ATC140715: Report of the Portfolio Committee on Trade and Industry on Budget Vote 36: Trade and Industry, dated 11 July 2014

Trade and Industry

Report of the Portfolio Committee on Trade and Industry on Budget Vote 36: Trade and Industry, dated 11 July 2014

The Portfolio Committee on Trade and Industry, having considered Budget Vote 36: Trade and Industry, reports as follows:

1. Introduction

Twenty years of democratic transition calls for bold and decisive steps to place the economy on a qualitatively different path that eliminates poverty and unemployment, creates sustainable livelihoods, and substantially reduces inequality. It also calls for radical economic transformation. The Department of Trade and Industry (DTI) budget reveals a fresh commitment to ramp up industrialisation and harness strategic trade policy to support this expansion. This, the committee believes can recapture policy space to implement a radical transformation of the economy.

Given this position then it is imperative that the following objectives are pursued:

§ Accelerate economic growth along an inclusive and sustainable path.

§ Achieve significantly higher levels of employment creation and decent work.

§ Reduce inequality substantially.

§ Ensure meaningful black participation in the ownership, control and management of the economy.

§ Roll back monopoly practices and uncompetitive behaviour and advance black industrialists.

It is in this context that the R9.8 billion Budget Vote 36 of the DTI seeks to expand manufacturing to create jobs through the development of the productive sectors. It also contributes toovercoming the structural challenges of the economy and through its appropriation address primary and secondary challenges which are constraining growth. Measures are being put in place to deal with the primary and secondary challenges.

The DTI’s budget is informed by the urgency of sustainable and skilled job creation,the fight against poverty, and the need to accelerate broad-based black economic empowerment with sharper incentives to grow a more diversified and productive economy centred in the main on the productive sectors of our economy. The R9.8 billion DTI budget reveals a fresh commitment to ramp up industrialisation and harnessing strategic trade that underpins industrial development. This, the committee believes, is its greatest contribution towards recapturing policy space in implementing a radical transformation of the economy.

The State of the Nation Address (SONA) raises three key issues that relate directly to the DTI’s mandate, namely [1] :

· Increasing private sector investment to support industrial development;

· Broadening participation, especially by black South African, women and youth in the economy; and

· Strengthening the country’s economic and investment ties with other regions and specifically African countries through regional integration.

In line with the priorities expressed during the SONA, the DTI is implementing the Industrial Policy Action Plan (IPAP II), with the 6th iteration seen as a vehicle to accelerate economic transformation through the re-industrialisation of the South African economy. The IPAP II recognised the achievements of the past, but has acknowledged that the “results have been uneven and much remains to be done to develop greater traction around many IPAP interventions” [2] . A deliberate set of policy interventions, such as government procurement and beneficiation of mineral resources, is needed to unlock the economic potential of all sectors in support of industrialisation. The committee agreed with this but noted that serious challenges remain around co-ordination among the national departments and between the three spheres of government,as well as an active commitment from all national departmentsto localisation in procurement.

Furthermore, the decentralisation of productive activities which builds local economiesshould be accelerated and expanded. Examples in the previous financial year include the establishment of small maize mills, such as the Kuvusa Small Maize Mill and the IsigayoCompact Mill, and work has begun with the South African Poultry Association (SAPA) to facilitate the entry of broad-based black economic empowerment (BBBEE) entities in the poultry broiler industry. Future decentralised projects include further development of the Exotic Hides Cluster, up-scaling of small-scale sawmillers, support for Creative and Craft industries and the processing of the essential oils happens close to the farming area in the Amathole District. However, decentralisation must be accompanied by appropriate infrastructure support.

The use of R4.4 billion (45 per cent of the total DTI budget allocation) as incentives to promote industrialisation should be strategically employed to ensure that allocated financial resources support sustainable and productive economic development; while incentives of R2.3 billion (23 per cent of the total DTI budget allocation) is allocated to support broadening participation programmes. The following industrial development incentives support private sector investment in the manufacturing sector to maintain and create jobs as well as upstream and downstream linkages:

· Automotive Incentive Scheme (AIS).

· Business Process Services (BPS).

· Film and Television.

· 12I tax rebate.

· Critical Infrastructure Programme (CIP).

· Manufacturing Competitiveness Enhancement Programme (MCEP).

However, the committee believes the challenges facing the manufacturing sector, including the cost and reliable supply of energy and high administrative prices, particularly in the transport sector, may disincentivise value-addition activities being promoted within the economy. However the allocation in the outer years of the medium term expenditure framework (MTEF)period should be reviewed.

The DTI indicated that mineral beneficiation is an important vehicle to diversify the economy. Government recognises the importance of beneficiation; therefore, it has introduced tools such as the special economic zones and the Minerals and Petroleum Resources Development Act (No. 28 of 2002); incentives relating to beneficiation will be developed in this regard. Current legislative instruments available to the state are not being implemented or utilised effectively yet are essential but not a sufficientcatalyst to guide local beneficiation and industrialisation of mineral resources.

The DTI is continuing to advance trade and economic integration into Africa. This is informed by South Africa’s developmental trade policies that seek to align trade measures and tariffs to our industrial policy objectives. Negotiations around the Southern African Development Community (SADC)-European Union (EU) Economic Partnership Agreements (EPA) [3] have been concluded which allows for greater harmonisation with the South African Customs Union (SACU) [4] and an improvement on the Trade and Development Co-operation Agreement (TDCA) between South Africa and the EU. South Africa is championing regional integration through the SACU and the SADC, as well as the Tripartite Free Trade Area which includes SADC, the Common Market for Eastern and Southern Africa (COMESA), and the East African Community (EAC). The budget allocation reflects the expenditure on negotiations which in the committee’s opinion is paving the way to regional integration which underpins intra-African trade. In the current financial year, the budget allocation may not be sufficient.

The consideration of the budget vote offers the committee an opportunity to assess how effectively the DTI’s strategic plan contributes to the outcomes expressed in the National Development Plan (NDP).The configuration of the 2014/15 Budget Vote 36 should contribute towards the achievement of a radical economic transformation agenda. Therefore, the consideration of the budget provides the committee with an important opportunity to assess whether the budget is adequate to achieve government’s policy of accelerated and inclusive industrialisation to ensure that the growth potential of the economy is unlocked.

The establishment of the Ministry of Small Business Development requires the transfer of the small business and co-operatives programmes to the newly established Ministry. The establishment of the new Ministry will impact on the Trade and Industry budget. Funds associated with the programmes would be allocated to the Department of Small Business Development once the functions have been clearly outlined. Despite the existence of these two separate departments, the current vote has to be passed before the realigned budgets can be developed. Therefore, Budget Vote 36 would be approved and debated by Parliament as a single vote for this financial year.

1.1. Constitutional Mandate of the Committee

Portfolio Committees exercise oversight over their respective departments and agencies in line with their Constitutional mandate set out in section 55(2) of the Constitution (No. 108 of 1996) and section 27(4) of the Public Finance Management Act (No. 1 of 1999). In addition, the Money Bills Amendment Procedure and Related Matters Act (No. 9 of 2009) also requires committees to consider and report on their department and entities’ strategic plans. Portfolio committees may also advise the Standing Committee on Appropriations in the National Assembly regarding possible amendments within a budget vote for its consideration.

1.2. Purpose

The purpose of this report is for the Portfolio Committee on Trade and Industry to report on its deliberations and consideration, which is essentially the unpacking and scrutinising of the DTI’s strategic plan and its associated budget vote (Budget Vote 36). Furthermore, to make recommendations regarding the approval, amendment or rejection of Budget Vote 36 and any other recommendation regarding the implementation of the DTI’s strategic plan.

1.3. Process

The committee’s consideration of Vote 36 involved a robust engagement with the Minister, Dr R Davies, and the Director-General, Mr Lionel October, on 1 July 2014, when they provided the context within which the DTI’s Strategic Plan had been developed and presented its Annual Performance Plan. The DTI’s plans were discussed in relation to its mandate, which covers five key intervention areas, namely [5] :

· Industrial development.

· Trade, investment and exports.

· Broadening participation.

· Regulation.

· Administration.

Due to the recent announcement of the establishment of a new Ministry on Small Business Development, the newly established Portfolio Committee on Small Business Development was also in attendance to seek clarity on which portions of DTI’s work would be reallocated to the new Ministry upon its establishment through proclamation within the Government Gazette.

During this engagement, the budget was unpacked against the DTI’s strategic plan and the priorities of the post-election SONA within the prevailing economic climate. This required the committee to evaluate the alignment of incentives and other instruments of industrial and trade policy objectives to ensure that the stated objectives are met.

2. Key issues of the SONA that relates to DTI’s mandate

In his post-election SONA address, President JacobGedleyihlekisaZuma 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. The DTI’s mandate mainly relates to the latter priority of creating decent work. Table 1 below 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 [6]

Highlights from the State of the Nation Address [7]

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, the 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”

• “to deepen economic development, trade, and investment partnerships with the BRICS 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 thatthe 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.

3. Input from the Department of Trade and Industry

The Minister of Trade and Industry provided the strategic overview of DTI’s priorities within the context of the NDP with the core focus being to contribute to overcoming the triple challenges of poverty, inequality and unemployment. In this regard, the New Growth Path (NGP), the IPAP, and the National Infrastructure Programme are key programmes that would seek to give effect to this aspect of the NDP.

The NDP in its quest to achieve these objectives takes a broader view of the targets to be achieved including employment creation, trade facilitation, broadening participation, and fostering relationships with countries in the African continent. Therefore, the work of the Department needs to contribute to this bigger vision of the NDP.

The implementation of the IPAP underpins the radical socio-economic transformation programme [8] . The Minister informed the committee that IPAP remains the principal programme of the DTI’s work which requires the acceleration of industrialisation through various policy interventions such as government procurement and beneficiation. This would unlock the economic potential of both the private and the public sector in support of industrialisation.

In his presentation, the Minister highlighted the importance of industrial development to strengthen the economy which would require policy trade-offs. Rather it is the policy priorities based on the balance of evidence that informs favouring the productive sectors of the economy. [9] This was premised on the argument that the manufacturing sector has the “highest economic and employment multipliers [10] of any sector” [11] . Furthermore, higher levels of value-addition and moving up the value chain are expected to generate higher income levels and wealth. He informed the committee that in a recent report by KPMG “African Risen” [12] it supports the decision of an industrialised African continent.

Currently, Africa is producing and exporting primary products with the majority of the value chain captured in the developed economies and importing finished goods. The Minister argued that jobs are currently being created in the developed economies based on the primary resources of developing economies, such as South Africa. The Minister acknowledged that while many jobs are not created within the manufacturing sector, this sector had strong upstream and downstream multipliers. Therefore, South Africa must move up the value chain to create more jobs and generate more inclusive growth opportunities.

The Minister acknowledged that South Africa is not yet decisively placed on a new growth path driven by the productive sectors of the economy. His view was that the next phase of industrial development “must see more radical measures to advance job creation, reduction in poverty and inequality” [13] . He called for an up-scaled and accelerated re-industrialisation of the economy using infrastructure investment, localisation, and beneficiation as key instruments. However, he acknowledged that the current hostile global economic environment could contribute to a delay in achieving higher value addition and continued industrial development. In addition, the country’s energy constraints were a key impediment in the up-scaling of industrial policy and work was being prioritised to meet the manufacturing sector’s need for an adequate supply of reasonably priced electricity.

A further aspect of the up-scaling of industrial policy according to the Minister is through regional integration of the continent, specifically the development of regional industries or value chains. In this regard, South Africa supports the extension of a free trade area across the Continent that is accompanied by co-operative infrastructure development and promotes regional industrial development. However, South Africa is not supportive of establishing a customs union in the SADC.

The Minister informed the committee that with regard to trade policy, the negotiations on the SADC-EU EPA have been concluded with an improvement on the existing TDCA between South Africa and the EU . In addition, South Africa’s move from the TDCA to the EPA will re-establish a common platform within the SACU regarding trade relations with the EU. South African trade with the EU has moved from a surplus in 2008 to a deficit in 2012.

A number of pieces of legislation have recently been assented to but have not yet come into effect as the Department is finalising regulations. There is a need to factor in the expanded mandate as well the establishment of new entities and councils in the budget over the MTEF period. The Minister informed the committee that the sectionsdealing with small business and cooperatives would be transferred to the newly established Ministry of Small Business Development. While the Broad-Based Black Economic Empowerment aspectsand Broad-Based Black Economic Empowerment Advisory Council, focusing on promoting black industrialists, would remain with the DTI.

To ensure alignment of the DTI’s programmes to government-wide priorities and outcomes, the Department has identified key strategic outcome-orientated goals. These are to [14] :

· 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 developmental 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.

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

4. Overview of the Department’s 2014/15 Budget Allocation

The Department’s budget has increased from R9.51 billion in the 2013/14 financial year to R9.83 billion in the 2014/15 financial year, an increase of R319.5 million. However, in real terms, the budget for 2014/15 has decreased by 2.68 per cent from the previous financial year’s budget. Figure 1 provides an overview of the budget allocation for the previous financial year and the MTEF. However, it should be noted that the allocations from the 2014/15 to 2016/17 financial years include part of the budget allocation for the new Ministry and/or Department of Small Business Development and will be reduced in the following period accordingly.

For the 2014/15 financial year, the Department of Trade and Industry’s programmes remain similar to the previous financial year. Its budget is divided among these seven programmes:

· Administration.

· International Trade and Economic Development.

· Broadening Participation.

· Industrial Development.

· Consumer and Corporate Regulation.

· Incentive Development and Incentive Administration.

· Trade and Investment South Africa.

The real decrease in the Department’s budget for the 2014/15 financial year is mainly a result of real decreases in the Administration Programme (8.3 percent), the Broadening Participation Programme (6.26 percent), the Incentive Development and Administration Programme (4.16 percent), and the International Trade and Economic Development Programme (2.1 percent). However, the Trade and Investment South Africa programme, Industrial Development programme and Consumer and Corporate Regulation programme’s budget increased by 5.4 per cent, 4.68 percent and 1.92 per cent respectively See Table 1).

Figure 1: Overview of the Budget Allocation: 2013/14 – 2016/17


Data Source: National Treasury (2014) [15]

Over the mediumterm, the budget is expected to increase to reach R10.1 billion by the 2016/17 financial year. At a programme level, the increase in the medium term (2014/15 to 2016/17) will primarily be due to the increase in funds allocated to the incentive programmes as well as industrial development programme as they comprise the largest share of the budget.

Table 2: Summary of Budget Vote 36

Programme

Adjusted Appropriation

Budget

Nominal %

change

Real

% change

R million

2013/14

2014/15

2015/16

2016/17

2013/14-2014/15

Administration

725.9

706.9

730.7

770.0

-2.62%

-8.30%

International Trade and Economic Development

141.6

147.2

154.8

163.8

3.95%

-2.11%

Broadening Participation

1 010.3

1 005.8

1 060.2

1 118.1

-0.45%

-6.26%

Industrial Development

1 616.2

1 796.8

2 078.5

2 192.5

11.17%

4.68%

Consumer and Corporate Regulation

256.2

277.3

286.9

300.8

8.24%

1.92%

Incentive Development and Administration

5 443.1

5 540.3

6 246.5

7 050.8

1.79%

-4.16%

Trade and Investment South Africa

322.2

360.7

370.1

387.6

11.95%

5.41%

TOTAL

9 515.5

9 835.0

10 927.7

11 983.6

3.36%

-2.68%

Data Source: National Treasury (2014a)

The largest share of the budget is for the Incentive Development and Administration Programme (R5.5 billion). This is followed by the Industrial Development Programme (R1.8 billion), the Broadening Participation Programme (R 1.0 billion), the Administration Programme (R 706.9 million), the Trade and Investment South Africa Programme (R360.7 million), Consumer and Corporate Regulation (R277.3 million) and International Trade and Economic Development (R154.8 million).

Figure 2: Share of the Budget Allocation for the 2014/15 Financial Year


Data Source: National Treasury (2014a)

In terms of the economic classification, the majority of the DTI’s budget (84.1 per cent) consists of transfers mainly through incentives to businesses or to its entities, compared to 83.5 per cent in the 2013/14 financial year. The DTI’s transfers declined in real terms by 2 per cent since 2013/14. Payments on goods and services declined in real terms by 17.8 per cent since 2013/14. Compensation to employees increased by 5.5 per cent in real terms to R916.9 million in 2014/15. The Minister of Finance has issued a directive for Departments to implement cost-cutting measures. Therefore, the real budget across most expenditure types has been reduced. However, compensation of employees is increasing as a result of the filling of 290 posts to support the development and administration of special economic zones and for the MCEP as well as the annual cost of living increase.

Table 3: Budget allocation and share as per economic classification

Economic classification

(R million)

Adjusted appropriation

Budget

Budget Share

Nominal

%

change

Real %

change

2013/14

2014/15

2014/15

2013/14 – 2014/15

Compensation of employees

818.3

916.9

9.3%

12.0%

5.51%

Goods and services

709.4

619.6

6.3%

-12.7%

-17.76%

Transfers and subsidies

7 950.0

8 274.5

84.1%

4.1%

-1.99%

Payments for capital assets

37.9

24.1

0.2%

-36.4%

-40.12%

Total

9 515.6

9 835.0

100.0%

3.4%

-2.68%

Source: Own calculations based on National Treasury (2014a)

An overview of the budget allocated to each programme is provided below:

4.1. Administration

The Administration programme is responsible for providing strategic support and management to the Department and its entities. The programme also ensures successful implementation of the Department’s mandate.

For the 2014/15 financial year, the Administration programme share of the budget amounts to R706.9 million ( 7.2 per cent of the Department’s total budget) . The budget decreased by R19.0 million (2.62 percent in real terms) from R725.9 million in the previous financial year. The decrease in the programme is mainly as a result of cost-cutting measures that the Department will implement in order to decrease spending on goods and services such as advertising and printing services.

4.2. International Trade and Economic Development (ITED)

The ITED programme provides direction on national trade policy to promote economic development; build an equitable multilateral trading system; strengthen trade and investment relationships; and promote African development. The work of the programme links directly to one of the Department’s priorities, namely regional integration and global relations as stated in the Department’s strategic plan and reiterated by the President during the 2014 post-election State of the Nation Address.

The ITED programme has the smallest budget allocation of all the Department’s programmes. With a budget of R147.2 million, the programme accounts for 1.5 per cent of the Department’s total budget. The programme’s budget has increased from R141.6 million in the 2013/14 financial year to R147.2 million for the 2014/15 financial year. However, in real terms, the budget has decreased by 2.11 per cent.

The programme has two sub-programmes, namely the International Trade Development and African Economic Development. The International Trade Development sub-programme deals with issues of negotiations at an international level, such as the SADC-EU Economic Partnership Agreement. In the 2014/15 financial year, the International Trade Development sub-programme accounts for 61.9 per cent while the African Economic Development sub-programme accounts for 38.1 per centof the total programme budget.

4.3. Broadening Participation

The programme is aimed at developing policies and strategies to create an enabling environment for small, medium and micro enterprises, and improve the competitiveness of local and provincial economies to achieve equity, growth and job creation. This programme is responsible for the implementation of the Department’s priorities and one of the strategic objectives is to “facilitate broad-based economic participation through targeted interventions to achieve more inclusive growth”. [16]

The Broadening Participation Programme is the third largest programme of the Department’s budget with a 10.2 per cent share. The programme’s budget for the 2014/15 financial year is R1 billion. The Broadening Participation Programme has three sub-programmes which are: the Enterprise Development, Equity and Empowerment, and Regional Economic Development . For the 2014/15 financial year, the Enterprise Development sub-programme accounts for the largest share of appropriation in the programme with 89.7 per cent of the total Broadening Participation Programme budget.

It should be noted that the bulk of the allocation to the Ministry/Department of Small Business Development will be transferred from this programme by the 2015/16 financial year.

4.4. Industrial Development

The Industrial Development Programme is responsible for the design and implementation of policies, strategies and programmes to develop the manufacturing and related sectors of the economy with the aim of contributing to the creation of decent jobs, adding value to manufactured products and enhancing competitiveness in the domestic and export markets. Industrial development is also at the core of the Department’s work as outlined in its strategic objectives.

One of the main programmes of the Department, the Industrial Development Programme takes up the second largest share of the Department’s budget despite having just two sub-programmes: the Industrial Competitiveness and the Customised Sector Programmes.

The programme’s budget has increased from R1.6 billion in the 2013/14 financial year to R1.8 billion in the 2014/15 financial year, an increase of 4.6 per cent in real terms. In the 2013/14 financial year, an amount of R60 million was transferred by the Department to the National Metrology Institute of South Africa (NMISA) for capital expenditure, for the 2014/15 financial year this amount has increased to R111 million. In 2012, the committee had raised the concern that NMISA required extensive capital injections to ensure that it maintained state of the art equipment, as it played a critical role in ensuring South Africa’s competitiveness.

Furthermore, the new Legal Metrology Act (No. 9 of 2014) places additional responsibility on the National Regulator for Compulsory Specifications(NRCS) by expanding its mandate from enforcing trade metrology, measurements of quantity affecting commercial transactions, to legal metrology also covering measurements affecting health, safety and the environment such as temperature and blood pressure. Once this Act becomes effective, it will require further capacitation of the NRCS. Currently, the NRCS has received a 0.29 per cent increase in its real terms since the 2013/14 financial year.

In addition, the Industrial Development programme will contribute R723.4 million to the clothing and textile production incentive which is aimed at reviving the country’s clothing and textiles sector. As a key labour-absorbing sector, the clothing and textiles sector had been earmarked by the Department through the Industrial Policy Action Plan to be supported to increase its competitiveness; thus, maintaining a number of jobs amongst the more economically-vulnerable segment of the population. In 2013, the sector had contributed approximately R12.4 billion to the country’s GDP and had provided employment to approximately 108 000 workers (or 9.1 per cent of the non-agricultural employment rate). [17]

4. 5. Consumer and Corporate Regulation

The Consumer and Corporate Regulation Programme is aimed at increasing opportunities for previously disadvantaged South Africans by attracting both domestic and foreign investment; increasing investor confidence through developing world class regulatory frameworks for monitoring, compliance and enforcement; and creating competitive, fair and efficient markets by having effective financial, economic, governance and related regulatory institutions. It has three sub-programmes, namely Policy and Legislative Development, Enforcement and Compliance, Regulatory Services.

The programme’s budget has increased by 1.9 per cent in real terms for the 2014/15 financial year to R277.3 million. At a sub-programme level, expenditure for the Policy and Legislative Development sub-programme’s budget decreased by 1.8 per cent; the Enforcement and Compliance sub-programme increased by 4.3 percent; and the Regulatory Services sub-programme budget decreased by 2.3 per cent in real terms for the 2014/15 financial year following the same trend from the 2013/14 financial year.

The Regulatory Services sub-programme’s budget of R222.6 million includes transfers to regulatory agencies including the National Credit Regulator, National Gambling Board, National Consumer Tribunal, National Consumer Commission, and the Companies Tribunal. The transfers form 90.1 per cent of the sub-programme’s budget in the 2014/15 financial year compared to 84.6 per cent in the 2013/14 financial year. The largest increases received were for the Companies Tribunal (a real increase of 21.6 per cent since the 2013/14 financial year) and the National Consumer Commission (a real increase of 13 per cent since the 2013/14 financial year).

4. 6. Incentive Development and Administration

The Incentive Development and Administration Programme is responsible for designing and implementing incentives and programmes that support investment, competitiveness, employment creation and equity. This programme encapsulates the core mandate of the Department and plays a critical role in furthering the objectives of the Industrial Policy Action Plan; this is evident in the significant share of the budget that is allocated to the programme.

For the 2014/15 budget, the Incentive Development and Administration Programme is the largest expenditure programme accounting for 56.3 per cent of the Department’s total budget with a value of R 5.5 billion. The programme’s budget was the second fastest growing programme budget during the 2013/14 financial years due to the introduction of the Manufacturing Competitiveness Enhancement Programme. However, for the 2014/15 period, it is among the programmes that registered a significant decline with the budget being 4.1 per cent lower in real terms that in the previous financial year.

At a sub-programme level, the Manufacturing Investment Incentives sub-programme take up the largest share of the programme budget and has the largest sub-programme budget increase. The Manufacturing Investment Incentives budget increased from R3.3 billion in the 2013/14 financial year to R3.6 billion for the 2014/15 financial year, an increase of 4.2 per cent in real terms. The Infrastructure Development Support sub-programme takes up the second largest share of the budget with R853.8 million, showing a decline of 3.7 per cent from the previous financial year’s budget.

One of the programme’s core budget drivers will be the implementation of the new Special Economic Zones Act (No. 16 of 2014), which will require resources for enabling infrastructure and manufacturing incentives. The DTI is projecting the establishment of new special economic zones to be developed across provinces. However, the allocation of resources should take into account the time lags in establishing new special economic zones due to the need for feasibility studies to be completed and the appropriate approvals to be granted.

Currently, the programme has allocated R450 million for capital investment incentives in special economic zones for the 2014/15 financial year. This will increase to R1.13 billion and R1.68 billion in the 2015/16 and 2016/17 financial year respectively. The investment incentives for special economic zones replace the incentives for industrial development zones, which were allocated R438.2 million in the 2013/14 financial year for three industrial development zones.

In addition, the DTI has allocated R200 million, R70 million and R50 million over the MTEF for current expenses for prefeasibility and feasibility studies for identified special economic zones to be designated.

Figure 3: Budget share of the Incentive Development and AdministrationProgramme as per the economic classification

Source: National Treasury (2014a)

4. 7. Trade and Investment South Africa Programme

This programme is aimed at increasing the quality and quantity of domestic and foreign direct investment; promoting South African products in high growth markets; facilitating markets for South African manufactured products and services; and enhancing the ongoing promotion of exports and investment.

With a programme budget of R360.7 million for the 2014/15 financial year, the Trade and Investment South Africa Programme accounts for 3.7 per cent of the Department’s total budget.

There have been changes in this programme’s sub-programmes. In the 2013/14 financial year, there were three sub-programmes. With the introduction of the National Exporter Development Plan, the Export Development and Support sub-programme was established with the purpose of managing the National Exporter Development Plan which the Department introduced in April 2013.

At a sub-programme level, the Export Promotion and Marketing takes up the largest share of the budget with 44.4 per cent of the total budget. The Export Development and Support Programme accounts for 7.7 percent of the total programme budget.

The International Operations sub-programme’s allocation appears to have been decreased by 6.3 per cent in real terms. The DTI informed the committee that the 2013/14 allocation was adjusted upwards during that financial year to accommodate exchange rate fluctuations to funds transferred to foreign mission accounts. This exchange rate increase is not automatically carried forward to the 2014/15 allocation augmented through virements/shifting of funds during the financial year. However, this budget allocation does not allow for additional capacity to foreign missions or the establishment of additional foreign missions as previously raised by the committee.

5. Key issues raised by the committee during its deliberations

The committee raised a number of concerns during its deliberations, including:

5.1 Impact of industrial action on the economy: Currently South Africa has been experiencing a number of lengthy strikes, with the NUMSA strike being the latest example, which are impacting negatively on the economy. The committee enquired about the DTI’s role in ensuring limiting the potentially negative impact on the economy.The Minister acknowledged that industrial action does have an economic impact and that shorter periods of industrial action would limit the negative impact on the industrial economy. In response to the role of the DTI in this regard, the Minister informed the committee that the DTI has not been requested to intervene and that it falls within the mandate of the Department of Labour. However, some companies have managed to claw back lost production by for instance entering into an agreement with labour to extend working hours.

5.2 The supply of affordable electricity to the manufacturing sector: The supply of affordable and cheap electricity had been a competitive advantage within the manufacturing sector for many years. However, with increasing electricity tariffs and unreliable electricity supply due to a lack of energy infrastructure development, electricity supply has become increasingly costly and unstable and lead to several manufacturers closing down and/or becoming increasingly uncompetitive. Recently, Eskom’s requested tariff increase of above 8 percent was approved by the National Energy Regulator of South Africa, which potentially could continue to contribute to the uncompetitiveness of the manufacturing sector. The committee enquired what the DTI’s view on this tariff increase is and whether they have engaged with the relevant department and authority as high electricity cost could undermine the implementation of the Industrial Policy Action Plan. The Minister identified two problems associated with the electricity crisis, namely the need for maintenance of existing electricity infrastructure and the development of new infrastructure to meet increasing demands, as well as the inadequate use of energy efficient technologies, and the tariff increase to cover the associated cost of investment and municipal loading. He informed the committee that solutions must be found to insulate poor households and to ensure minimal disruption to local industries involved in production.

President J.G. Zuma in his post-election State of the Nation Address emphasised the need to solve the electricity problem and has proposed several interventions to do so. The Minister informed the committee that the DTI was actively involved in promoting energy efficient usage and technologies, especially in the manufacturing sector through the National Cleaner Production Centre. The Minister reiterated that municipal electricity charges are one of the major constraints to manufacturing development, and that the promotion of industrialisation decentralisation could contribute to the alleviation of the electricity crisis but requires support from municipalities.

5.3 Regulatory bodies: Challenges are still being experienced in registering businesses which could contribute to job creation. It would appear that the new Companies and Intellectual Property Commission (CIPC) are not yet delivering an optimal service to businesses due to their lack of accessibility. The committee enquired what steps the CIPC is taking to address these concerns and to improve on its efficiency of delivering a service to businesses. The Minister informed the committee that the CIPC had undergone a massive transformation from its predecessor, the Companies and Intellectual Property Registration Office (CIPRO), which had faced a number of inefficiencies including challenges with corruption. With respect to the registration of companies, the CIPC has been facilitating increased accessibility in partnership with First National Bank. It is now possible to register a company at a First National Bank branch and be able to begin operations almost immediately, which substantially reduce delays in company registration. This project is intended to be rolled out to other banks as well.

5.4 Industrial development: Technology and Human Resources for Industry Programme (THRIP): In the previous financial year, the target to support students under THRIP was not met. The committee enquired how the DTI intended to meet this target given the historical failure to do so . The DTI informed the committee that the programme had been administered by the National Research Fund (NRF) but going forward it will be administered by the DTI. The DTI will ensure that the programme runs more effectively and efficiently and that it is more aligned to industrial research in future.

5.5 Special Economic Zones (SEZs): The committee acknowledged the importance of SEZs to the economy but recognised that basic infrastructure, such as rail and road, is needed to ensure the success of the SEZs. The committee enquired whether the DTI has made provision in its budget for infrastructure support to SEZs.The Minister informed the committee that there has been a substantial increase in the DTI budget associated with the infrastructure development for SEZs from R450 million in the 2014/15 financial year to R1.68 billion in the 2016/17 financial year.

5.6 Small Business Development: A view was expressed that in certain countries small business centres are providing free advice, both business and legal to small enterprises. The committee enquired whether government is considering establishing small business centres across the country, similar to Canada, which can provide free services in relation to establishing a business. Furthermore, the committee enquired to what divisions of the DTI would be transferred to the newly established Ministry of Small Business Development.

The Minister acknowledged that government should actively promote small business development and although the DTI has had programmes for small business, it had not produced the desired results. To improve the outcome of support to small business, the DTI identified programmes that may have improve the sustainability of productive entrepreneurs. An example of this is the incubator support programme which contributes to real change in the manner the business environment operates. The Minister also argued that the real opportunity for small business is creating a symbiotic relationship with big business around supplier development.

The Minister informed the committee that some small business functions, such as Small, Medium and Micro Enterprises and Co-operative Development, would be transferred to the newly established Ministry of Small Business Development, along with the Small Enterprise Development Agency (SEDA) and the SEDA Technology Programme. The DTI will remain with the Broad-Based Black Economic Empowerment Advisory Council focusing on the promotion of black industrialists.

5.7 Black Industrialists: The emergence and development of black industrialists are critical to the radical economic transformation of the economy. The committee enquired whether the DTI has a strategy in place to promote black industrialists, and if the existing legislation facilitates their emergence. The Minister informed the committee that under the auspices of the Deputy Minister of Trade and Industry a task team would be established to develop a framework for the promotion of black industrialists.

5.8 Establishment of the Ministry of Small Business Development: After the 2014 election, President J.G. Zuma, announced the establishment of a new Ministry of Small Business Development. The committee enquired as to what programmes and entities of the DTI would be transferred to the new Ministry once it has been proclaimed in the Government Gazette. The Minister informed the committee that the small business and cooperatives aspects and the associated entities would be transferred to the newly established Ministry. The DTI would retain responsibility for Black Economic Empowerment.

5.9 Mineral Beneficiation : Industrial policy is essential to any form of development. The current discussion with the Department of Mineral Resources with regard to essential mineral input costs would not assist as the current status quo within the mining sector would not facilitate industrial development. The mining sector is involved in transfer pricing [18] , as well as imposing import parity pricing to domestic producers. The essential inputs to industrial development will not be available at a reduced price that would contribute to industrial development. The committee enquired whether government should not follow a more aggressive industrial policy linked to existing state-owned mining companies to ensure the availability of critical industrial inputs at a developmental price to promote mineral beneficiation and industrial development. The Minister informed the committee that government has launched the State Intervention in the Mining Sector programme with the focus on value-addition. The current priority is to use the instruments at the disposal of government to ensure the creation of a competitive advantage based on its rich mineral resources. The Mineral and Petroleum Resources Development Act (No. 28 of 2002) also has a set of tools to ensure that South Africa can receive a discounted price on platinum. The committee welcomed this progress.

5.10 Local Procurement: In the SONA, President J.G. Zuma stated that government would “promote local procurement and increase domestic production by having the state buy 75 per cent of goods and services from South African producers” [19] . To date, a number of products has already been designated for local procurement including canned/processed vegetables, certain pharmaceutical products, furniture products, the textile, clothing, leather and footwear sector, solar water heaters, school and office furniture, and electrical and telecommunication cables. Enforcement of the procurement of these designated products is a challenge. The committee will undertake oversight in this area during the course of the financial year.

There is a need to expand the types of products that would contribute to the development of small producers that would contribute to broadening participation in terms of employment and black ownership. The products listed below could be considered:

a. Glass, Cups, Plates, Spoons, etc.

b. Tiles and Building Materials.

c. Light-bulbs and Decorations.

d. Washing products and soaps.

e. Electronics.

The committee is of the view that localisation should be interpreted to include local supply chains, encouraging procurement for small businesses, particularly in townships, peri-urban and rural areas. Currently, these small businesses are often crowded out by large established production. The committee enquired whether the government should not require the state to only purchase food products produced locally. With respect to world trade agreements, South Africa has not signed the Agreement on Government Procurement , a plurilateral agreement among members of the World Trade Organisation,as it would have provided all signatories equal access to government procurement which would have fundamentally undermined South Africa’s industrial drive.

The Minister informed the committee that so long as South Africa is not a signatory it would be able to determine local public procurement requirements and make sector designations in this regard. The other constraint facing South Africa in this regard isthe Agreement onTrade-Related Investment Measures which relates to the private sector. This would prohibit South Africa to require the private sector to buy locally produced products. If South Africa does do that it would be in violation of its WTO obligations and could be taken to the WTO dispute mechanism and ultimately face sanctions.

5.11 Trade agreements and tariffs: Currently government is bound by a number of trade and tariff agreements. The committee enquired to the status of these agreements and whether South Africa’s trade policy is aligned to promote industrialisation. The Minister informed the committee that under the TDCA South Africa could not impose export taxes, but has clawed back some policy space in this regard under the SADC-EU EPA.

5.12 Co-ordination of industrial policy : Although IPAP is the responsibility of the DTI, it consists of a number of government department initiatives in support of industrial development. Therefore coordination among these departments is essential for the successful implementation of IPAP. Other departmental and entities’ programmes not explicitly mentioned in IPAP may also impact on its implementation. The committee has raised a number of concerns with regard to inter- and intra-governmental coordination challenges associated with the implementation of IPAP. An example of such a programme is the Recycling and Economic Development Initiative of South Africa (REDISA) that can play a significant role in support of industrial development.

5.13 Research supporting policy changes : The committee needs to be presented with the necessary research information that informs DTI’s policy positions, legislation and subordinate legislation.

6. Conclusion

Having considered the information shared and reports from the DTI with respect to their strategic and annual performance plans, the committee has reached the following conclusions:

6.1 The acceleration of industrialisation through the promotion of value-added products that can compete in the export market and against imports in the domestic market is necessary. The Minister should ensure that this industrialisation is inclusive, supporting black industrialists and black ownership within the productive sectors.

6.2 The allocation in the MTEF for the development of SEZs and the designation of two new Industrial Development Zones in the Western Cape (Zaldanha Bay) and KwaZulu-Natal (Dube Trade Port) and the designated SEZ in Harrysmith is welcomed. The committee encourages the promotion of the development of SEZ across provinces.

6.3 The decentralisation of productive activities should be encouraged and expanded to allow for greater impact in support of local economic development. This should be facilitated through effective coordination with the newly established Ministry of Small Business Development as well as the Economic Development Department.

6.4 Beneficiation of minerals remains the major untapped opportunity for South Africa to use its mineral wealth to move up the value chain. The committee concurs with the Minister’s assertion that moving up the value chain can contribute to unlocking the productive capabilities of this economy which would assist in balancing the current account. In this regard:

· The implementation of the Minerals and Petroleum Resources Development Act could contribute to secure concessional access to mineral feed stocks to regain the competitive advantage in this sector.

· The committee is of the view thatstrategic minerals should be made available at a developmental price to help grow our manufacturing industry. The acceleration and expansion of industrialisation is also directly linked to the retention of a percentage of extracted mineral resources.

6.5 Compliance with the existing public procurement measures among all spheres of government remains a concern to the committee. Government’s administrative capacity to identify suppliers that meet localisation requirements and to provide adequate notification of its intention to procure specific products locally should be enhanced.

6.6 Unreliable electricity supply, the high municipal electricity surcharges and protracted industrial action are key constraints in the manufacturing sector. The resolution of these constraints requires effective intra- and inter-governmental coordination in particular the relevant departments including the Department of Energy, the Department of Labour and Department of Cooperative Governance to ensure cohesive policies in support of industrialisation to ensure cohesive policies in support and expansion of industrialisation

6.7 Furthermore, the committee encourages the Minister to strengthen coordination efforts with the departments and public entities responsible for implementing the IPAP.

6.8 The committee is supportive of the continued focus on the implementation of a developmental trade strategy that underpins the IPAP. In this regard, the promotion of deeper regional integration that incorporates regional industrial development and facilitates intra-African trade through infrastructure development and the implementation of other trade facilitation measures is welcomed.

6.9 Furthermore, the committee is of the view that South Africa should allow trade policy space to ensure that domestic industries, particular developing ones, can be adequately supported within the boundaries of its international obligations. Future trade negotiations should take cognisance of these requirements.

6.10 The committee is encouraged by the conclusion of the negotiations for the SADC-EU Economic Partnership Agreement. The outcome of this agreement should provide South Africa with additional market access, additional policy space in terms of the application of certain export taxes, will preserve the integrity of the Southern African Customs Union and accommodate the African regions’ regional integration efforts.

6.11 Given the low level of private sector investments in the productive sectors, the factors that inhibit private sector investment should be identified and strategies implemented to address these.

6.12 The committee welcomes the establishment of the new Ministry of Small Business Development, as it recognises the important role that small enterprises, cooperatives and the informal sector plays in the economy. Its establishment will facilitate a more focussed approach to their development.

6.13 Broadening economic participation is essential to address the triple challenge of poverty, inequality and unemployment.

6.14 The committee recognises the need to supportentities to be established through recent legislative changes. Furthermore, existing entities with expanded mandates should be adequately resourced,in terms of human and financial resources, to fulfil their legislative mandate.

6.15 The International Operations sub-programme allocation, within the Trade and Investment South Africa programme, needs to be reconsidered, with a view to a considerably larger and more focused effort to increase South Africa’s presence in strategic markets.

6.16 The legislative framework underpinning industrialisation should be reviewed to ensure that an enabling environment to mineral beneficiation exists.

6.17 Research should inform all Departmental actions as the committee is of the view that there should be a link between its objectives and the tools chosen to achieve its objectives. All amended legislation submitted for consideration should include a Regulatory Impact Assessment (RIA).

7. Acknowledgements

The committee would like to thank participants from the Ministry of Trade and Industry, and the DTI at the meeting. The committee also wishes to thank its committee support staff in particular the Committee Secretaries, Mr AndréHermans and Mr NkanyisoMhkize; the Content Advisor, Ms Margot Herling; the Researcher, Ms ZokwandaMadalane, and the Committee Assistant, Mr Denver Woodington, for their professional support and conscientious commitment to their work. The Chairperson thanks all Members of the committee for their active participation during the process of engagement and deliberations and their constructive recommendations made in this report.

8. Recommendations

The Portfolio Committee on Trade and Industry having, considered the 2014 proposed Budget Vote 36: Trade and Industry, recommends that:

8.1. The Minister should consider additional funding for the Consumer and Corporate Regulation Programme’sallocation for its regulatory bodies to fulfil their mandate in the outer years of the MTEF.

8.2. The Minister should consider i ncreasing 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 .

8.3. The House adopts Budget Vote 36: Trade and Industry.

The Democratic Alliance abstained as it has reservations with regard to recommendation 8.3 and certain aspects of the report.

The Economic Freedom Fighters voted against the adoption of the report as it has reservations with regard to recommendation 8.3 and is of the view that the budget in its current form does not advance industrialisation, and neither is it informed by the NDP.

The Freedom Front Plus voted against the adoption of the report as it has reservations with regard to recommendation 8.3 and certain aspects of the report.

Report to be considered.

References

Davies, R. (2014) Strategic overview of the dti priorities . Presentation to the Portfolio Committee on Trade and Industry, 1 July.

Department of Trade and Industry (2014a) Strategic Plan .

Department of Trade and Industry (2014b) Annual Performance Plan .

Department of Trade and Industry (2014c) the dti’s 2014/15-2016/17 Annual Performance Plan . Presentation to the Portfolio Committee on Trade and Industry, 1 July.

Department of Trade and Industry (2014d) Radical economic transformation is key for economic growth, Minister Davies . Media release 29 June.

Department of Trade and Industry (2014e) Industrial Policy Action Plan .

Investopedia (2014) Transfer price . http://www.investopedia.com/terms/t/transferprice.asp

Madalane, Z. (2014) The Department of Trade and Industry’s Perspective on the 2014 State of the Nation Address .

National Treasury (2014a) Estimates of National Estimates: Budget Vote 36 .

National Treasury (2014b) Budget Review 2014 .

Zuma, J. G (2014) State of the Nation Address to joint sitting of Parliament . Parliament. Cape Town. 17 June.



[1] Zuma (2014)

[2] DTI (2014e)

[3] This EPA does not cover the official SADC region but only includes Angola, Botswana, Lesotho, Mozambique, Namibia, South Africa and Swaziland.

[4] SACU consists of South Africa and Botswana, Lesotho, Namibia and Swaziland (commonly known as the BLNS) and requires that the five countries implement a common external tariff on all third parties. The previous regime where South Africa was implementing a bilateral with the EU (namely the TDCA) and the BLNS were implementing a separate regime implied that the principle of a customs union had not been implemented consistently and the EU could trade with SACU in a discriminatory manner to avoid paying a higher tariff.

[5] DTI (2014a)

[6] DTI (2014a)

[7] Extracts from Zuma(2014)

[8] Zuma (2014)

[9] Davies ( 2014)

[10] A multiplier, in economic terms, refers to the multiplication effect that an investment and/or injection into the economy may have on jobs or economic growth in a broad manner. So if an industry has an employment multiplier of 2, then for every R1 invested into that industry, 2 jobs is expected to be created in the economy. While an economic multiplier of 2 would imply that for every R1 invested into that industry, R2 is expected to be generated in the economy.

[11] DTI (2014e: 18 -19)

[12] African Risen: The Blue Sky Continent (2014)

[13] Davies ( 2014)

[14] DTI (2014a)

[15] The real percentage change or inflation-adjusted calculations are based on an estimated 2014 Consumer Price Index of 6.2 per cent (National Treasury 2014b: 14).

[16] DTI (2014a)

[17] DTI (2014e)

[18] The transfer price refers to the price at which divisions of a company transact with each other. Transactions may include the trade of supplies or labour between departments. Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities.( Investopedia 2014)

[19] Zuma (2014)

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