.4

Industrial Development

1 796 824

660 054

627 695

4.9

65.1

Consumer and Corporate Regulation

277 256

138 565

137 468

0.8

50.4

Incentive Development and Administration

5 540 281

1 178 135

669 431

43.2

87.9

Trade and Investment South Africa

360 748

58 483

45 457

22.3

87.4

Total

9 835 029

2 527 360

1 908 715

24.5

80.6

Source: DTI (2014c)

In the first quarter of the 2014/15 financial year, the DTI projected spending of R2.52 billion. However, the DTI’s expenditure fell short of this projection. Expenditure totalled R1.91 billion, 24.5 per cent short of the targeted quarterly expenditure.

At a programme level, there was under-spending on all programmes. An acceptable level of deviation from the budget is an amount up to 10 per cent. However, the Administration, International Trade and Economic Development, Incentive Development and Administration, and Trade and Investment South Africa Divisions had relatively high levels of underspending during the period (see Table 10 ).

It should be noted that expenditure in the first quarter is usually low, this is evident from expenditure reports of previous years. However, this should pick up gradually from the second quarter onwards.

4.5.1. Expenditure by economic classification

In terms of the economic classification, under spending was as a result of 85 percent under spending on capital assets, 25.3 per cent on transfer payments, 34 per cent on goods and services, and 8.5 per cent on compensation of employees.

Table 11 : First quarter (2014/15) Expenditure by economic classification

(R’000)

Revised Budget 2014/15

1 st Quarter

Available budget (%)

Cash Flow projections

Expenditure

Variance (%)

Compensation of employees

916 869

223 088

204 069

8.5

77.7

Goods and services

612 658

163 426

107 879

34.0

82.4

Payments for financial assets

0

0

26

0.0

0.0

Capital assets

30 957

5 433

817

85.0

97.4

Transfer payments

8 274 545

2 135 413

1 595 924

25.3

80.7

Total

9 835 029

2 527 360

1 908 715

24.5

80.6

Source: DTI (2014c)

As noted in the table above, there was unbudgeted expenditure on the payments of financial assets amounting to R26 000 during the quarter.

4.5.1.1. Expenditure on Goods and Services

Within expenditure on goods and services, the largest spending was on the following line items:

· Stationery, printing and office supplies (R58.6 million);

· Travel and subsistence (R17.5 million);

· Consultants and professional services: business and advisory services (R5.3 million);

· Advertising (R3.7 million);

· Communication (R2.5 million);

· External audit cost (R2.4 million); and

· Contractors (R2.1 million).

In terms of goods, inventory and property payments had been under spent. However, there was significant over spending on advertising, consumable supplies, travel and subsistence, and consultants and professional services.

4.5.1.2. Transfer Payments

There was significant under spending in transfer payments by the DTI. Under spending in the first quarter was at 41 per cent amounting to R446.6 million. This was as a result of the following transfers not being made in the quarter:

· Industrial Development Zones (R53.5 million);

· SEZs: Investment Incentives (R130 million);

· ProTechnik Laboratories (R1.1 million);

· Isivande Women's Fund (R2.7 million); and

· South African Women's Entrepreneurs Network (R8.1 million).

In addition, there was significant under spending under the following incentive programmes:

· Manufacturing Competitiveness Enhancement Programme;

· Automotive Production and Development Programme; and

· Critical Infrastructure Programme.

In the 2012/13 financial year (previous year), there had been significant under spending in the same transfer areas.

Despite the large level of under spending in most of the transfers, it is important to note that there was over spending of R42.2 million in the EMIA incentive. However, in terms of the annual budgeted amount for this incentive, this is still within the annual budgeted allocation.

4.5.1.3. Expenditure on unbudgeted items

Payment for financial assets was not budgeted for in the 2014/15 financial year. However, in the first quarter there was an expenditure of R26 000 towards this item. Clothing material and accessories in another item that was not budgeted for in the first quarter, however, a total of R8 000 was spent.

4.6. Issues raised during the deliberations

The following concerns were raised regarding the performance of the DTI during the committee’s deliberations:

Renewable energy and/or regional development : The committee raised the issue with respect to job creation in renewable energy sector and whether government is considering the Eastern Cape and provinces other than Gauteng, KwaZulu-Natal and the Western Cape as possible destinations for future projects in this regard. Furthermore, the committee enquired whether the DTI is considering a SEZ specifically for agro-processing where certain provinces producing primary agricultural products may have a comparative advantage. The Minister informed the committee that a number of projects have been identified for the Eastern Cape and Free State provinces, including bio-fuel projects with the opportunity for the export of bio-ethanol to the EU. With respect to the SEZs, the DTI, together with provinces, is undertaking feasibility studies on the potential of establishing SEZs in the Wild Coast, which may include value-addition to cattle farming, and the platinum sector. There has been consultation around the SEZ for the platinum sector in Harrismith.

Economic impact of the DTI’s work : The committee acknowledged that the DTI is one of the best performing departments in government; however, a view was expressed that its actions had not necessarily translated into economic growth and job creation, given the decline in the manufacturing sector. The Minister acknowledged the decline in economic growth within the manufacturing sector, but disagreed with the assertion that the implementation of the IPAP had not yielded any positive results. He was of the view that progress had been achieved given the current global environment. The IPAP where it has been implemented has made a difference in the most vulnerable industrial subsectors such as the clothing and textile industry and had stabilised the sector and prevented further job losses given its economic reality. In addition, the implementation of a developmental trade policy provides a measure of tariff support for industries. The government’s decision to procure locally in support of local manufacturers, the introduction of incentives through the Manufacturing Competiveness Enhancement Programme, which saw an increase in the competitiveness of South African industries, had made a significant difference. He is further of the view that the decline in the mining sector was a major contributing factor with respect to economic growth. The Minister further implores that the challenges facing the economy must be seen against the background that South Africa has been a mining economy and that the commodity boom has passed.

Addressing constraints to sustained economic growth : The committee was of the view that a coordinated approach among all major stakeholders is critical to identify and address the constraints to sustained economic growth. The Minister agreed that a social dialogue is critical and emphasised that NEDLAC is the appropriate forum. The DTI is continuously engaging its social and economic partners to find consensus on key economic issues such as localisation, competitiveness and beneficiation.

The committee raised concerns around high administered prices, the security of the electricity and water supply and its impact on the manufacturing sector. The Minister acknowledged that high administered prices remains a challenge, especially for the manufacturing sector, and indicated to the committee that the DTI is having discussions with the National Port Regulator about port charges for manufactured goods, and hoped to address the matter through Operation Phakisa. The nuclear intergovernmental relations agreement is expected to contribute to the country’s energy supply security.

South African investors abroad : The committee was of the view that South Africa is still one of the most viable economies on the African economy which still attracts foreign direct investment. The committee enquired how the DTI was ensuring that business benefited from NEPAD projects, the impact of the rise of extremism on South Africa’s trade agreements and whether the DTI has measures in place to protect South African business globally. The Minister informed the committee that the “Code of Business Conduct for South African Companies Operating Abroad” needs to be finalised to ensure ethical business conduct on the part of South African businesses as this influences the reputation of “Brand South Africa”.

Youth enterprise development : The committee enquired about the status of the YEDS. The Minister informed the committee that the YEDS would migrate to the newly created Small Business Development Department. However, the Youth Accord requires that the DTI designates 80 per cent of jobs in the business process services sector to youth.

Development of black industrialists : The failure of black industrialist to emergence remains a major concern for the committee. The committee enquired whether the incentive programme to promote broadening participation in the mainstream economy of businesses owned by the previously disadvantaged communities has been effective and whether there is sufficient funding in the outer years to support the emergence of black industrialists. The DTI informed the committee that the bulk of incentives were paid to established companies. This did not reflect the economic reality of the need to promote the creation of black industrialists and direct incentives are required to address the emergence of black industrialists. It is important that incentives are not used to purchase imported goods but benefit local producers.

5. Financial and non-financial performance of identified entities

5.1. National Consumer Commission

The National Consumer Commission (NCC) was established by the Consumer Protection Act (CPA) (No. 68 of 2008) and became operational on 1 April 2011. The NCC’s core mandate is to assist in protecting consumer rights by increasing consumer awareness of what these rights are; investigating prohibited conduct by business; and enforcing compliance with the provisions of CPA.

This core mandate falls within the Department of Trade and Industry’s strategic objective to “create a fair regulatory environment that enables investment, trade and enterprise development in an equitable and socially responsible manner”. The NCC, therefore, has a critical role to play in empowering rural and low income consumers, who are often most affected by unfair business practices and least able to address these challenges.

According to the Act, the NCC’s functions include the:

· Development of codes of good practice relating to the provisions of the Act.

· Promotion of legislative reform through consultation with provincial consumer protection authorities, national organs of state, consumer protection groups, alternative dispute resolution agents and suppliers.

· Promotion of consumer protection within organs of state.

· Enforcement of the Act including the investigation and evaluation of any prohibited conduct and offences, issuing and enforcing compliance notices.

· Research to increase knowledge of the nature and dynamics of the consumer market.

· Promotion of public awareness of consumer protection matters.

· Liaison with other regulatory authorities on matters of common interest.

· Provision of advice and recommendations to the Minister.

The NCC’s strategic objectives are to (i) promote compliance with the Consumer Protection Act; and (ii) be a well-governed and capacitated organisation.

The NCC consists of 6 divisions, namely:

· The Office of the Commissioner

· Corporate Services : responsible for financial, supply chain, human resources, IT and records management.

· Enforcement and Investigations : responsible for the enforcement of the Consumer Protection Act through the facilitation of complaints handling and conducting investigations.

· Legal Services : responsible for the enforcement of the Consumer Protection Act through (i) applications to the National Consumer Tribunal for declaration of conduct as prohibited; (ii) the provision of legal opinions and advice to consumers, suppliers and other divisions of the NCC; and (iii) various projects related to the Opt-Out Register, the establishment of Codes of Good Practice, accreditation of Industry Codes and enforcing product labelling requirements.

· Advocacy, Education and Awareness : responsible for consumer advocacy, education and awareness and managing stakeholder relationships. It also profiles the NCC as a brand for consumer protection in South Africa.

· Research Analysis and Knowledge Management

5.1.1. Financial and non-financial performance as at end of March 2014

5.1.1.1. Non-financial performance

Seven of the 12 output areas were achieved. The five output areas not achieved were [22] :

· The percentage of complaints resolved on an average of 80 days. On average, complaints were resolved within 297 days due to large backlog of complaints from the 2012/13 financial year before the NCC changed its approach to complaints handling.

· The resolution of the backlog, 92 per cent of the initial 6 045 complaints were resolved. Non-referral letters were drafted for the outstanding complaints but had been undergoing quality control by the end of March 2014.

· Only one of the two targeted industry codes had been recommended to the Minister. The NCC was dependent on industries to approach it in this regard but will proactively identify and engage with industries to develop such codes.

· The development of the code of good practice for the return of vehicles within the motor industry had not been finalised by year end. This was dependent on the accreditation of the Motor Industry Code by the Executive Authority.

· A high level ICT (information and communication technology) strategy had not been developed due to insufficient internal capacity.

Furthermore, the NCC had adjusted some of its targets during this financial period. Targets concerning complaints handling had been adjusted upward due to improved efficiencies. Some targets related to investigations were adjusted downward to focus on investigations of trends rather than individual complaints and to accommodate capacity and financial constraints. The target to develop and implement a policy for the accreditation of consumer protection groups was deleted due to financial constraints. It was also noted that consumer protection groups required funding from the NCC, which it was unable to provide. [23]

In the 2013/14 financial year, the Auditor-General focused on the first strategic objective in terms of its usefulness and reliability. No material findings were found. However, material misstatements were found, which had been corrected.

5.1.1.2. Financial performance

The NCC received a transfer of R45.5 million from the DTI, a 5.8 per cent decrease from the 2012/13 financial year. It also received other income of R0.37 million in interest. The NCC spent R44.9 million, leaving a surplus of R0.95 million or 2.1 per cent of total revenue, which is within the accepted range of 5 per cent of revenue. [24]

Employee related costs amounted to R28 million or 62.4 per cent of total expenditure. Employee related costs increased by 22 per cent since the 2012/13 financial year.

Since its inception, the NCC had failed to provide a detailed breakdown of its operating expenditure, lumping many sub-categories within broader categories of administration and other operating costs. However, in the 2013/14 financial year, operating expenditure had a detailed breakdown under Note 18 of the financial statements. Operating expenses declined by R5.3 million or 26.1 per cent to meet the National Treasury’s call for the implementation of cost-cutting measures.

The NCC still had fruitless and wasteful expenditure of R3.6 million, mainly from that carried over since the 2012/13 financial year (R3.58 million). Irregular expenditure had been reduced from R14.9 million in the 2012/13 financial year to R6.9 million in the 2013/14 financial year. The causes of the irregular expenditure was mainly due to non-compliance with Treasury Regulations related to procurement and supply chain management. Although irregular and fruitless and wasteful expenditures remain high, these have significantly improvement from the 2012/13 financial year.

5.1.1.2.1. Auditor-General’s Report

The NCC received an unqualified audit opinion with findings. Table 12 provides an overview of the audit opinions over the last two financial years, as well as the findings the Auditor-General made in relation to the NCC’s financial statements.

Table 12 : Audit opinions and key findings for the 2012/13 to 2013/14 financial years

Year

Auditor-General’s opinion

Emphasis of matters

2012/13

Qualified 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.

• Operating expenditure for the prior year was incorrectly allocated to the 2012/13 financial year.

• Significant uncertainties linked to disclosed contingent liabilities for a lawsuit and a claim for cancelling contracts and the retention of R2.8 million without Treasury approval.

• The restatement of corresponding figures.

• Material impairments as a result of long outstanding receivables.

2013/14

Unqualified with findings

• Significant uncertainties linked to various lawsuits amounting to R2.3 million and a disclosed contingent liabilities of R5.2 million due to the retention of funds without Treasury approval.

• The restatement of corresponding figures in the 2012/13 financial year due to an error being discovered during the 2013/14 financial year.

Source: NCC (2013b) and (2014a)

Compliance with laws and regulations

Furthermore, the Auditor-General found non-compliance in terms of the following during the 2013/14 financial year:

· Accumulation of surpluses without National Treasury approval.

· Financial statements submitted for auditing was not in accordance with the prescribed financial reporting framework.

· Material misstatements of property, plant and equipment, as well as the provision for leave pay.

· The preference point system was not applied in all procurement of goods and services above R30 000.

· The accounting authority did not take effective steps to prevent irregular and fruitless and wasteful expenditure.

Internal control

The Auditor-General found that:

· The accounting officer had not exercised sufficient oversight over financial reporting and compliance with laws and regulations and related controls.

· Management had not implemented proper record keeping to ensure complete, relevant and accurate information that was accessible and available to support the procurement of goods and services.

5.1.2. Human resources

The NCC approved its new structure during the 2013/14 financial year. The structure has 182 approved posts, of which 72 (39.6 percent of all available posts) were filled at the end of March 2014. The highest vacancy rate was within the Enforcement and Investigations Programme (62 per cent). [25] As most of the vacant positions are not funded and increases in the budget over the 2014/15-2016/17 period will not be adequate to fund all the vacancies, the NCC has decided to revisit the structure and identify the critical posts. Other approved posts that are not critical may be abandoned.

Staff appointed outside of the approved structure had been incorporated into the structure based on a skills audit.

On 31 March 2014, the demographics of the staff complement is 100 per cent black employees, mainly African employees and two Indian males. In terms of top and senior management, 31.3 per cent of managers were female. The NCC also employed two persons with disabilities (2.8 per cent of the staff complement).

Although there had been no training budget allocated for the 2013/14 financial year, the NCC had held in-house training by experts within the NCC on the Consumer Protection Act to close its skills gap.

5.1.3. Financial and non-financial performance as at end of June 2014

5.1.3.1. Non-financial performance

The NCC reported that it had fully achieved 15 of its 20 first quarter targets. It highlighted a number of quarterly achievements, including [26] :

· Conducting four targeted inspections on 65 retailers within nine municipalities in two Provinces. These inspections focused on whether the following areas were aligned to the Act: returns, refunds, labelling and expired goods. The NCC found altered and falsified labelling as well as no labelling of ingredients and the name of the producer on certain foodstuffs. The NCC will conduct follow-up inspections to ensure that there is adherence to consent agreements.

· Recalling several products during the quarter for safety reasons. Some of these recalls have been due to proactive monitoring of products on global markets.

· Improving the NCC’s visibility and awareness of consumer protection matters. This has included exposure in three newspapers (City Press, Beeld and Times Media), on community and national radio stations (such as Palaborwa Radio Station, Phalaphala FM, Northwest Radio Station and SA FM) and on television (including ENCA TV, SABC Newsroom and ANN7).

The five quarterly targets that were not fully achieved were:

· The proportion of complaints analysed within eight working days of receipt : Only 76 per cent of registered complaints were analysed or assessed within 2 working days compared to the target of 95 per cent. The remaining complaints had been analysed by the end of July 2014. The NCC would endeavour to implement standard assessment criteria for different categories of complaints to improve the understanding of assessments by staff.

· The proportion of complaints resolved within 60 working days of receipt : the NCC had resolved 51 per cent of registered complaints within ten working days compared to the target of 70 per cent. The NCC explained that the delays in resolving the other complaints was mainly due to email system failure following power outages. It should be noted that the targeted time period had been lowered from 80 days to 60 working days within which complaints should be resolved in as listed in its Annual Performance Plan. However, this difference may be attributable to the non-working days in the 80 day period.

· The number of research reports completed and signed off by the executive committee : The NCC had planned to have identified a research project and have the proposal signed off by the executive committee during the first quarter. The research proposal had been submitted to the Deputy Commissioner but had not been submitted to the executive committee at the time.

· Up to date risk register and risk strategy : The NCC had planned to review its risk register and implementation strategy, present the review to the executive committee and have it approved by the Commissioner by the end of June 2014. The risk register had been reviewed and the risk assessments were done. However, the implementation strategy had not been reviewed in the first quarter. This has been finalised during the second quarter. It should be noted that there is no record of this target within the NCC’s 2014/15 Annual Performance Plan.

· Proportion of positions filled : The NCC had advertised 28 positions in the latter part of the 2013/14 financial year. The shortlisting and interviews had been finalised for 22 posts with 20 of these positions being filled. At the end of June 2014, two offers were pending and the remaining 6 positions would be finalised in the next quarter.

Furthermore, the NCC highlighted a number of challenges to it achieving its mandate, namely:

· A 60.4 per cent vacancy rate at the end of June 2014, while only 45.1 per cent of its approved positions were funded. Hence only 10 of the vacant positions could be financed. It would be undertaking a formal restructuring to potentially abandon some of these unfunded, vacant positions.

· Major skills shortages within the NCC and an inability to initiate a proper skills upgrade programme due to insufficient funding. In the interim, the NCC is providing internal training to staff.

· Occasional backlogs requiring employees within the Enforcement Division to work overtime.

· The existence of irregular expenditure arising from the lease of its premises being procured in an irregular manner. The cost of cancellation and possible relocation make it unfeasible for this to be rectified in the short term; however, the lease contract will expire within the next two years.

5.1.3.2. Financial performance

The NCC has been allocated R53.4 million for the 2014/15 financial year, a 20 per cent increase from the previous financial year, which is in line with the committee’s recommendation made within its previous BRRR. As at 30 June 2014, the NCC had received 60 per cent of its grant revenue from the DTI and interest income of R290 719. It had also spent 21.4 per cent of its annual budgeted expenditure. The NCC reported that its under spending of operating expenses is related to disputed telephone accounts and lower audit costs than in previous years.

It should be noted that the annual planned expenditure may be too low given the need for the NCC to decrease its vacancy rate, as its work is dependent on skilled labour.

Table 13 : Budgeted versus actual revenue and expenditure as at end June 2014

Annual budget

Actual 1 st Quarter

Available budget (%)

Revenue

Grant revenue from the DTI

53 376 000

32 026 000

40.0

Other income

0

290 719

n/a

Total revenue

53 376 000

32 316 719

39.5

Expenditure

Employee related costs

32 338 000

7 919 728

75.5

Amortisation and depreciation

745 000

436 360

41.4

Operating expenditure

21 038 000

3 088 073

85.3

Total expenditure

53 376 000

11 444 161

78.6

Surplus/(deficit)

0

20 872 558

n/a

Source: NCC (2014b) and (2014c) and the National Treasury (2014c)

5.1.4. Key issues raised by the committee

The following concerns were raised related to the performance of the NCC during the committee’s deliberations:

Insufficient resources : Although the committee welcomed progress made by the NCC, especially in terms of improving its governance and implementing the required systems, it was concerned about the NCC’s ability to achieve its broad mandate given the high vacancy rate, inadequate skills of existing staff and inadequate funding. It inquired what the appropriate level of resources would be so that the NCC is able to protect consumers. The Minister initially approved a structure of 132 persons. However, the former Commissioner had appointed an additional 38 employees that fell outside the approved structure. The Minister advised the NCC in September 2012 to absorb these employees by increasing the structure of the NCC for the sake of stability. A number of these were employed within the contact centre. The NCC’s new approved structure consists of 182 posts due to the situation it was facing at that time. The NCC will be engaging in a restructuring process to align its posts with its new strategy and the needs of the organisation.

Skills audit : The committee required clarity on the status of the skills audit.

Backlogs : The committee was concerned about the backlogs in the NCC given the high number of unfunded posts and the skills levels. The NCC explained that backlogs were due to the lack of human capacity to deal in combination with an influx of the complaints and its initial approach to deal with individual complaints rather than referring these to the appropriate industry bodies where they exist. The NCC has changed its strategy to collaborate and co-operate with industry. Conciliations will now be done by industries once industry codes are accredited.

Fruitless and wasteful expenditure : The committee inquired whether the NCC was able to recover this expenditure, particularly the professional legal fees paid on behalf of the former Commissioner. Furthermore, the committee sought clarity on the circumstances surrounding the interest and penalty paid to the South African Revenue Service. With reference to recovering the legal fees of personal nature, the NCC had instructed attorneys to recover funds that appeared to be recoverable. The SARS incident was an isolated case. SARS should be paid monthly and in this instance, sign-off by the former Commissioner was not received on time and the payment was late that month.

Criminal liability in relation to irregular expenditure : The committee sought clarity on the status of disciplinary action taken against officials in relation to irregular expenditure incurred or permitted under the former Commissioner and whether there are cases for criminal prosecution. In addition if any recovery processes have been initiated. App roximately 10 employees had recently been charged on omissions or commissions while serving on bid committees that had led to irregular expenditure in terms of the lease of the NCC’s premises. With regards to criminal liability, criminal complaints were being lodged with the police and the prosecution would depend on the National Prosecuting Authority.

Audit action plans : The committee sought clarity on the status of the 18 action plans that were in progress.

5.2. National Credit Regulator

The National Credit Regulator (NCR) is an entity of the Department of Trade and Industry which is aligned to two of the Department’s strategic objectives of:

· Facilitating broad-based economic participation. In this regard the NCR is tasked with promoting increased access to credit through responsible credit granting and continually enhancing a consumer credit market regulatory framework.

· Creating a fair regulatory environment that enables investment, trade and enterprise development in an equitable and socially responsible manner. In this respect the NCR is responsible for protecting consumers from abuse and unfair practices in the consumer credit market and address over-indebtedness.

The NCR’s mandate of promoting increased access to credit through responsible credit granting and continually enhancing a consumer credit market regulatory framework and protecting consumers from abuse and unfair practices in the consumer credit market and address over-indebtedness is implemented through the following activities: [27]

· Registering of credit providers, credit bureaus and debt counsellors and monitoring the compliance of these entities with the National Credit Act (No. 34 of 2005).

· Education of consumers and promotion of public awareness on the protection afforded by legislation and the role of the NCR.

· Receive and investigate consumer complaints.

· Enforce the Act and take action against parties that contravene it.

· Research on trends in the consumer credit market.

· Monitor access to credit to identify factors that might undermine access, competitiveness and consumer rights.

· Advise government on policy and legislation in relation to the consumer credit market and industry.

The NCR’s work is presented in the entity’s four strategic objectives. These are:

· The promotion of increased access to credit through responsible credit granting;

· The protection of consumers from abuse and unfair practices in the consumer credit market and address over-indebtedness;

· The continuous enhancing a consumer credit market regulatory framework; and

· Monitoring and improving NCR’s effectiveness in fulfilling its mandate.


Figure 2 : Budget per Strategic Programme: 2013/14 Financial Year

Source: NCR (2014a)

5.2.1. NCR’s 2013/14 non-financial performance

The table below describes the NCR’s performance against its planned targets per strategic objective. The performance side of the table shows the NCR’s performance as per the Annual Report 2013/14.

Table 14 : Key interventions and performance for the NCC

Strategic Objectives

Key Interventions

Performance

Promoting increased access to credit through responsible credit granting.

Report on implementation of recommendations

Achieved

Final functional specification document of the NRCA database Management system produced.

Achieved

Establishment of NCRA Steering Committee.

Develop proposal on affordability assessment guidelines

Achieved

Protecting consumers from abuse and unfair practices in the consumer credit market and address over-indebtedness

Consumer rights awareness strategy: Produce a report on Implementation of the strategy.

Achieved

Enforcement Strategy: Produce a report on implementation of the strategy.

Achieved

Stakeholder strategy: Produce a report on implementation of the strategy

Achieved

Continually enhancing a consumer credit market regulatory framework

2 credit bureau investigations conducted. Enforcement action taken in terms of section 43, 70, 71, 72 and regulations 17 to 20 of the Act.

Achieved

On-site guidelines to be approved and 12 on site visits to be conducted.

Monitoring and improving NCR’s effectiveness in fulfilling its mandate

50% positive response rate.

Achieved

Functional Complaints ICT

Achieved

Go live registrations sub system.

Not achieved: Registrations sub system did not go live as planned

Source: NCR (2014a)

5.2.1.1. Registration

The total number of entities registered with the NCR as at 31 March 2014 were 5 724 credit providers with 45 508 branches; 13 credit bureaus; and 2 105 debt counsellors.

5.2.1.2. Compliance monitoring

Credit providers registered with the NCR are required to submit standardised compliance reports and assurance engagement reports on an annual basis. These reports provide the NCR with an indication of whether or not the credit providers comply with the Act. During the 2013/14 financial year, a total of 14 onsite visits were conducted.

5.2.1.3. Consumer Education and Communication

During 2013/14, the NCR addressed 316 workshops organised in partnership with non-governmental organisations, trade unions, employers, traditional authorities, government departments and organisations in the credit industry.

5.2.1.4. Investigations and Enforcement

A total of 153 investigations were approved during the year. The priority investigation issues were:

· reckless lending;

· affordability assessments;

· proper disclosure (pre-agreements and contracts);

· unlawful retention of bank cards, identity documents and pin codes;

· excessive fees and interest;

· conduct of debt counsellors; and

· credit bureaus’ compliance.

5.2.1.5. Debt Counselling

During the 2013/14 financial year, a total of 468 proactive and reactive compliance monitoring visits were conducted on debt counsellors nationally.

5.2.2. Financial performance

The NCR’s spending patterns for the 2013/14 financial year show that the NCR has underspent in all of its programmes. The underspending has been as much as 15 per cent in each of the programmes. The graph below shows spending per programme for the period under review.


Figure 3 : Spending per programme: 2013/14 Financial Year

Source: NCR (2014a)

5.2.2.1. Auditor General’s Report

The NCR received an unqualified audit for the 2013/14 financial year. However, the Auditor General put emphasis on a matter pertaining to a material impairment of R9.7 million which was incurred as a result of a change in accounting estimates for provision for bad debts. Furthermore, the Auditor General raised concerns with the entity’s design and implementation of formal controls over the IT systems and the evaluation and protection of information.

5.2.3. Human Resources

The NCR had employed a total of 135 people as at the end of the 2013/14 financial year.

The demographics of the staff complement was 95 per cent black employees. Female employees accounted for 67 per cent of total employees while people with disabilities accounted for 1.4 per cent.

Table 15 : Employment statistics as at end March 2014

Filled posts

135

Fixed contract

6

Learners

20

Black employees (% of total employees)

95.0

Female Employees (% of total employees)

67.0

Employees with disabilities (% of total employees)

1.4

Source: NCR (2014a)

5.2.4. Financial and non-financial performance as at end of June 2014

5.2.4.1. Non-financial performance

For the 2014/15 financial year the NCR has revised its Annual Performance Plan. The new APP accounts for a total of 13 targets. Of the 13 targets, 11 were planned to be achieved from the first quarter of the year. During the first quarter, all 11 targets were met and 4 were exceeded. The NCR highlighted the following achievements [28] :

· Implementation of a new strategy to combat unlawful advertisements. As a result of this strategy, the number of compliance notices issues for the quarter was exceeded.

· The regulations became effective from 1 April 2014 hence the target for workshops held was exceeded.

· The removal of credit information was a topical issue that resulted in the target for interviews and news coverage of the NCR to be exceeded.

5.2.4.2. Financial performance

There are two main sources of NCR’s incomes, funding from the Department and registration fees. In the first quarter, funding from the Department accounted for 83 percent of the NCR’s income and represents 67 percent of the expected annual transfer from the Department. While registration income accounted for 15 per cent of total income.

Personnel costs, premises and equipment, and Consumer education are the biggest cost items on the NCR’s expenditure.

By the end of the first quarter of 2014/15 financial year, the NCR spent 71.4 per cent of the projected expenditure for the first quarter. The NCR also received R1.3 million more income than the expected income, translating to 2.8 per cent more income for the same period. The following reasons were provided for this variance:

Income:

· Income from registration fees was 17 per cent higher than expected

· The NCR received unexpected income amounting to R370 1720 from the National Loans Register and other income from insurance claim, billboard advertising, and Bankseta amounting to R142 604.

Expenditure:

· Capital expenditure was 92 per cent less than the budgeted amount.

· There was also underspending on professional fees and debt relief costs.

Table 16 : Budgeted versus actual revenue and expenditure as at end June 2014

R’000

1 st Quarter budget

1 st Quarter actual

Variance (%)

Income

Fees from registration

5 654 112

6 659 620

17.8%

DTI Transfers

38 307 066

38 307 000

0.0%

Fees from National Loans Register

-

370 172

100%

Other income

-

142 604

100%

Interest received

669 000

413 010

-38.3%

Total income

44 630 178

45 892 406

2.8%

Expenditure

Personnel Costs

15 877 986

16 610 454

4.6%

Premises and Equipment

1 356 075

2 132 949

57.3%

Communication

331 489

392 595

18.4%

Information Technology

547 875

561 177

2.4%

Professional Fees

1 004 000

868 636

-13.5%

Consumer Education

1 524 384

1 351 368

-11.3%

Stakeholder Communication

412 894

309 182

-25.1%

Debt Relief

239 737

93 307

-61.1%

General expenses

1 011 196

1 124 854

11.2%

Total expenditure

22 305 636

23 444 522

5.1%

Capital expenditure

Total Assets

3 971 263

855 988

-78.4%

Projects

7 721 454

0

-100.0%

Capital expenditure

11 692 717

855 988

-92.7%

Source: NCR (2014b)

However, expenditure on premises and equipment was 57 percent more than the budgeted amount for the quarter at R2.1 million while the budgeted amount was R1.3 million. This variance is said to be due to depreciation of assets which was not budget for.

Additional funding request:

The NCR informed the committee that it required an additional R15.7 million for the 2014/15 financial year. In order to make up this shortfall, the NCR has suspended its ICT project (R7 million), instituted budget efficiencies of R4 million and has reduced spending on professional fees by R4.7 million. The budget efficiencies is partially possible as the NCR has taken a decision to consolidate bi-annual impact assessment studies on the NCR’s effectiveness to one assessment. Apart from the current operational expenses, the NCR’s mandate will expand once the National Credit Amendment Act (No. of 2014) becomes enforceable and additional funding is required to exercise these new responsibilities. [29]

5.2.5. Key issues raised by the committee

The following concerns were raised related to the performance of the NCR during the committee’s deliberations:

Absenteeism of members serving on the board and on the audit and risk committee : The committee noted with concern the rate of absenteeism of members serving on the Board, and the audit and risk committee and requested that the NCR provide clarity in this regard. The NCR informed the committee that it had raised the issue of absenteeism with the DTI who is represented on the board. The amendments to the National Credit Act changed the NCR’s governance structure to only consist of an audit committee and not a full board. As a result of this amendment, the board members were informed that their term of office had expired. The powers that were previously vested with the board have been devolved in terms of section 49 of the PFMA and now reside with the Chief Executive Officer.

Site visits: The committee raised a concern that the target for the number of site visits planned had been set too low. The NCR informed the committee that site visits are one of the tools it utilised when monitoring credit providers’ compliance with the Act. The NCR also relied on accounting officers or auditors who are required to submit and report on any contravention of the National Credit Act annually in the course of an audit, as well as on complaints received from consumers.

Cost of credit : The committee enquired when the exercise on the reduction of the cost of credit to consumers would be completed. The NCR informed the committee that as a result of the need to comply with the supply chain management processes as stipulated in the PFMA, the process was delayed but that a service provider had been appointed. The NCR informed the committee that the NCR should be able to submit its first report on the matter by the end of the 2014/15 financial year.

Issuing of compliance notices: The committee was concerned that only six compliance notices were issued during the 2013/14 financial year.

Research recommendations: The NCR informed the committee that it had completed its implementation plan with respect to the research recommendations from its stakeholder assessment surveys. The committee enquired where it can access this. The NCR responded that the research recommendations are available on the NCR’s website.

Nature of complaints: The committee enquired into the nature of complaints received by the NCR. The NCR informed the committee that most of the complaints relate to the overcharging of interest and fees as well as additional fees which are not allowed in terms of the Act. The NCR informed the committee that they referred matters to the National Consumer Tribunal where consumers are charged service fees which are not allowed in terms of the Act. There are only three costs allowed in term of the Act, which are interest, initiation costs, and monthly service charges.

Internal control matters: The committee enquired about the audit action plans to address the findings related to internal controls. The NCR informed the committee that the necessary action plans have been implemented to address shortcomings highlighted by the Auditor General. These action plans are also monitored by the DTI on a quarterly basis.

Professional fees: The committee enquired to what constitutes professional fees as reflected in the first quarterly financial report. The NCR informed the committee that between 80 and 90 per cent consist of legal fees as the NCR is a regulator. The NCR requires the services of attorneys to represent it during hearings with the NCT.

5.3. Companies and Intellectual Property Commission

The Companies and Intellectual Property Commission (CIPC) was established through the merging of the Companies and Intellectual Property Registration Office (CIPRO) and the Office of Companies and Intellectual Property Enforcement (OCIPE). The Companies and Intellectual Property Commission (CIPC) was established by the Companies Act (No. 71 of 2008) and became operational on 1 May 2011. The mandate of CIPC is to mainly administer the country’s legislation relating to the regulation of corporate and intellectual property through registering businesses, intellectual property rights and cooperatives; promoting compliance and enforcement of the Companies Act; and promoting education and awareness on matters of company and intellectual property laws. [30]

The Companies and Intellectual Property Commission’s (CIPC) strategic objectives are: [31]

· To encourage the formalisation of South African businesses and their identity.

· Encourage the maintenance of high standards of corporate governance, transparency and brand protection.

· To promote the protection and commercial exploitation of innovations in key sectors.

· To protect our cultural heritage and support a strong competitive South African creative industry that provides benefit to local artists.

· To provide easy access to credible, reliable and relevant information and advice and secure, value-added services.

· Build an enabling and intelligent work environment anchored in a governed and sustainable organisation.

· To improve the reputation and organisational performance of CIPC.

5.3.1. Issues raised in the Budget Review and Recommendations Report (2012/13)

· Call centre management : the Portfolio Committee noted its concerns regarding number of calls not being answered by the CIPC and the low target set by the CIPC in this regard. This was a recurring as the issue of accessibility of the CIPC through their call centre, website and other media had been raised before.

· Performance : the Committee suggested that the number of calls received and answered be measured and become part job description, and will be measured against performance to ensure that staff attends to calls to ensure that people take responsibility for calls. The Swedish model that was to be roll-out is based on implemented a switch board system which will have people with knowledge of the CIPC answering the phone instead of a call centre model.

5.3.2. Performance information: 2013/14 financial year

5.3.2.1. Non-financial performance

For the financial year 2013/14, CIPC reported on a total of twelve (12) indicators and targets are in alignment with those stated in the 2012/13 Annual Performance Plan. Of the 12 performance indicators, 8 targets were achieved or exceeded and while four (4) were not fully achieved.

The performance indicators which were not achieved were the:

· Percentage of companies that have complied with the filing of annual returns as prescribed.

· Percentage of investigations completed within the published service standard.

· Percentage of copyright in film applications allocated an official application number within the published service standard.

· Percentage of calls answered during the reporting period.

Of the achieved targets, it is noteworthy that the set targets are low. Especially since those targets were exceeded in the previous financial year.

The CIPC revised its strategic plan during the financial year. This was a result of the Auditor General’s 2012/13 findings on the performance information of the entity. The Strategic Plan (2013/2014 – 2016/2017) and the Annual Performance Plan (2013/14) were then tabled as the revised plans. The APP and BP were revived to ensure that the entity’s performance information meet the SMART [32] criteria and to ensure that performance information is reliable, verifiable, well defined, relevant, cost effective and appropriate. The revision was approved by the Minister and incorporated into the 2013/14 performance (See page 28 – page 30 of the Annual Report).

5.3.2.2. Human Resources Performance

The CIPC’s key employment statistics are reflected in the table below:

Table 17 : Employment statistics as at end March 2014

Total posts

640

Total Employment

450

Number of vacant posts

190

Vacancy rate (% of total available posts)

29.7

Black employees (% of total employees)

84.4

Female Employees (% of total employees)

60.9

Employees with disabilities (% of total employees)

1.6

Source: CIPC (2014a)

The CIPC restructured its organisation at the end of June 2013 and its new approved posts total 640. By the end of the 2013/14 financial year, 450 people were employed, and 190 posts were vacant. This results in a vacancy rate of 29.7 per cent. This rate is high given that the CIPC is a service delivery entity and its main resources are its employees.

The demographics of the staff complement is 380 black employees. Female employees accounted for 60.9 per cent of total employees while people with disabilities accounted for 1.6 per cent, lower than the target of 2 per cent.

5.3.2.3. Financial performance

For the 2013/14 financial year, CIPC’s revenue amounted to R455 million, showing a 14.6 percent increase from the 2012/13. Revenue from exchange transactions [33] contributed 47 percent to total revenue, while revenue from non-exchange transactions [34] accounted for 53 percent. Revenue from exchange transactions had been increasing by 9.4 percent and revenue from non-exchange transactions increased by 20.2 percent in the 2013/14 financial year when compared to the 2012/13 financial year. [35]

In terms of expenditure, the CIPC spent R309 million, an increase of 7.3 per cent from the previous financial year. Employee costs amounted to R186.8 million and 60 percent of total expenditure, followed by consulting and professional fees at R34.3 million and operating leases for property at R24 million.

In the last financial year’s engagement with the CIPC, it was noted by the entity that it was intending to invest in improving its ICT systems. In this regard, CIPC indicated that it will be investing R30 million in the 2013/14 financial year. For the current financial year, CIPC has spent a total of R21.4 million on computer hardware (R17 million) and on computer software (R4.3 million).

5.3.2.4. Auditor General’s report

The Auditor General’s opinion was unqualified with emphasis of matters, however, raised concerns in the area of leadership, financial performance and management, and governance.

In terms of leadership, the areas of concern are:

· The oversight responsibility regarding financial and performance reporting and compliance and related internal controls.

· The establishment and communication of policies and procedures to enable and support understanding and execution of internal control objectives, processes, and responsibilities.

· Developing and monitoring of the implementation of action plans to address internal control deficiencies.

In terms of financial performance and management, the area of concern is the implementation of proper record keeping in a timely manner to ensure that complete, relevant, and accurate information is accessible and available to support financial and performance reporting.

This concern is articulated in the Auditor General’s report which is on page 55 of the Annual Report where the Auditor General notes that he was unable to obtain the necessary information to verify the reliability of reported performance information.

On page 56, the Auditor General notes that “…management did not data validation processes and implement corrective action in order to ensure that performance information is supported by reliable reports. Furthermore, management did not have sufficient controls to ensure that source documentation supporting actual achievements was available”.

Furthermore, the Auditor General noted that the CIPC’s management did not take effective steps to timeously monitor compliance with applicable laws and regulations to prevent irregular expenditure.

In terms of governance , the areas of concern are the design and implementation of formal controls over IT systems to ensure the reliability of the systems and the availability, accuracy and protection of information.

5.3.3. Financial and non-financial performance as at end of June 2014

5.3.3.1. Non-financial performance

The CIPC’s revised Annual Performance Plan identifies 23 targets for the 2014/15 financial year. During the first quarter, 78.3 per cent or 18 of the targets were met. The CIPC highlighted the following achievements [36] :

· Growth in the proportion of online transactions for company registrations, director changes, trademarks, patents, designs and copyright in film applications. New systems have been introduced to facilitate online transactions. These increased transactions include those via First National Bank and the elf-service terminals.

· 1 211 business rescue notices had been filed since May 2011. For the first quarter of the 2014/15 financial year, 84 notices were filed. Only 447 businesses (36.9 per cent of total number of notices) have ended their business rescue proceedings, of which 169 businesses (37.8 per cent of ended business rescue proceedings) had substantially implemented their business rescue plan over the previous three financial years leading to their financial rehabilitation.

The CIPC provided the following explanations for underperformance [37] :

· Percentage of companies registered manually within 25 working days: The CIPC underperformed by 2 percentage points. The delays were due to the implementation of the e-mail indexing solution.

· Percentage of cooperatives registered manually within 21 working days: The CIPC underperformed by 2 percentage points. This was due to system down times.

· Percentage of online design applications: The CIPC underperformed by 2 percentage points. The big firms, namely Spoor and Fisher and Adams & Adams, have not been utilising the electronic system.

· Percentage of calls answered that come through the call centre number during the reporting period: The CIPC targeted that 60 per cent of calls would be answered; however, only 21 per cent were answered during the first quarter. The low answer rate was due to staff adjustment challenges and the need to balance answering calls and ensuring normal production.

· Number of self-service terminals installed and operational: twelve of the 13 planned terminals were operational, although the CIPC had installed 13 terminals. The thirteenth terminal had been installed at Maponya Mall in Soweto in partnership with the National Youth Development Agency. However, the Department of Home Affairs was reluctant to provide access to its biometric fingerprint database, which is essential for the terminal to work. The National Youth Development Agency is responsible for acquiring this authorisation for the terminal to be activated.

The CIPC intends to implement a query resolution strategy to improve its service to business. This should address:

· The capacity of call takers to resolve queries in terms of their skills and workloads.

· The ICT and telephony challenges.

Furthermore, a dedicated office is planned at the Johannesburg Stock Exchange for listed companies and their subsidiaries, which is expected to be operational in November 2014. A dedicated e-mail service is currently available for these companies for their share capital changes, name changes and other Memorandum of Incorporation amendments.

5.3.3.2. Financial performance

The CIPC earns revenue from its business activities including the registration of companies and cooperatives, annual returns from companies and closed corporations and registration and administration of intellectual property rights. For the 2014/15 financial year, the CIPC projected earnings of R393.4 million. More than half of the revenue is expected to be derived from annual returns of companies and closed corporations (35.8 per cent and 19.3 per cent respectively), while registration and administration of intellectual property rights forms 23.6 per cent of its projected income.

At the end of June 2014, the CIPC had earned R101.1 million, 25.7 per cent of the projected annual revenue and 2.8 per cent more than the projected income by the end of the first quarter. Revenue from annual returns exceeded the first quarter target by 25.6 per cent. However revenue from trademarks and copyright lagged behind by 60.8 per cent and 77.2 per cent respectively. Other income was generated from recovery of expenditure for private telephone calls from staff, bursary debt and the sale of tender documents. Furthermore, the CIPC has also retained earnings to the value of R1.4 billion, of which R453 million will be used for special initiatives or projects over the MTEF period.

The CIPC spent less than 56 per cent of its projected expenditure as at the end of June 2014. The following reasons were provided for this large variance:

· Remuneration cost : Compensation of employees was 23 per cent lower than projected as advertised posts were provided for but had not been filled.

· Audit fees : 77 per cent of the projected audit fees for internal and external audit, performance and computer audits were not spent. Only the internal audit services had been paid for.

· Communication costs : Communication costs have been underspent by 93.6 per cent in the first quarter. There has been some savings under this line item as the cost of private phone calls are recovered from staff. However, for this financial year, about R9.2 million has been committed to posting Annual Return deregistration letters.

Table 18 : Budgeted versus actual revenue and expenditure as at end June 2014

R’000

Total budget

1 st Quarter budget

1 st Quarter actual

Variance (%)

Available budget (%)

Income

Revenue

393 444

98 361

101 123

2.8

74.3

Other income

0

0

51

n/a

n/a

Interest

43 000

10 750

19 950

85.6

53.6

Total income

436 444

109 111

121 124

11.0

72.2

Operating expenditure

Operating expenditure

402 607

104 069

73 997

28.9

81.6

Special projects – OPEX [38] allocation

22 043

5 511

183

96.7

99.2

Total expenditure

424 650

109 580

74 180

32.3

82.5

Capital expenditure

Operational: Capital Expenditure

26 100

6 425

2 901

54.8

88.9

Total: operating and capital expenditure

450 750

116 005

77 081

33.6

82.9

Closing surplus/(deficit) – OPEX Budget

-14 306

-6 894

44 043

738.9

Source: CIPC (2014b)

5.3.4. Key issues raised by the committee

The following concerns were raised related to the performance of the CIPC during the committee’s deliberations:

Turnaround times for application processing : The committee welcomes the continuous improvement in service delivery but was still concerned that it takes five working days to allocate an application number and 25 working days for manual registration of a company. While the CIPC has achieved 92 per cent of the service delivery standards, the committee is of the view that the service delivery standard is still too long and should be reduced over time. The committee noticed that the baseline targets of 2013 had been reduced which has allowed the CIPC to over-achieve on those targets. The CIPC informed the committee that the matter regarding the low targets has been discussed but that the main concern was the need to balance the target against the need to provide the necessary scope to stabilise and improve query resolution and call taking within the organisation, hence the low targets. Although the CIPC has shown improvement with respect to the registration of businesses, the name reservations process required more innovation and improvement with respect to the turnaround time. The CIPC informed the committee that the target for manual registration was specifically set to encourage movement towards electronic transactions with more resources allocated to the latter process.

Dispute with staff related to new query resolution function : The committee was alarmed by a note on page 27 of the Annual Report, which indicated that staff were being discouraged from taking calls by one of the representative trade unions which would have a negative impact on business trying to access the CIPC. The CIPC informed the committee that the central issue with staff has been around change management. The change in the job descriptions which added query resolution as a result of the redesigning of the organisation impacted on the job grade. The CIPC staff were now required to not only to capture information but also to provide resolutions to queries as a result of the move towards digital resolutions. This change in job grading required further discussion with the staff and unions to find an amicable resolution.

Ease of doing business : The committee enquired about the World Bank’s “Doing Business 2013” report which ranked South Africa eight places lower to 64 and whether it could be related to long service delivery standards. The CIPC informed the committee that the reference to the international ranking is relative and not necessarily indicative of company registration only but includes value-added tax registration and other licences. The CIPC is of the view that as a country there is always room for improvement. The CIPC indicated that it was currently in discussions with other departments on ways to improve turnaround times for registrations. Since 12 September 2014, the CIPC has a direct link with the SARS which is expected to improve future rankings.

Cost of services : The committee enquired whether the move towards self-service centres and the new website would make services provided by the CIPC cheaper or whether it would increase the cost to maintenance of the CIPC’s infrastructure. The CIPC informed the committee that it received approval from the National Treasury to increase its fees by five percent annually but would likely move towards providing free services to consumers. A recent study done by the Swedish Office indicates that offices that are expected to be self-sustaining, such as the CIPC, fall within the lowest quartile in the world with respect to fees.

Presence of “runners” : The committee enquired about the “runners” operating as agents and intermediaries when the public is registering their companies at the CIPC and whether the CIPC had addressed the matter. The CIPC acknowledged the existence of “runners” but has put systems in place to increase the public’s awareness and to mitigate against the use of “runners”. It is also important that the CIPC’s staff are educated around ethical behaviour supported by a fraud prevention plan which are currently being implemented. A whistle blowing campaign had been launched.

Resolution of governance challenges : The committee noted certain challenges raised by the Auditor General with respect to governance, such as the design and implementation of formal controls over IT systems and the occurrence of irregular expenditure. The CIPC acknowledged the challenges raised but informed the committee that it had brought these issues to the Auditor General’s attention. There has been continuous engagement with the Auditor General’s office to address these shortcomings. The CIPC has implemented an audit matrix that reflects the issues that requires to be addressed with specific timelines. Monitoring mechanisms are built into the process overseen by an internal risk committee.

5.4. National Gambling Board

The National Gambling Board (NGB) is mandated through the National Gambling Act (No. 7 of 2004) to oversee gambling activities within South Africa. Legalised gambling activities are gambling at casinos, bingo halls and on limited payout machines, as well as betting with a bookmaker and wagering on horse racing and other sport.

According to the Act, the NGB’s functions include:

· Monitoring and investigating the issuing of national licences by provincial licensing authorities for compliance.

· Investigating, monitoring and evaluating the compliance monitoring by provincial licensing authorities of licensees.

· Ensuring that national norms and standards established by the Act are uniformly and consistently applied by provincial licensing authorities.

· Establishing and maintaining a national register of excluded persons, a national central electronic monitoring system to monitor gambling activity on limited payout machines, and a national register of gambling machines and devices.

· Advising the National Gambling Policy Council on licensing of gambling activities, matters of national policy and on the determination of national norms and standards regarding any matter in terms of this Act.

· Monitoring socio-economic patterns of gambling activity within the Republic relating to the socio-economic impact of gambling, and addictive or compulsive gambling.

· Providing a broad-based public education programme about the risks and socio-economic impact of gambling.

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