ATC160318: Report of the Portfolio Committee on Trade and Industry on their oversight visit to KwaZulu-Natal, from 2-4 and 23 February 2016, dated 16 March 2016

Trade, Industry and Competition

Report of the Portfolio Committee on Trade and Industry on their oversight visit to KwaZulu-Natal, from 2-4 and 23 February 2016, dated 16 March 2016

 

The Portfolio Committee on Trade and Industry having visited (i) companies, such as Unilever South Africa and Toyota South Africa Motors (TSAM), to assess the impact of incentives they had received; (ii) the National Regulator for Compulsory Specifications (NRCS) to assess its ability to ensure that goods entering South Africa comply with the necessary technical standards and its service delivery performance; (iii) the Dube TradePort Industrial Development Zone (IDZ) to assess the development progress, as well as engaging with the Dube TradePort Corporation (DTPC) to assess its readiness to implement the Special Economic Zones (SEZ) legislation; (iv) companies such as Samsung South Africa, Laser Junction, Lebombo, and Quantum Farms located within the IDZ; and (v) the KwaZulu-Natal Gaming and Betting Board (KZNGBB), the National Gambling Board (NGB), and Hollywoodbets; reports as follows:

 

1.   Introduction

 

In terms of section 42(3) of the Constitution of the Republic of South Africa, 1996, the National Assembly among others scrutinize and oversee executive action. The National Assembly through the Portfolio Committee on Trade and Industry oversees the work of the Department of Trade and Industry (DTI) and its entities to ensure that national priorities such as the creation of decent employment are met. The DTI’s main mandate is to facilitate the creation of an environment conducive to industrialisation and regional economic development that facilitates economic transformation, as well as regulate business and protect consumers. Its range of functions should therefore support the achievement of this mandate.

 

Physical oversight visits provide the committee with the opportunity to test whether reporting by the Department and its entities are a true reflection of its reported service delivery. The committee embarked on an oversight visit from 2-4 February 2016 and engaged with Unilever South Africa on 23 February 2016 in Parliament to conclude its oversight engagement. The visit focussed on the impact of DTI’s incentive programmes, industrialisation and regional economic development in relation to the Dube TradePort IDZ, which are a type of SEZ.

 

 

 

1.1  Purpose of the visit

 

The committee visited companies receiving incentives from the DTI which included Unilever South Africa and TSAM. The intention of these visits was to discuss their experiences related to any incentives they may have received from the Department. With respect to Unilever South Africa, the committee was interested in the investment to expand the plant, the benefits of the 12I tax incentive to the investor and its contribution to the agro-processing industry. In addition, the green investment made in this plant would become more and more important for global trading in future due to global climate change concerns.

 

With respect to TSAM, the committee was interested in the investment to expand the plant, the benefits of the People Carrier Automotive Investment Scheme (P-AIS) to the investor and its contribution to the passenger vehicle manufacturing industry. Furthermore, the committee also engaged Toyota on prospects to increase local content.

 

The committee visited the Port of Durban to view how the NRCS inspectors and/or the customs officials identify and intercept products that are subject to compulsory specifications and technical regulations. In addition, how these products are handled when they do not meet the required standard.

 

With respect to its visit to the Dube TradePort IDZ, the committee engaged companies located within the Dube TradePort IDZ on their experiences related to any incentives they may have received from the DTI. In this regard, the committee visited Samsung South Africa, Laser Junction, and the Dube Agrilab. It also toured Quotum Farms and Lebombo. This was to assist the committee to assess the DTI’s service delivery in terms of certain incentives offered and to determine areas which should be monitored. Furthermore, the committee met with the DTPC to discuss the development of the IDZ, and its readiness to change its operational, funding and service delivery models to meet the new legislative requirements.

 

The following Members of Parliament and the Secretariat participated at different legs of the oversight:

 

1.     Ms J Fubbs, Chairperson (African National Congress (ANC))

2.     Mr L Kalako (ANC)

3.     Mr N Koornhof (ANC)

4.     Mr D Macpherson, Democratic Alliance (DA)

5.     Mr B Mkongi (ANC)

6.     Mr N Shivambu, Economic Freedom Fighters (EFF)

7.     Mr A Hermans, Committee Secretary

8.     Ms M Sheldon, Content Advisor

9.     Mr D Woodington, Committee Assistant

 

1.2  Purpose of the report

 

This report captures the substantive discussions the committee had during the oversight visit. The Committee Secretaries can be contacted for access to the detailed presentations from various stakeholders.

 

The report is set out in five parts. Part A provides an overview of each of the companies receiving an incentive from the DTI and provides the substantive discussions had with these companies. Part B provides an overview of the NRCS activities in relation to port inspections and provides the substantive discussions had with the border control agencies at the Port of Durban. Part C provides an overview of the Dube TradePort IDZ, the DTPC and the companies visited and an outline of the key issues raised during the visit. Part D provides the substantive discussions on matters relating to gambling industry in KZN. Part E sets out the committee’s findings/conclusions, acknowledgements and recommendations to the Minister of Trade and Industry.

 

Part A: Engagement with Unilever South Africa and Toyota South Africa Motors

 

2.      Companies that are recipients of DTI’s incentives

 

1. Unilever

 

Unilever is a multinational consumer goods company with a footprint across the globe. South Africa is one of the countries that Unilever invested in. In South Africa, Unilever has a number of operations including the Tea/Food Solutions Factory in Willowton, Pietermaritzburg, Soaps/Personal Care Factory in Durban, Ola Factory in Queensburgh, Durban, Margarine/Detergents Factory in Boksburg, Phoenix HPC Factory in Phoenix, and the Indonsa Savoury Factory in Durban[1].

 

Unilever’s Indonsa Plant is the second largest savoury plant globally. It had been approved for a 12I tax incentive in 2012 for an expansion of its plant producing savoury food products in Durban, KwaZulu-Natal, which started production in March 2015. The expansion was worth about R473 million and increased its manufacturing capacity to 100 000 tons while reducing its carbon footprint by 41 tons of carbon emissions and creating 63 additional direct jobs. This plant falls within the agro-processing industry, which is a substantial contributor to job creation and adds value to primary agricultural products. The expansion project was approved for the 12I tax incentive. Unilever received an investment allowance of R165.6 million and a training allowance of R2.3 million.

 

2.1.1       Discussion (Formal engagement on 23 February 2016)

 

Mr S Desai briefed the committee focusing on the company’s manufacturing transformation, the 12I tax incentive, sourcing of local material, the implications of the new Broad-based Black Economic Empowerment (B-BBEE) Codes of Good Practice, and its strategic partnerships. The committee also visited it Indonsa Plant on 2 February 2016.

 

The committee in its engagement with Unilever South Africa highlighted the following issues:

 

·         The impact of the new B-BBEE Codes of Good Practice on Unilever SA: Unilever South Africa informed the committee that based on the 2007 B-BBEE Codes of Good Practice it was received a BEE score that translated into a Level 6[2] in 2014 with 60 per cent procurement recognition level. The amended generic scorecard came into effect in May 2015 which is expected to negatively impact on Unilever’s BEE scorecard. Unilever informed the committee that the amended codes require it to double its contribution to skills development. It must now spend double the amount on the training of black employees which requires a significant budget adjustment. With respect to Preferential Procurement, companies are now required to spend 40 per cent of the total eligible spend on suppliers that are at least 52 per cent black-owned. Unilever South Africa informed the committee that currently it spent about 14 per cent of its procurement budget on companies that are at least 51 per cent black-owned. Unilever South Africa is of the view that it takes time to find and develop the right suppliers for the products that the business requires and that some of the inputs cannot be sourced locally. According to the new codes, the calculation for senior, middle, and junior management, as well as skills development must be made on the national demographic split.  As a Durban-based company Unilever South Africa is over-indexed with respect to the Indian population which will take some time to redress. The new codes identify three priority elements that are ownership, skills, and enterprise and supplier development which automatically will discount Unilever, as the company is internationally owned and fail to meet the requirement of “ownership”. To earn the 53.02 points Unilever South Africa could earn using the previous codes would mean that they are a level 8 contributor to B-BBEE. However, because the entity does not comply with the priority elements, it would be discounted to non-compliant under the amended codes. Unilever South Africa informed the committee that it developed a plan to implement activities to achieve about 63 points in their first codes verification which will result in a Level 7 discounted to Level 8. This would allow the company to remain complaint after the discounting principles has been applied with a recognition level of 10 per cent.

·         Local procurement and the challenges and opportunities associated with it: Unilever South Africa informed the committee that it has increased its sourcing of local products from 40 to 45 per cent. Over the last four years, it has sourced 100 per cent of the sunflower and canola oil used locally, as well as rooibos tea subject to its availability. Currently, the company is in the process of sourcing dehydrated vegetables from Level 1 BEE suppliers, which need to be assisted to produce the appropriate quality required by the Indonsa plant. The challenge facing Unilever South Africa is sourcing locally produced palm oil, which are a key ingredient for thousands of consumer products, and linear alkyl benzene (LAB), an input in the manufacturing of laundry detergents and washing preparations.

·         Experience of the DTI’s incentive scheme and specific impediments that may inhibit the growth of Unilever SA: Unilever South Africa commented positively on the administration of the DTI’s incentive scheme. They informed the committee that the incentive had supported significant investment in fixed assets in South Africa and significantly contributed to job creation. Three major factories were built in the last three years with an overall investment of R1 billion.

·         Proportion of manufactured goods exported and the challenges and opportunities existing for exports: Unilever South Africa informed the committee that of the 700 000 tons of goods produced in South Africa only 71 000 tons, approximately nine per cent, is exported to Africa. The rest of the goods produced are sold in the local market.  They have identified a number of opportunities that would contribute to South Africa’s competiveness, which are:

o     A simplified customs process and faster border processing.

o     The provision of further tax incentives on manufacturing and operational cost of running an export business.

o     The introduction of rebates on imported raw and packing materials.

o     The introduction of a preferential export status for Unilever which would ensure fast-tracking of processes.

 

1. Toyota South Africa Motors (TSAM) - Quantum Sesfikile Plant

 

The TSAM Quantum Sesfikile Plant has been assembling semi-knocked down kits for its Quantum Sesfikile passenger vehicles since April 2012. It initially made an investment of R40 million, employing an additional 90 people. In May 2015, it started manufacturing completely knocked down kits after investing a further R476 million and increasing its staff component by 248 people. The second phase of its investment represented local content above 30 per cent.

 

Subsequently, TSAM has been studying how to increase its local content by at least another five per cent with a list of about 115 components that could potentially be sourced from local manufacturers by its purchasing department in cooperation with Toyota Japan. This process will consider existing incentives like the Automotive Incentive Scheme and Production Incentive including the outcome of any changes made in the Automotive Production and Development Programme Review. The list consists of parts families including resin parts, brake systems, fuel tank and fuel pipes, seat belts and other safety components, suspension parts, additional interior trim, wiper-blade arms and brackets, headlamps and tail lamps, radiators and reserve tanks, and pressings.

 

The DTI had approved two (2) Passenger Automotive Investment Scheme (P-AIS) projects for the Quantum Sesfikile project. The first project was an investment worth R73.8 million, which received an incentive of R14.2 million paid to Toyota. The second project is still ongoing. TSAM is investing R524.3 million and is expected to receive R131.1 million from the DTI. The project is expected to create 678 direct jobs once fully operational.

 

2.2.1       Discussion

 

Mr A Kirby briefed the committee focusing on the SKD assembly, TSAM’s switch to a CKD assembly which means that everything from the body shell to the interior will now be assembled in South Africa, its job creation potential, and its localisation drive.

 

The committee in its engagement with TSAM highlighted the following issues:

 

·      The impact of the new Broad-Based Black Economic Empowerment (B-BBEE) Codes of Good Practice on TSAM: TSAM informed the committee that the drastic change to the recognition levels in itself would have significant impact on the B-BBEE level attained.  This, together with the Priority Elements, would result in Toyota SA, which is currently a Level 5, dropping to a Level 7. Furthermore, due to the Priority Elements and in TSAM’s case non-compliance with the Ownership requirement, a further level drop would result in Toyota SA being Level 8. So they would essentially drop from Level 5 to Level 8.  This has a significant impact on dealers, who use this score for their Preferential Procurement.  Regarding the actual B-BBEE initiative, TSAM informed the committee that it is an extremely competitive environment and the complexity of the new codes makes it very costly to administer. While TSAM supports the intent of B-BBEE and manages transformation on an organic level within Toyota SA, it was of the view that this intent should be realised by a simpler and more cost-effective B-BBEE intervention. 

Below is a breakdown of the codes requirements and the challenges TSAM faces:

• Ownership: As a multi-national company, the options available are limited to Equity Equivalence, which comes at a very high cost, according to TSAM.  With this element being a priority element, TSAM will drop by 1 level as it has not achieved the 40 per cent sub minimum for this element. 
• Employment Equity: TSAM raised some concerns around the Junior Management element being eliminated.  It is of the view that with the demographic differential being implemented, it should be aligned with the Employment Equity Act.  The other challenge that TSAM is facing is ensuring that their staff demographics meet the Economically Active Population requirements.  
• Skills Development: TSAM informed the committee that skills development had been identified as a priority element, which requires a 40 per cent compliance. Failure to comply would result in a drop of one level. Although this would not impact TSAM with the current scoring, the change to 6 per cent spend (effectively doubling the current 3 per cent) is a challenge due to the training of staff within the Economically Active Population ratio.  Other elements within the skills development process which poses a challenge is the exclusion of some of TSAM’s internal training and skills development programmes. Toyota SA has always had a very robust learnership programme. The introduction of the revised codes and the bonus points allocated to the placements of learnerships may be counter-productive in that organisations may limit the number of learners employed to the expected absorptive capacity of the industry. 
• Enterprise and Supplier Development: According to TSAM, the value of the Exempted Micro Enterprises (EME) and Qualifying Small Enterprises (QSE) limits is very restrictive in the Automotive Industry and requires an amendment.   The levels set for EME and QSE do not take into account the magnitude of its operations and very few of its suppliers can meet this level. Given the limits of the EME and QSE, Supplier Development at 2 per cent of Net Profit after Tax (NPAT) is rather difficult with the extremely limited number of suppliers within its Industry who qualify for this development

·      Local procurement and the challenges and opportunities associated with it: TSAM informed the committee that the new Hilux to be launched into the South African market on 22 February 2016 had increased local procurement from 41 per cent to 49 per cent, which includes raw materials and components.  TSAM further informed the committee that the deteriorating exchange rate had reduced its competitiveness, further exacerbating the value of imported content. TSAM’s strategic plan to address this is to dedicate sufficient resources to increase its localisation drive significantly as it is important to have a dedicated organisation within Toyota SA, led by a member of Board of Directors, to execute this plan.  The objective of TSAM is to ultimately expand its local supply base and create organic employment opportunities in South Africa.  

 

TSAM highlighted the following challenges:

 

• Lower volumes compared to its competitors in Asia who it competes with for parts sourcing.
• High cost of tooling amortisation based on the lower volume, as well as lack of a local cost-effective tooling industry.
• The majority of the raw materials being imported and/or exposed to foreign exchange fluctuations, which results in high input costs.
• Comparative inefficiency of some local suppliers coupled with higher inflationary pressures compared to international competitors.
•  Weak second and third tier supplier base to provide local materials and/or subcomponents or other parts.
• Lack of the latest technology being imported into South Africa due to low volume base and economies of scale.
• High and excessive electricity price increases.
• Poor public infrastructure (including water and electricity supply) in certain areas.
• Labour market instability due to industrial action may reduce appetite for multinationals to invest further.

 

TSAM highlighted the following opportunities:

 

• The creation of a self-sustainable component supply base capable of exporting to Europe, Asia and the Americas.
• Full maximisation of governmental incentives.
• Expansion to a SEZ (currently not available to Toyota SA).
• Willingness and capability of key suppliers.
• Common supplier base with Europe and Asia.
• Future potential growth of African markets to increase volumes of production and improve the business cases for new and additional investment of global suppliers.
• Working with the African Union to control the dumping of End of Life Vehicles (ELV) in Africa by other nations. This fuels the second-hand grey market in Africa which can be a safety and environmental hazard.

·         Proportion of manufactured goods exported and the challenges and opportunities existing for exports: TSAM informed the committee that, over the next 5 years, it intends to export 44.3 per cent of local production. Markets are limited, and due to Toyota Motor Corporation (TMC) in Japan’s global distribution strategies, it is difficult to develop new markets.  TSAM’s primary focus is to provide products and serve the African market.  According to TSAM, the African market is not expected to grow significantly over the next 10 years.  Europe manufactures the Corolla in Turkey, thus Toyota SA only supply Hilux into this market.  Furthermore, the Light Commercial Vehicle (LCV) market segment is sensitive to economic cycles and slow to recover after an economic downturn.   A key opportunity for TSAM lies in component exports as part of the global Toyota supply chain.  The same regional restrictions, as for vehicles, do not apply for component supply into model production lines.   TSAM informed the committee that the primary challenge to grow exports (of both vehicles and components) is to achieve cost competitiveness to its affiliate Toyota companies in countries such as Thailand, Argentina, Turkey and Japan.  This is difficult to achieve with a volatile currency, labour instability and low productivity, lack of global quality standards in the local supplier base and significant foreign direct investment into key sectors. 

·         Experience of the DTI’s incentive scheme: TSAM highlighted investment support it had received through the AIS, and duty free imports based on volume of production and value-addition known as the Production Incentive through the APDP. The latter expressed a duty rebate scheme to reduce duties charged on imported components and vehicles. According to TSAM, the MIDP and APDP (which commenced in January 2013) had been instrumental in growing the vehicle manufacturing base in the country and in the case of Toyota, had assisted in growing exports from a very low number to 60 per cent of production in its 2015/16 financial year. TSAM informed the committee that without the AIS and APDP, the above would not have been possible. This is further confirmed by the investment in 2013/14 on the new Corolla model and in 2015/16 on the new Hilux/Fortuner models. A combined investment of some R6.8 billion. Specific support for component exports and especially on “vulnerable” components had also maintained a high level of production and exports of catalytic converters where its geographic dislocation costs are covered by the value of the duty credits earned.

·         Specific impediments that may inhibit the growth of TSAM: TSAM listed a number of impediments related to the application of duty credits under the APDO incentive, port tariffs, the Taxi Recapitalisation Programme and the introduction of complete knockdown kits. TSAM highlighted specific concerns with regard to policy, associated with the APDP incentive, as it relates to independent importers. TSAM’s main concern is the sale of duty credits to importers who have no production base in South Africa. According to TSAM, the APDP has allowed these importers to buy duty credits from suppliers and some Original Equipment Manufacturers (OEMs). This lowers the cost of imported fully built-up vehicles into South Africa thus increasing their competitiveness relative to locally manufactured vehicles. TSAM further argues that Industrial policy that encourages local value addition should not be used to increase the competitiveness of imported vehicles where the importers have no manufacturing facilities in the country. The tariffs for imported vehicles are also too low and afford little protection to locally manufactured vehicles. According to TSAM, tariffs should be established to provide adequate protection to local manufacturers and to increase domestic demand for these same vehicles. 

 

With regard to OEMs that are local manufacturers, the duty credits lower the cost of local production thus assisting with export competitiveness and also allows the OEM to import built-up vehicles at reduced duties to complement the marketing mix in the country. In this regard, the OEM can become duty neutral through localisation and export activities but should not be allowed to sell surplus duty credits as is currently the case. Therefore, the policy should allow duty neutrality only.

 

TSAM informed the committee that port tariffs in South Africa exceeded those of Thailand and should be addressed as a matter of urgency[3].  

 

With respect to the Taxi Recapitalisation Programme, TSAM informed the committee that the policy has successfully addressed the scrapping of unroadworthy mini-bus taxis with about 40 000 of these having been already scrapped since its inception, but that the programme should be directed towards the continued replacement of these high mileage vehicles and to encourage the purchase of locally manufactured vehicles. However, this would require a policy change, as currently the incentive’s sole purpose is to scrap a vehicle. This should be expanded to its replacement with a newly purchased, locally manufactured one. TSAM further informed the committee that the DTI changed the import duty tariff from May 2015 to encourage local manufacturing of minibus taxis but the scrapping incentive has not been amended to support this change. TSAM is of the view that the current taxi recapitalisation incentive is being used to further reduce the cost of imported vehicles.

 

With respect to the introduction of the full CKD assembly, TSAM informed the committee that the Customs Regulation changes only allowed OEMs to import parts duty free but not suppliers. This had an unintended consequence. TSAM approached the International Trade Administration Commission of South Africa (ITAC), the DTI and the South African Revenue Service (SARS) on this matter and at a joint meeting in November 2015 a way forward was agreed to.  According to TSAM, it had fulfilled its obligations but no progress seems to have been made by the DTI to initiate this amendment.  The cost to Toyota who has to reimburse its suppliers is in the region of R1.6 million per month. TSAM has submitted a formal letter to the DTI in February 2016 and is concerned about the perceived reluctance on the part of the DTI to conclude the matter.

 

Part B: Visit to the Port of Durban in terms of the National Regulator for Compulsory Specifications’ (NRCS) operations

 

3.     Visit to the Port of Durban – NRCS operations

 

3.1  Overview

 

The National Regulator for Compulsory Specifications is established and mandated to promote public health and safety, environmental protection and ensure fair trade[4].  This mandate is achieved through the development and administration of technical regulations and compulsory specifications, as well as through pre-market approval and market surveillance activities to ensure compliance with the requirements of the compulsory specifications and technical regulations.  While consumer protection lies at the heart of the activities of the NRCS, this function cannot be separated from South Africa’s role as a global trading partner.  South African goods and services need to be competitive in terms of cost and quality and, at the same time be guaranteed to be safe and fit for purpose. 

 

After conducting an international study on regulatory enforcement practices, the NRCS adopted and implemented Risk-Based and Border Enforcement approaches to its work since 2012.  The Border Enforcement approach, coupled with Targeted Inspections (Risk-Based) proved to be very successful in identifying regulated products being imported into South Africa and determining whether the necessary approvals for importing and trading in such products were granted. 

 

The Border Enforcement approach resulted in the NRCS identifying large volumes of products that were being imported into South Africa without meeting the requirements of the compulsory specifications and technical regulations.  The identified non-compliant products were detained or returned to the country of origin, a large majority of them were destroyed costing the South African government millions of rand.  Such successes could not be achieved without the support and cooperation of key partners such as the SARS (Customs and Excise) and the South African Police Service (SAPS) (Border Police).  The NRCS, the SARS, the SAPS and other partners continue to cooperate with each other in ensuring the fulfilment of each entity’s organisational mandate through the Border Control Operational Coordinating Committee (BCOCC), which will be replaced by the Border Management Agency. 

 

The NRCS has a critical role to play in ensuring human and environmental health and safety is maintained in terms of products that are manufactured and imported and then sold to consumers. In this regard, the NRCS conducts inspections at ports of entry, at factories and at retail outlets to ensure that products that are subject to compulsory specifications and technical regulations do meet these standards. Products that do not meet these criteria are confiscated and can either be destroyed or returned to the original manufacturer/exporter abroad.

 

The committee visited the Port of Durban to view how the NRCS’ inspectors and/or the customs officials identify and intercept products that are subject to compulsory specifications and technical regulations. In addition, how these products are handled when they do not meet the required standard.

 

3.2  Discussion

 

The NRCS briefed the committee on its border inspection process. The following key issues were raised:

 

·      Preferred trader system: The NRCS informed the committee that it had adopted dual approaches for its enforcement surveillance activities. A targeted inspection strategy, targeting mostly the port of entry (source), together with a risk-based approach has yielded positive results in curbing various forms of fraudulent and illegal imports, as well as harmful, substandard products imported into the country. This is done in compliance with the necessary World Trade Organisation’s (WTO) Agreements/Rules. The NRCS informed the committee that it has requested a company of attorneys to study its obligations under the WTO Agreements/Rules which should be completed by June 2016. This will allow the NRCS to develop a system where it would be able to grade and categorise traders based on their respective risk levels. The NRCS would be able to identify trusted importers and exporters with the required systems and controls in place to ensure a high level of compliance, hence the preferred trader concept.

·      The slow turn-around time associated processing of goods at ports of entry: The NRCS informed the committee that its objective is to reduce the turnaround time to 24 hours. Once the containers are referred to the NRCS, a team of inspectors is dispatched to conduct inspections at the different ports of entry. If the products comply with the necessary compulsory specifications and technical requirements, the container is fully released. If products are non-compliant, the products remain detained until proof of compliance is provided and the appropriate corrective action is taken as determined by the NRCS. The NRCS also noted that delays are often as a result of the provision of incorrect documentation and/or goods not meeting the necessary compulsory specifications.

·      Destruction of products seized by custom authorities: The NRCS informed the committee that destroying products is the last resort and that all avenues are explored to correct the compliance, but if this fails to try to ship the containers back to the country of origin. The NRCS would also engage the regulators of the country from which the goods came from to ensure traceability. Only when no one claims the container would the NRCS destroy the products, as non-compliant products cannot be sold on the market.

The SARS informed the committee that the disposal of goods seized by it are guided by its policy. The methods that SARS utilised are to either destroy the goods or to auction these by tender. An auction can only take place on goods that are not prohibited and restricted in South Africa and it engages with the NRCS and the Department of Health through the BCOCC on goods that are prohibited. Goods, such as clothing and textiles, would not be auctioned in South Africa to limit competition with domestic producers, as the intention of these auctions is to recover the import duty that has been lost to the fiscus. 

 

Part C: Visit to the Dube TradePort

 

1. Dube TradePort  Industrial Development Zone

 

The committee visited the Dube TradePort on 3 February 2016. It was taken on a brief tour of the active zones within the IDZ, which included formal meetings with:

 

·         The Dube TradePort Corporation (DTPC),

·         Samsung South Africa, and

·         Laser Junction.

 

The committee was also taken on site visits to the AgriZone, visiting Qutom Farms and Lebombo’s pack house and the Dube Cargo Terminal.

 

4.1  Dube TradePort Development Corporation

 

4.1.1       Overview

 

The Dube TradePort is based next to the King Shaka International Airport in KwaZulu-Natal. This IDZ is operated by a provincial public entity, namely the DTPC. The Dube TradePort was opened in 2012 and then designated as an IDZ in 2014. It occupies 2 840 hectares and is intended to be a world-class airfreight and passenger hub comprising four business zones that promotes manufacturing, assembly and logistics facilities. The four zones include:

 

• Dube TradeZone (the IDZ): An industrial estate targeting new-generation warehousing, logistics and distribution, manufacturing, assembling, air-related cargo distribution, high-tech aerospace services, electronic manufacturing, automotive industries, pharmaceuticals, clothing, textiles and cold-storage activities. The estate houses freight forwarders and shippers and is connected to Dube Cargo Terminal and to King Shaka International Airport.
• Dube City: A business and leisure centre with mixed land-use.
• Dube Cargo Terminal:  Directly linked to freight forwarders located in Dube TradeHouse via an elevated conveyor system, it is capable of rapidly and safely handling 100 000 tonnes of cargo annually, increasing to 2 million tonnes by 2060.
• Dube AgriZone: An integrated perishables supply chain that houses a specialised tissue culture laboratory, Dube AgriLab, greenhouses, pack houses, a high care value-adding distribution centre and a nursery, through to refrigerated air and road transport.

 

The targeted sectors include:

 

• Aerospace and aviation-linked manufacturing and related sectors,
• Agriculture and agro-processing, including aquaculture, horticulture and floriculture,
• Electronics manufacturing and assembly,
• Medical and pharmaceutical production and distribution, and
• Clothing and textiles.

 

In May 2015, the Dube TradePort had been approved to receive funds from the SEZ Fund to the value of R24 million to construct bulk infrastructure to the value of R976.5 million. This investment is expected to create 885 direct jobs and 245 construction jobs.

 

The legislative environment within which IDZs have operated will be changing once the Special Economic Zones Act (No. 16 of 2014) becomes enforceable. Existing IDZs will have three years to align themselves with these new requirements.

 

4.1.2      Discussion

 

The DTPC briefed the committee on its structure and master plan, its alignment to national and provincial policies and plans, its one-stop shop model, its transitioning plan in relation to the SEZ legislation, and funding for development and maintenance of the IDZ. The following key issues were raised:

 

·         Challenges associated with the approval process in respect of Environment Impact Assessments (EIAs) and the perceived bottlenecks: The DTPC informed the committee that it currently has four EIA applications lodged with the National Department of Environmental Affairs, which have been pending for about five years. The reason for this is related to the DTPC’s obligation to delineate a conservation area as set out in the 2007/8 Record of Decision (RoD). The RoD is held by the Airports Company of South Africa (ACSA). The DTPC itself respects the environmental processes that are underway and recognizes the environmental preconditions in its immediate context. However, notwithstanding that the processes associated with the EIA must be upheld, the time taken by the relevant authorities is simply too long. The DTPC informed the committee that a number of processes had been undertaken with the relevant authorities at all spheres of government to resolve environmental obligations on site. These interventions included the Climate Resilience Framework being undertaken in partnership with Tongaat Hulett Developments and eThekwini Municipality, as well as the Delineation of the Conservation Area undertaken with various stakeholders in all three spheres of government. In the spirit of cooperation, the DTPC agreed to hold back the four EIA development applications to allow for an amicable resolution to be reached among all parties on the matter. All four projects have therefore been impacted by the inability to secure environmental authorizations in good time, as the delineation matter was only resolved in January 2016. This allowed for three of the four applications to be made. The fourth application will rely on the finalisation of the Climate Resilience Framework. 

The DPTC further informed the committee that as part of the land preparation process, development projects are also subject to the Land Planning process after environmental applications are approved.  This requires the securing of land use rights as legislated by the Spatial Planning and Land Use Management Act (No. 16 of 201) and the KwaZulu Natal Planning and Development Act (No. 6 of 2008). Both of these Acts have legislated timeframes in order to permit municipal councils to assess development applications in a rigorous and competent manner. There is still a significant amount of uncertainty on when the Climate Resilience Framework process will reach finality, as it will now enter into a public participatory phase. This does not provide the DTPC with any certainty on when future authorizations will be issued for development projects thereby having a direct impact on the pace of development on-site.   The DTPC informed the committee that the net effect is that industrial land availability for private sector investment remains constrained until all of these processes are complete.   

·         The DTPC’s cost structure and funding model: The DTPC’s cost structure includes operating expenditure and capital expenditure with more than half of the allocated budget through the Medium Term Expenditure Framework (MTEF) being spent on capital projects. The DTPC’s funding model is a combination of own revenue, provincial budget allocation and specific grants from the DTI.  

·         The DTPC’s strategy to mitigate against future water shortages given that KwaZulu Natal is being classified as a water scarce province:  The DTPC informed the committee that in its AgriZone it used the following to meet its water needs:

1. Rainwater harvesting and providing sufficient storage capacity on site through ponds;
2. Recycling of water inside greenhouses;
3.  Use of boreholes; and
4. Treated and tested wastewater, which can be used for operating things like ablutions and industrial type activities. This water is treated to General Limit Values (GLVs) as specified by the Department of Water Affairs.  

There is also a reverse osmosis plant at the AgriZone that further treats water where necessary to ensure the needs of the tenants are met. Thus far there has been no need to use municipal water at the site for agricultural activities due to the water management strategy outlined above. The DTPC informed the committee that it actively collaborates with the eThekwini Municipality Water and Sanitation Department on assessing solutions to mitigate future water shortages. Currently, a pre-feasibility study has been undertaken with the municipality on water re-use in the northern region. The study would provide both parties with a level of certainty on the potential for water re-use for industrial demand and potable use in the municipalities instance, while also defining a way forward to collaboratively move towards putting a long term solution in place.

·         Employment challenges facing the DTPC: The DTPC currently has a moratorium on recruitment in line with National Treasury austerity measures. Staffing structures and roles are being optimized to deal with this in the short to medium term. The DTPC highlighted the skills shortages among senior management which impacts on efficiencies due to the operational burden that this places on Executives with four senior manager positions currently vacant. Critical skills that cannot be sourced due to the moratorium are in the areas of: information technology (IT), air-cargo operations, horticulture, special economic zone, and agricultural science. The shortages in these operational areas hinders efficiencies and its ability to meet service level agreements and ultimately its ability to grow revenue.   

·         Status of the DTPC’s plans with regard to its land acquisition and infrastructure development project: The DTPC informed the committee that in terms of the organization’s Strategic Plan for 2015 to 2020, 700 additional hectares are targeted for acquisition over the next 5 years. Over the 2014/15 and 2015/16 financial years, the DTPC has acquired approximately 277 hectares adjacent to its existing land holdings. This land is well located next to land planned for future use as a multi-modal logistics and rail staging area, and is highly accessible and visible from the R102 provincial route. Importantly, the land abuts a railway line which bears significant advantages in future once a rail line and linkage is established to the South Durban Basin and the Port of Durban. These land acquisitions are in line with the DTPC’s strategy to expand its footprint in the north for future expansion of its operations and the IDZ footprint by implication.  

      The provincial Economic Development, Tourism and Environmental Affairs Department (EDTEA) has mandated the DTPC to acquire land for the KwaZulu Natal Automotive Supplier Park.  This mandate is in line with its  objects, powers, duties and functions as set out in sections 3(b), (c), (d) and (e), and 4(2)(a)(ii), (c), (g), and (j) of the KwaZulu-Natal Dube TradePort Corporation Act (No. 2 of 2010). The DTPC has to ensure sustained economic development well into the future, and as such, one of its strategic objectives is to ensure the availability of land for future expansion in support of the establishment of the Durban Aerotropolis. The DTPC currently is in the process of negotiating the purchase of 1 000 hectares in Illovo South of Durban for the Automotive Supplier Park.  

·         Plans to link Dube TradePort with the Port of Durban: The DTPC informed the committee that it is a member of the SIP (Strategic Integrated Project) 2 KwaZulu Natal Working Group that has been involved in a process of the development of the eThekwini Freight Strategy by the eThekwini Transport Authority in consultation with Transnet to guide long term road freight movement in the city.  The Dube TradePort was a contributor to the Aerotropolis Joint Initiative in partnership with Tongaat Hulett Developments for the northern region of eThekwini Municipality. In the immediate proximity of the precinct, an intermodal staging area is planned for a part of the Inyaninga Industrial Development (neighbouring Dube TradePort). The intention is for the existing railway line from northern KwaZulu Natal to the South of Durban to be re-established in order to strengthen cargo throughput at the airport and link Dube TradePort with the harbour.   

·         Challenges associated with visas granted to foreign nationals: The DTPC informed the committee that there have not been serious challenges experienced in this regard, except for delays with the visa application for a Samsung executive who was required to get police clearance from other countries he used to work from. There was no impact on the investment or its operations. The Department of Home Affairs will be a critical stakeholder of Dube TradePort in implementing its One-Stop Shop.

·         The model for and functioning of the One-Stop Shop, as well as the effectiveness of this model: The DTPC has established a solution at the Cargo Terminal, which offers major services and approvals, such as Customs, Agriculture, Border Police, etc. under one roof. This makes it easier and more efficient to process paperwork on the spot without causing any delays for the cargo. Furthermore, the Dube TradePort Relations Manager works closely with current investors and potential investors to ensure that their needs are taken care of and provides a link with the various Dube TradePort business units and external stakeholders. These arrangements pre-existed the designation of the TradePort, as an IDZ. The main purpose of the One-Stop Shop is to provide easier access to investors in terms of information, licences and permits, fast track approvals, and provide post-care services to operational investors – in line with the aims and objectives of the Special Economic Zones Act (No. 16 of 2014).   The DTPC informed the committee that it is planning to have a One-Stop Shop administered by at least two officials who will be responsible for receiving and processing applications for investors. They will, as the first point of contact for investors, provide the necessary information and will be responsible for submitting the forms/documents on behalf of investors to the relevant departments/agencies and provide the necessary feedback to investors with respect to their applications.  The DTPC recognised that in order for the One-Stop Shop to operate optimally it must try and establish closer working relationships with the relevant departments/agencies. This model complies with the One-Stop Shop Model that was presented by the DTI to the Portfolio Committee on Trade and Industry during the SEZ Bill hearings. The Dube TradePort is also participating in the provincial one-stop shop feasibility study and will align with the outcomes of this process.     

·         Clarity on the linkages with the Investment Promotion and Interdepartmental Clearing House: The DTPC informed the committee that the Dube TradePort works closely with the DTI’s investment promotion unit, and Trade Investment KwaZulu Natal (TIKZN) with respect to investment promotion. As a result, there were a number of referrals that the Dube TradePort have received from both the DTI and TIKZN for potential investors, which is an indication of the good working relationship that exists between these organisations. The DTPC is aware of the Interdepartmental Clearing House, but it has not been officially presented to the DTPC nor have they had discussions with the DTI in this respect. Once the DTPC has been consulted on this matter, then its role will be clarified.

·         Funding for the development and maintenance of the Dube TradePort:  The DTPC is a Schedule 3C public entity and receives grant funding from the EDTEA.  This funding is part of the MTEF allocation received through the KwaZulu Natal Provincial Treasury.  In terms of the Public Finance Management Act (No. 1 of 1999), the DTPC is not allowed to borrow funds and the funding model therefore does not include any loans. The DTPC also receives grant funding from the SEZ Start-up Fund and the Infrastructure Fund administered by the DTI for the purposes of investment promotion, project management and specific infrastructure projects relating to the development of the Dube TradePort IDZ. The DTPC has various other income streams. However, these are not significant at present, at around 14 per cent of the DTPC’s total income, but these are growing.  Ultimately, the DTPC aims to enlarge its asset base so that it can maximize its revenue generation and move towards financial self-sustainability over the medium to long term.  

·         The relationship with the provincial and local government to ensure the effective functioning of the Dube TradePort IDZ and its ability to attract and retain investors: The DTPC informed the committee that it has a good working relationship with the Local Authorities and Provincial Government. It is actively involved in various fora at planning, environmental and infrastructure levels. The DTPC is part of the SIP 2, the N2 Corridor Plan, the Aerotropolis Airport Planning Forum, the Virginia Airport Steering Committee, the Cooperative Governance and Traditional Affairs (COGTA) KwaZulu Natal Planning Forum, the Provincial Growth and Development Plan Action Working Group, and the Climate Resilience Framework and Advisory Forum.  The strong working relations between the DTPC and local and provincial government and agencies ensured that it continues to attract investors and retain the existing ones.   

·         The current investor pipeline for the Dube TradePort IDZ:  The DTPC informed the committee that currently it has nine operational investors worth R558.5 million. A further six investors committed to invest approximately R326 million in the next 18 to 24 months.  

 

4.2    Engagement with Laser Junction

 

4.2.1      Overview of Laser Junction

 

Laser Junction was established in 1995 as a family business and specialises in laser cutting, precision bending and steel fabrication. It is able to cover a wide range of customer requirements including high volume ‘direct to line supply’ production work, once-off jobbing shop orders, and large-scale special products. It supplies parts and components to industries such as the automotive, rail, power, electronic, construction and light engineering.

 

In 2013, it underwent a management buy-out with a B-BBEE partner and had attained B-BBEE Level 3 certification. It has 62.5 per cent black ownership and 25 per cent black female ownership.

 

4.2.2      Discussion

 

Mr W Evans briefed the committee and provided an overview of company. The following key issues were raised:

 

·         Impact of the new B-BBEE Codes of Good Practice:  Laser Junction informed the committee that it is expected that most companies will drop by at least 2 to 3 levels under the new revised Codes (data confirmed by BBBEE auditor, AQRate). Despite it being a 62 per cent black-owned company, it expects to be affected in a similar manner. According to Laser Junction, the B-BBEE legislation is generic to all types of companies and does not take the following into account:

• The size of the business (a company with a R100 million turnover has the same requirements as a company with a R5 billion turnover). The industry/sector in which a company operates (a manufacturing company vs an insurance broker).
• The financial strength of a company (a company in a loss-making situation still has to outlay a considerable amount of money to remain B-BBEE compliant for Skills Development, as the target is still to spend 6 per cent of payroll).
• There is no emphasis or points for job creation.
• Support for black suppliers: Laser Junction informed the committee that there are few black suppliers in the industry. Due to the current economic environment and limited resources, Laser Junction is not in a position to finance the development of black suppliers.
• Local procurement of inputs: Laser Junction informed the committee that the majority of goods and materials are procured locally.
• Percentage of its products exported: Laser Junction currently has limited exports; however, there is a high, lucrative potential for future exports.  Laser Junction informed the committee that Bombadier had already indicated an interest in international supply of its product if the business is able to prove its ability during the Transnet locomotive project, which requires high volumes of parts at a high quality. AGCO, an American-based agricultural equipment manufacturer had also expressed an interest in sourcing parts from South Africa and is currently conducting a feasibility study. 
• Manufacturing Competitiveness Enhancement Programme (MCEP) incentive: Laser Junction informed the committee that it had submitted an application in December 2014 for the MCEP incentive for the amount of R800 000. This amount was budgeted for to assist with the move of the business to its new factory in the Dube TradePort IDZ. According to Laser Junction, it received notification from the DTI that the programme was oversubscribed and therefore closed. This required Laser Junction to source additional short-term funding to cover its move to the Dube TradePort. The oversubscription of MCEP could potentially impact on Laser Junction’s ability to acquire new machinery that is required for its Bombadier Project due to the cost of this additional funding.
• Cost of Local vs Imported Steel:  According to Laser Junction, the cost of locally produced steel is still 30-40 per cent more expensive than imported steel despite the conditional tariffs imposed on imported steel as dictated by the ITAC decision[5]. This is compounded by the 10 per cent increase in local prices from ArcelorMittal South Africa (AMSA) to metal fabricators even though this is in violation of the conditions set. This increase will have a major impact on margins, at a time when all businesses are struggling within the industry and will increase the costs of finished products for tenders. However, the DTI has indicated that there had been no final agreement between government and steel producers regarding the pricing of steel.

 

4.3  Engagement with Samsung South Africa Production (SSAP)

 

4.3.1      Overview of Samsung

The Samsung plant is a greenfield project established in the Dube TradePort IDZ. Prior to this investment, Samsung did not have any manufacturing facilities in South Africa and only outsourced the assembly of LED televisions and LCD monitors to three different companies in South Africa. This new plant now manufactures the LED televisions and LCD display monitors and may expand to other products dependent on the viability to do so in future.

 

The plant was a recipient of the 12i Tax Incentive, which was approved in March 2014 based on projected investment to be leveraged of R228 million and projected jobs of 306. The total investment and training allowance approved was R235 million, while Samsung has utilised R64 million of this to date. The plant started production in December 2014 employing 129 employees at the time.[6]

 

4.3.2      Discussion

 

SSAP briefed the committee. The following key issues were raised:

 

·         The impact of the new B-BBEE Codes of Good Practice: SSAP informed the committee that as it is a new entity, it was in the process of undergoing B-BBEE verification.

·         Support for black industrialist and suppliers: Currently, the SSAP is utilising two suppliers for raw materials, namely Iso Moulders (Pty) Limited (Ltd) and Corruseal (Pty) Ltd. Iso Moulders manufactures expanded polystyrene (EPS) products, and is the only supplier in KwaZulu Natal, and has a level five B-BBEE score. Corruseal is the supplier of packaging. Corruseal has a level two B-BBEE score.  SSAP informed the committee that apart from raw materials, it utilises a number of local suppliers for its capital expenditure, consumables and services. Examples of local supplier services include: audit services, security, cleaning, logistics, engineering components, repairs and maintenance, rentals, IT network costs, insurance, etc. SSAP currently has more than 200 local suppliers on its supplier database.  

·         Local procurement and the challenges and opportunities associated with it: SSAP informed the committee that its production facility is procuring boxes, cushions and packing materials locally. The plan is to source the following products locally in the near future: plastic injection covers and rear covers, press machinery, and manual labels. According to SSAP, one of the challenges are that domestic goods are more expensive than imported goods. Furthermore, local suppliers are not located near to the Dube TradePort which increases the costs of logistics.

·         Percentage of goods exported and the challenges and opportunities within the export market: In 2015, the domestic sales for SSAP accounted for 93 per cent of the total sales, while exports contributed only seven per cent. SSAP informed the committee that it plans to increase its exports into Africa in 2016 with the goal to increase its export sales to 42 per cent of total sales.

·         Impact of the DTI’s incentive scheme: SSAP informed the committee that it is currently receiving a rebate of duties on the importation of raw materials and components used in the manufacturing process. This includes rebates on material purchased for the production of SSAP’s finished goods, such as televisions, monitors and small mount devices (SMD) components. SSAP is located within the Dube TradePort and benefits from both the fiscal and customs incentives geared towards manufacturing as captured in Schedule 3 of the Industrial Rebates on Customs duties.

 

SSAP informed the committee that it is also a recipient of the 12i tax incentive which would become effective once the setup costs have been fully utilised. Furthermore, the benefit of a reduced tax rate as an SEZ incentive would also accrue once it generates profits.  SSAP informed the committee that incentives received in other countries has impacted on its relative cost competitiveness. SSAP would like to encourage the DTI to benchmark its incentives against those offered by the Egyptian Government. According to the SSAP, a major impediment is the high logistics costs and the distance between the Port of Durban and the Dube TradePort.

 

 

 

 

Part D: Engagement with the KZN Provincial Gaming and Betting Board, the National Gambling Board, and Hollywoodbets

 

5.       Overview of Gambling related matters in KwaZulu-Natal

 

The committee has been actively dealing with gambling since 2009, when a rigorous review was undertaken. As a result of engagements with a number of stakeholders it became apparent that there were several concerns among stakeholders with respect to the regulation of various forms of gambling. The committee has previously engaged with the Ms B Scott, Member of the Executive Committee (MEC) within the KZN Administration with regard to recent claims of maladministration and abuse of public funds within the KwaZulu-Natal Gambling and Betting Board, and the roll-out of Electronic Bingo Terminals highlighted the challenges facing the gambling industry in KwaZulu-Natal.

 

Of major concern to the committee is the lack of transformation within the horseracing industry, with specific reference to it self-regulatory status, ownership, the grooms and the betting industry. With respect to the grooms it relates to their working conditions grooms and lack of recognition by the National Horseracing Authority, while all other stakeholders have recognition agreements with it. Furthermore, the industry raised concerns regarding the impact of bookmakers on betting revenue from the totalisator and intellectual property concerns around the broadcast and use of race material. There were also other concerns due to legalised horse-racing being limited to thoroughbred horse-racing and the consequential transformations issues related to this, as the thoroughbred horse-racing industry is quite capital intensive.

 

The committee agreed that as part of its oversight visit in KwaZulu-Natal it should engage the KZNGBB on the current status of the roll-out of EBTs and on recent developments with respect to gambling in the province. The committee also intends to engage the Department of Trade and Industry on matters relating to horseracing and the Grooms, as well as engaging the betting industry on their areas of concern.

 

6.     Engagement with the KZNGBB

 

Ms S Dube briefed the committee on developments and challenges faced within KwaZulu Natal in respect of gambling-related matters. The briefing highlighted developments within KwaZulu Natal as it relates to the casino, the limited pay-out machines, and the bingo industries, as well as the roll-out of electronic bingo terminals, and horseracing and betting. She also raised the general challenges facing the gambling industry.

 

The committee in its engagement with the KZNGBB highlighted the following issues:

 

·         The slow pace of transformation in the horseracing and betting industry and how is the matter being addressed in KZN: The KZNGBB informed the committee that it has introduced a number of measures to facilitate the transformation of the industry in the Province. The following measures should contribute to the transformation mandate of the KZNGBB:

• The KwaZulu-Natal Natal Gaming and Betting Act (No. 9 of 2011) requires that the horseracing industry transforms, therefore this forms part of the Board’s mandate.
• Regulation 3 requires that the KZNGBB submit a quarterly report to the relevant portfolio committee in the Provincial Legislature which must contain information regarding the progress within the horseracing and betting industry in the province.
• Requirements of the B-BBEE regulations has been incorporated into the licensing conditions, which are monitored.
• New booking rights were determined, which are aimed at Historically Disadvantaged Individuals (HDIs), as well as requiring that new acquisitions by corporate entities meet the minimum requirements of ownership.

·         Review of the National Gambling Policy: The KZNGBB informed the committee that it formed part of the policy discussions and submitted proposals for consideration. Two workshops were held between the DTI and other gambling regulators where concerns around policy matters were raised. The status and the outcome of the policy process resides with the NGB.

·         Self-regulation versus institutional regulation of the horseracing industry: Currently, no formal regulations govern the operation of the industry with the National Horseracing Authority (NHA) regulating the sport of thoroughbred horseracing in Southern Africa. It is the NHA’s responsibility to ensure that all racing takes place at licensed premises within the rules that govern horseracing. The KZNGBB raised the concern about those that fall outside this regulated industry, such as rural horseracing. The need to formalise this industry is important and the KZNGBB hopes that the new National Gambling Policy addresses this shortcoming within the horseracing industry. The KZNGBB informed the committee that it is only empowered to regulate and transform the bookmaking industry, racecourses and totalisator operators.

·         Power of the NGB and Provincial Licensing Authorities (PLAs) within the gambling environment: The KZNGBB informed the committee that this is a policy matter and representations were made during the review process of the National Gambling Policy. The KZNGBB is of the view that licensing should remain the exclusive competence of the PLAs. However, where the NGB is involved in ensuring compliance with national norms and standards and ensuring the reduction of harm arising from uncontrolled gambling activities, it is supported that criteria is set out by way of regulations to ensure fairness and certainty.

·         Slow pace of transformation within the betting industry: The KZNGBB informed the committee that prior to the enactment of the KwaZulu-Natal Gaming and Betting Act, each bookmaking right was owned by a sole proprietor and was viewed as a micro enterprise and therefore exempt from B-BBEE compliance. This resulted in the reluctance of industry players to transform their businesses. The change in legislation to allow for corporatisation has given the KZNGBB the ability to enforce changes whenever it receives new acquisition applications. However, this is a slow process. Further changes to the B-BBEE legislation to define the industry’s thresholds in terms of turnover or gross profit would certainly assist in identifying those industry players who are required to obtain level two status.

·         Stakeholders within the gambling industry that do not comply with the B-BBEE Codes of Good Practice: The KZNGBB informed the committee that it had raised the awareness around the betting industry and had requested industry players to submit their plans in order to achieve compliance. Action will be taken against industry players that are not in compliance with the B-BBEE Act.

·         KZNGBB’s position with respect to payment of taxes by bookmakers: With regard to the view expressed by bookmakers that taxes paid by them is unfair, a clear distinction should be made with regard to taxes paid by bookmakers, and taxes retained by bookmakers. The KZNGBB is of the view that the horseracing taxes of six per cent do not burden bookmakers and therefore they cannot claim that the taxes are unreasonable. Currently, bookmakers do not directly contribute to the racecourse operators or any other sporting code but simply offer betting on the outcome of events organized by them.

·         Concerns with respect to grooms: The KZNGBB informed the committee that they are of the view that the NHA should receive government funding and for its mandate to be expanded to include ensuring transformation of non-gambling activities of the horseracing industry.

 

7.     Engagement with the National Gambling Board

 

Ms C Kongwa briefed the committee on developments within the gambling industry. The briefing focussed on the proliferation of LPMs, the lack of transformation within the gambling industry, problems associated with the regulation of online gambling, and the issue of concurrence.

 

·            The proliferation of LPMs: The NGB informed the committee that the LPM industry directly impacted on its mandate as the National Gambling Act (No. 7 of 2004) requires it to oversee that provinces are in compliance with national legislation. The NGB must ensure that provinces exercise their competency or authority within the spirit of concurrent jurisdiction with respect to gambling.  The NGB informed the committee that over time challenges with respect to concurrent jurisdiction arose. According to the NGB, the problem is that gambling is seen as a revenue source by the provinces with the NGB responsible to ensure that the socio-economic impact thereof is minimized. The call for a further roll-out of LPMs by the industry, notwithstanding the legislative position with respect to provincial allocations is not supported by the NGB. Legislation and regulation is clear that when a province intends going beyond the 50 per cent threshold they must request the NGB to commission a socio-economic impact assessment which will inform the Minister’s decision on whether to permit the next phase of roll-out of LPMs which will allow a province to get 85 per cent of its provincial allocation. The NGB recognises the right of provincial licensing authorities to issue licences but when it goes beyond the permitted allocation for LPMs it must consider other factors such as the proximity to places of worship, schools, and the geographic spread of LPMs.

·            Transformation of the gambling industry: The NGB welcomed that transformation requirements should form part of licensing conditions before a licence is issued.  More inspection of licensees to ensure that they comply with their licensing conditions should be encouraged.

·            The proliferation of online gambling: The NGB informed the committee that they are concerned with the proliferation of online gambling. They are meeting with the Internet Service Providers’ Association to explore ways which would assist the NGB in identifying sites that are offering online gambling and to effectively regulate the industry or close down service providers that are in contravention of the National Gambling Act.

 

8.       Engagement with Hollywoodbets - Bookmaker

 

8.1  Overview

 

Bookmaking forms part of the horseracing and betting industry. Bookmakers tend to take bets on domestic and international horse races, sports events, mainly soccer, and other lawful contingencies. Larger bookmaking stores may also apply for licences to operate up to five LPMs, as well as liquor licences. Bookmakers in South Africa range from one-man operations to larger stores, such as Hollywoodbets.

 

Most of the issues previously raised regarding bookmakers were related to their bets on horse racing. These included:

 

• The horseracing industry, in particular the totalisator[7] operators, have complained about the contribution that bookmakers make towards horse racing. At the time, the totalisator contributed up to 25 per cent of its revenue from placed bets towards the racing industry, while bookmakers contributed only 3 per cent of patrons’ winnings to the racing industry. The South African Bookmakers Association has explained that this is attributable to the different operating models used with a stark difference between the risks faced and the surety of profit margins.
• The totalisator has also raised concerns about bookmakers placing open bets[8] against the totalisator. It accuses bookmakers of using its intellectual property without paying for it, as the odds for these bets are generated or determined by the dividends paid by the totalisator and this results in direct competition for punters’ bets. Thus, reducing the amount available to contribute to the horse racing industry. However, the bookmakers disagree that this practice diverts funds from racing or is unlawful competition.
• Bookmakers have complained that the totalisator operators had begun to infringe on their terrain by widening their offering beyond horse racing to include other sporting events. These actions have also been questioned as to whether they infringe on the Lotteries Act (No. 57 of 1997) by creating “sports pools”.
• Furthermore, bookmakers were charged for the commercial right to use Phumelela’s racing pictures, which had been considered exorbitant at the time.
• Due to the relative size of most bookmaking operations, namely one or two person operations, and the relatively lower margins, the industry had been struggling to transform their businesses. The industry were advocating that transformation be promoted in manner that recognises the industry’s operational features.

 

The Portfolio Committee on Trade and Industry had recommended that the Minister consider maintaining the revenue formula for bookmakers and the totalisator in relation to their contributions to the horseracing industry. However, bookmakers should not be allowed to take open bets, namely bets based on the odds of the totalisator.[9]

 

8.2  Discussion

 

Hollywoodbets briefed the committee on their concerns with respect to the draft National Gambling Policy document with specific reference to the following:

 

·         The disputed employment figures of bookmakers as presented in the draft policy document: The DTI informed the committee that the employment figures used had been updated with figures compiled by the NGB, but that it acknowledged the figure provided by Hollywoodbets.

·         The prohibition of bets taken on lottery by bookmakers: The DTI informed the committee that it is of the view that taking bets on the National Lottery (Lotto) is perceived to be undermining the exclusive national competence to operate the Lotto which would negatively affect the ability of the lottery operator to generate funding for good cause organisations. The policy has been updated which will require the licence to collect bets is only issued by the National Lottery Commission (NLC). The licence holder will further be required to contribute an amount determined by the Minister of Trade and Industry into the National Lotteries Distribution Trust Fund. This will require an amendment to the National Gambling Act (No. 7 of 2004) that the issuing of licences authorising betting on the Lotto shall be a competence of the NLC only.

·         The impact of the “Intellectual Property Tax” on Open Bet: The DTI informed the committee that where intellectual property rights are involved, it should be respected in accordance with South African Laws. If the exploited product is not subjected to an Intellectual Property right, PLAs must be empowered to determine a reasonable rate to be paid for exploitation of such product and this should not be used as a tool to remove competitors.

 

Part E: Conclusions, Acknowledgements and Recommendations

 

9.     Findings/Concluding remarks

 

Based on its deliberations, the committee drew the following conclusions:

 

9.1    During its engagements with a number of stakeholders, the unintended consequences of the revised Broad-based Black Economic Empowerment Codes of Good Practice was raised. The committee is concerned by the possible impact of the revised codes and the fact that the majority of companies visited may no longer be in compliance. Thus, their eligibility for the Department’s support in future and their ability to access local public procurement opportunities, especially where they meet the local content thresholds, may be compromised.

9.2      Although most companies were willing to purchase from local black suppliers, there were challenges where no black suppliers existed in the industry or suppliers were not able to supply inputs that met the requisite quality standards and/or the relative cost of these inputs due to reduced economies of scale as the volumes being required by the domestic market is too low. There was therefore a need for intensive supplier development to fill this gap and improve their global competitiveness.

9.3       The relatively high cost of port tariffs remains a concern, particularly for exporters of value-added goods. Although some work has been done to address this, the matter should receive urgent attention.

9.4       To lower the cost of production, intra-African trade becomes critical to ensure that the appropriate economies of scale are reached. For instance, Unilever, Toyota South Africa Motors and Samsung raised concerns about the domestic market being too small to lower their overall cost of production and that non-tariff barriers existed that limited their African footprint. Measures to support this, such as trade facilitation at customs borders and rebates or duty credits on imported raw materials or intermediate inputs for local manufacturing, should be considered.

9.5       There is a need for concerted efforts to be made to ensure that government policy and initiatives support the local industrialisation drive, such as the Taxi Recapitalisation Programme and the lengthy time associated with the completion of Environmental Impact Assessments. Currently, there is a disjuncture between departments, as large procurement projects do not necessarily focus on supporting the development of local industries, which are opportunities to increase the domestic demand.

9.6       The committee supported the consideration of a preferred trader system by the National Regulator of Compulsory Specifications. However, this should not compromise the safety of consumers and should be compliant with the World Trade Organization obligations.

9.7       The committee noted the possible reasons for the delays in releasing goods that are subject to compulsory specifications, such as the absence of the requisite documentation or the products not meeting all the specifications. However, the committee emphasised that there is a need for the Department and the National Regulator of Compulsory Specifications to ensure that there is adequate capacity at ports of entry to reduce inefficiencies in processing goods.

9.8       The committee welcomed the integrated approach between the provincial and national government that was displayed in developing the Dube TradeZone and the Cargo Terminal.

9.9       The provision of state of the art infrastructure and supporting services contributes to the attractiveness of the Industrial Development Zone and its ability to encourage investment, as it can increase investors cost competitiveness.

9.10     Despite the 10 per cent tariff protection against certain imported steel products, local steel prices remained 30-40 per cent more expensive than imported steel. This is compounded by the 10 per cent increase in local prices from ArcelorMittal South Africa to steel fabricators even though this is in violation of the conditions set in terms of the decision to increase the import duty. The increase in local steel prices will have a major impact on margins, at a time when all businesses are struggling within the industry and will increase the costs of finished products that government procures.

9.11     Although there is a lack of transformation in the horseracing industry with regard to ownership, the committee acknowledges that this is related to the cost of owning thoroughbred horses outweighing the potential monetary benefit of racing. However, more efforts should be made to address transformation throughout the rest of the horseracing value chain.

9.12     As the issues raised by Hollywoodbets and the provincial licensing of electronic bingo terminals are to be addressed in the National Gambling Policy, the committee reserves its opinion on these matters.

 

10.      Acknowledgements

 

The committee would like to thank the companies and their respective management, for their cooperation and transparency during our oversight visit.

 

The committee also wishes to thank its support staff in particular the committee secretary, Mr A Hermans, the content advisor, Ms M Sheldon, the researcher, Ms Z Madalane, and the committee assistant, Mr D Woodington, for their professional support and conscientious commitment and dedication to their work.  The Chairperson wishes to thank all Members of the committee for their active participation during the process of engagement and deliberations and their constructive recommendations reflected in this report.

 

11.      Recommendations

 

Informed by its deliberations, the committee recommends that the House requests that the Minister of Trade and Industry should consider:

 

11.1     Providing support for companies contributing to the strategic national objectives, especially those struggling to meet the new B-BBEE criteria within the required compliance timeframes.

11.2     In conjunction with the relevant ministers, strengthening the coordination of government policies to ensure that public procurement is leveraged to support the industrialisation and localisation drives.

11.3     Measures to address non-tariff barriers hindering intra-African trade to facilitate the expansion of the market for locally produced, value-added goods.

11.4     The expedition of the National Regulator of Compulsory Specifications’ process of considering and developing a preferred trader system before Parliament adjourns in June 2016.

11.5     Enforcing the conditional decision to increase the customs duty on certain steel products in a manner that would ensure that downstream manufacturers benefit.

 

Report to be considered.

 

 

 

 

References:

 

Department of Trade and Industry (2014) Consumer and Corporate Regulation Division. Powerpoint presentation for the Portfolio Committee on Trade and Industry. Cape Town, Parliament. 1 August.

 

Department of Trade and Industry (2015) Minister Davies Approves ITAC Recommendation for Tariff Increases of Steel and Products with Conditions. Media statement, 28 August. Available: https://www.thedti.gov.za/editmedia.jsp?id=3468.

 

Department of Trade and Industry (2016) Oversight Visit to Dube Trade Port IDZ on 3 February 2016. Briefing for the Parliamentary Portfolio Committee.

 

Global NCAP (2014) Global NCAP calls for urgent withdrawal of Datsun Go. Available: http://www.globalncap.org/global-ncap-calls-for-urgent-withdrawal-of-datsun-go/.

 

World Trade Organisation (2015) Consolidated Tariff Schedules Database. Available: http://tariffdata.wto.org/ReportersAndProducts.aspx.

 

 

 

---

[1] Unilever (2015).

[2] A Level 1 is the highest that can be achieved and a Level 8 is the lowest.

[3] 2014/15 Global Port Pricing Comparator, South African Ports Regulator.

[4] NRCS Act (No. 5 of 2008).

[5] Department of Trade and Industry (2015).

[6] Department of Trade and Industry (2016).

[7] A totalisator works by pooling all bets received from punters for a race or a type of bet and using a proportion of the money to distribute among winners. Whereas, a bookmaker is directly liable to pay winnings for each bet placed.

[8] An “open bet” is defined by the National Gambling Act (No.  of 2004) as either “(a) a bet, other than a totalisator bet, taken by a bookmaker on one or more contingencies, in which no fixed-odds are agreed at the time the bet is placed; or (b) a bet in respect of which the payout is determined after the outcome of the contingency on which such a bet is struck became known, with reference to dividends generated by a totalisator”.

[9] Portfolio Committee on Trade and Industry (2012).