ATC161025 : 2016 Budgetary Review and Recommendation Report of the Portfolio Committee on Economic Development

Economic Development

2016 BUDGETARY REVIEW AND RECOMMENDATION REPORT OF THE PORTFOLIO COMMITTEE ON ECONOMIC DEVELOPMENT
 

The Budgetary Review and Recommendation Report of the Portfolio Committee on Economic Development, dated 25 October 2016.

 

The Portfolio Committee on Economic Development (hereinafter referred to as the Committee), having considered the performance and expenditure Report for the 2015/16 financial year of the Economic Development Department (the Department), the report is as follows:

 

1. Introduction

                                                

1. Mandate of the Portfolio Committee

 

The mandate of the Committee is derived from Section 55 and 56 of the Constitution of the Republic of South Africa and provisions that are contained in the Rules of the National Assembly. The Committee is mandated to consider, amend and/or initiate legislation that is specific to, or impacts on economic development as per the mandate of the (Economic Development Department); monitor and oversee the activities and performance of the Ministry and the Economic Development Department (hereinafter referred to as the Department or EDD) and its public entities. The Committee’s mandate is to also consider and review the budget of the Department and its public entities; consider sector-related international treaties and agreements; and provide a platform for the public to participate and present views on specific topics and/or legislation. The Department’s entities are, namely, the Competition Commission, Competition Tribunal, Industrial Development Corporation (IDC) and the International Trade Administration Commission of South Africa (ITAC).

 

1. Strategic Outcome Oriented Goals of the Department of Economic Development

 

1. The Department ‘s strategic oriented goals are to:

 

1.2.1.1 Promote decent work through meaningful economic transformation and inclusive growth and;

1. 2.1.2 Provide participatory, coherent and coordinated economic policy, planning and dialogue for the benefit of all South Africans.

1.2.1.3 Ensure the implementation of the New Growth Path, a critical component of the National Development Plan, as economic government policy and conduct adequate oversight over its component parts. 

 

The Department contributes directly to four of the national Government priority outcomes, namely:

• Outcome 4: Decent employment through inclusive economic growth.
• Outcome 5: A skilled and capable workforce to support economic growth.
• Outcome 6: Efficient, competitive and responsive economic infrastructure network.
  • Outcome 7: Vibrant, equitable and sustainable rural communities.

 

1. The Department’s core mandates are to:

 

1.2.2.1 Identify priorities for job creation, inclusive growth and industrialisation;

1.2.2.2 Support the alignment of the government departments around implementation;

1.2.2.3 Oversee and provide strategic direction to development finance institutions and;

1.2.2.4 Provide strategic direction on competition policy and trade administration matters through oversight of regulatory bodies.

 

Amongst its other key mandates, the Department plays the all-important role of providing strategic coordination of the various efforts towards economic development at different levels of government. Some examples include the convening (together with the Department of Trade and Industry) the MinMec / Technical MinMec with Members of the Executive Council (MECs) and provincial economic development department. The EDD supports the dti in its convening of the Outcome 4, Technical Implementation Forum. The Department is also a member of the Economic Sectors, Employment and Infrastructure Development Cluster.

 

The Department also provides support to the Presidential Infrastructure Coordinating Committee (PICC), through active and constructive monitoring of the level of infrastructure construction completion, preparing the Quarterly Construction Update, as well as providing oversight of Strategic Integrated Projects (SIP) Intergovernmental Forums and Coordinating Agencies.

The Department’s activities reported herein were guided, primarily, by its 2014-19 Strategic Plan which is as follows:

 

 

1.   2014 – 2019 Strategic Plan of the Economic Development Department

 

The Strategic Plan sets out the objectives of the Department for the duration of the current administration.

The Department has identified six strategic objectives which have been integrated into three programmes, namely Administration; Growth Path and Social Dialogue; and Infrastructure Development, Investment, Competition and Trade. The Department’s Strategic Objectives are the following;

• Strategic Objective 1: Provide strategic guidance to the Department; and technical and administrative support to the Ministry to achieve the rest of the Department’s strategic objectives.
• Strategic Objective 2: Co-ordinate jobs drivers and the implementation of the National Growth Path economic strategy in support of the National Development Plan.
• Strategic Objective 3: Facilitate Social Dialogue and implementation of social accords.
• Strategic Objective 4:  Coordinate infrastructure Development and strengthen its positive impact on the economy and citizens.
• Strategic Objective 5: Promote Investment, industrial financing and entrepreneurship for jobs and inclusive growth.
• Strategic Objective 6: Promote competition, trade and economic regulation in support of job creation and social inclusion.

Through the following programmes, the Department carries out its mandate and addresses its strategic goals and Government outcomes:

 

Programme 1: Administration

Programme 2: Economic Policy Development

Programme 3: Economic Planning and Coordination

Programme 4: Economic Development and Social Dialogue

 

1.4 Purpose of the Budgetary Review and Recommendation Report

 

The process for the budgetary review and recommendation is set out in Section 5 of the Money Bills Amendment Procedure and Related Matters Act, 2009 (Act No. 9 of 2009). The Act sets out the process that allows Parliament’s National Assembly, through its Committees, to make recommendations to the Minister of Finance to amend the budget of a national department. In October each year, Committees reporting to the National Assembly must submit a Budgetary Review and Recommendation Report (BRRR) for each department that falls under its oversight responsibilities, in this case, the Economic Development Department. The BRR Report:

 

• must provide an assessment of the Department’s service delivery performance given available resources;
• must provide an assessment on the effectiveness and efficiency of the Department’s use and forward allocation of resources; and
• may include recommendations on the forward use of resources.

 

The BRR Report may also act as a source document for the Standing/Select Committees on Appropriations/Finance when they make recommendations to the Houses of Parliament on the Medium-term Budget Policy Statement (MTBPS).

 

 

1. KEY POLICY DEVELOPMENTS AND LEGISLATIVE CHANGES

 

2.1 Policy development

Guidelines for the Assessment of Public Interest Provisions in Mergers

South Africa’s competition regulation allows the Competition Authorities to assess the impact of mergers from a competition and public interest perspective. The Competition Authorities are required to consider the potential impact of a merger on competition in the economy. Furthermore, the merger should be justified on substantial public interest grounds, as identified in the Competition Act No. 89 of 1998. The grounds referred to are the following; effect on employment, impact on small and medium enterprises, impact on a particular industrial sector or region, and the impact on the ability of national industries to compete in international markets[1]. Consequently, the competition authorities will in certain cases approve mergers subject to public interest related provisions.

For instance, in the merger between Sibanye Platinum Bermuda and Aquarius Platinum which would affect about 26 000 employees, the Tribunal imposed the following condition;

• Retrenchments shall be limited to 14 executive managers and 260 employees
• The Black Economic Empowerment (BEE) policy that is in place at Aquarius Platinum would comply with the Mining Charter requirements.

 There has been on-going debate on how the competition authorities make assessments on public interest issues when dealing with mergers. As a result, in January 2015, the Commission published the “Draft Guidelines for the Assessment of Public Interest Provisions in Mergers” for public comment.

After several engagements with stakeholders, the Final Public Interest Guidelines were gazetted on 02 June 2016. The Guidelines spell out what the Commission is likely to take into account and the types of information that the Commission may ask for when determining public interest grounds[2].

The Guidelines make the application of public interest issues, transparent and promote predictability in the assessment thereof.  In addition, the Guidelines also strengthen the application of the public interest provisions of South Africa’s Competition Act.

 

Predatory Pricing 

Predatory pricing occurs when a firm, usually a dominant firm, charges very low prices i.e. below production costs, in order to drive competitors out of the market. If the dominant firm (or predator) does this successfully, jobs will be lost and new firms will also not be able to enter the market as they will not be able to produce below cost price. Subsequently, when there is no competition threat, the dominant firm will become a monopoly. It will increase its prices in order to earn super profits.

Predatory pricing is one of the anti-competitive behaviours that fall under abuse of dominance. This conduct is prohibited not allowed in South Africa. Section 8(d) (iv) of the Competition Act No. 89 of 1998, prohibits a firm from “selling goods or services below their marginal or average variable cost”. 

In the year under review, the Competition Commission dealt with predatory pricing in a case against Media24.  In September 2015, the Competition Tribunal ruled  that  Media24  had  violated  the  Competition  Act by engaging in predatory  pricing to  drive a  rival  community  newspaper, Gold-Net News (GNN), out of the market in Welkom.

In explaining the damaged caused by this conduct, the Tribunal states that; 

• An effective competitor was removed from the market, and
• Consumer choice was affected in two ways: advertisers lost an alternative outlet to advertise their goods and paid higher prices and readers lost the choice of an alternative newspaper.

The Tribunal added that given that the monopoly was still operational when the case was finalised, “the anti-competitive effects are substantial and enduring[3].”Media24 has now appealed the ruling. If the Appeal Court finds in the Commission’s favour, then this will be the Commission’s first successful predatory pricing case.

 

2.2. Legislative Changes

 

On other relevant legislation

 

During the period under review, the Department contributed to the development of two significant legal instruments. The first was the Criminal Matters Amendment Bill where the Department and the PICC contributed to legislation by the Department of Justice (Over the course of the year, the Department also did significant research and consulted on proposed amendments to the Amended Competition Act. On 1 May 2016, a Presidential Proclamation was gazetted, bringing into effect certain sections of the Competition Amendment Act. It makes it a criminal offence for directors or managers of a firm to collude with their competitors or fix prices, divide markets among themselves or collude in tenders or to acquiesce in collusion. They expose themselves to jail time if they are convicted.

 

2.3 The following policy frameworks, programmes and policy pronouncements continue to guide the Annual Performance Plan (APP) of the Department:

1. State of the Nation Address (SONA) annually;
2. National Development Plan;
3. Medium Term Strategic Framework;
4. New Growth Path;
5. National Infrastructure Plan;
6. Industrial Policy Action Plan;
7. Delivery Agreements on Outcomes 4, 5, 6 and 7
8. Framework for South Africa’s response to the international economic crisis.
9. Finance and fiscal policy framework;
10. Public Finance Management Act No. 1 of 1999;
11. Municipal Finance Management Act No. 56 of 2003 and related by-laws.

 

 

1. PERFOMANCE INFORMATION BY PROGRAMME

The following are highlights of achievements in each of the Department’s programmes:

3.1 Administration

3.1.1 ITAC made changes to regulations in relation to the Automotive Production and Development Programme (APDP) regulations and issued amendments to Export Control Regulations.

 

3.2 Growth Path and Social Dialogue

 

3.2.1 The Department promoted trade and investment through a number of initiatives. These included the Minister’s participation in the Presidential Business Working Group; hosting investor meetings with a range of sectors and promoting investments in road shows with the IDC leadership; engagement with Black Industrialists hosted by the Gauteng Premier; meeting international investors abroad; approving investments in the rest of the African continent, among others. In addition to the work undertaken by the Minister, the Department undertook work on unblocking investment, supporting the green industry and indigenous chicken subsector in agriculture and supporting the steel industry.

 

3.2.2 Together with the dti, the EDD took initiatives to support the steel industry while it faces the steel surplus worldwide. The initiatives undertaken include the Minister’s meeting with industry and unions to get feedback on government’s proposed policy interventions; ITAC’s raising of a range of steel tariffs; the establishment of a task team on steel to negotiate a developmental price for steel; and establishing additional capacity for the International Trade Administration Commission of South Africa (ITAC) to monitor the implementation of the scrap metal policy.

 

3.2.3 Another key area of work to highlight is the continued contribution of the Department to the work of government in developing economic policy and building the economy. Work includes, as examples, its contribution into the Inter-Ministerial Committee (IMC), Economic Sectors, Employment and Infrastructure Development (ESEID) and the War Room on Energy.

 

3.2.4 The Department, through the office of the Deputy Minister, engaged the provinces and local municipalities around the Nine Point Plan to provide them with the necessary support to align and integrate the Plan into their key programmes. Other critical provincial work included discussions on integrated development funding for growth and job creation.

 

3.3 Investment, Competition and Trade

3.3.1 The Department, through the technical task team of the PICC provided support for the implementation of the National Infrastructure Plan through its work with the Secretariat of the PICC. The PICC drives and coordinates the public infrastructure programme. Some of the achievements in this area this year include the technical work on legislation to combat cable and metal theft from public infrastructure; as we as facilitating the approval of an USD $180 million loan from the Brazil, Russia, India, China and South Africa (BRICS) New Development Bank to lay transmission lines for the renewable energy plants.

 

3.3.2 Under Strategic Objective 5, the IDC signed two important agreements during the year, one for a R10 billion pledge by the China Construction Bank and the second was an agreement with BAIC (Beijing Automotive International Group) to establish an automobile plant in South Africa, which, when it meets its feasibility study criteria, will be the first new light passenger assembly plant to be built in South Africa in more than 40 years, with an initial capacity to produce about 50 000 cars, trucks and Sport Utility Vehicles (SUVs).

 

3.3.3 Under Strategic Objective 6, The Minister issued a trade directive that requires ITAC to consider the commitments companies make on investment, jobs and industrial output, when making request for tariff increases or rebates of duty, this will ensure that companies not only rely on tariff protection, but also invest in new technologies, training of workers and project innovation to protect and expand market share. It also serves to ensure that any costs are accompanied by an increase in jobs.

3.4 Human Resources

 

There was a high vacancy rate at senior management level situation at the end of March 2016. Since it was established about 6 years ago, the Department has had about 5 people in the Director-General’s position. Currently, the Department has an Acting-DG, before him was another Acting DG[4].

 

Vacancies from 31 March 2011 to 31 March 2016

Year	Total funded posts	Filled posts	Vacant posts	Vacancy rate in  per cent	Terminations & transfer	Turnover rate in  per cent
31-Mar-11	124	75	49	39.5%	13	68.4%
31-Mar-12	124	107	17	13.7%	25	27.5%
31-Mar -13	142	131	11	7.7%	16	13.91%
31 Mar -14	166	136	30	22.06%	43	32.08%
31 Mar-15	164	121	43	26.2%	30	22.1%
31 Mar- 16	140	116	21	17.1%	22	18%

Source: EDD Annual Reports (2011, 2012, 2013, 2014, 2015 and 2016)

 

The trend in the vacancy rate has been generally high above 13 per cent. The rate however improved from 26.2 per cent in the previous financial year to approximately 17.1 per cent in the year under review. The latter figure of 17 per cent however is very high. Of greater concern is that the Department has been operating without a Director-General for about a year.  

 

Expenditure, on employee compensation increased, albeit not as expected, from R70.9 million in 2013/14, R75.7 million in 2014/15 to about R79.4 million in 2015/16.

 

According to National Treasury, in 2015 “Cabinet-approved reductions of R41.5 million over the medium term on compensation of employees (were) due to vacancies between 2011/12 and 2013/14.” 

 

Although the Department has been able to achieve all its targets with a minimal staff compliment, there has been little improvement in the reliability of the key performance indicators, as stated by the Auditor General.

 

1. Summary of previous key financial and performance recommendations of Committee

 

4.1     Committee Strategic Plan and Budget Vote Report

 

During the previous (2014/15) consideration of strategic plans and budget process, the Committee made the following recommendations to the Minister of Economic Development:  

 

1. Report to the Committee, as a matter of considerable urgency, on the finalisation of the (human resource) organogram that will speak to the personnel and specific capacity needs of the Department.
2. Address the challenges relating to the filling of vacancies, including those that currently have people in acting positions and provide quarterly progress reports in this regard;
3. Ensure the creation of a conducive working environment that will see personnel at all levels being productive and thus improve staff retention in the Department;
4. Work on ensuring that (for future reporting) the Department’s Key Performance Indicators (KPIs) and targets are clear, verifiable and measurable;
5. Address issues relating to space constraints in the Competition Commission, Competition Tribunal and ITAC and provide a final progress update in its 2016/17 First Quarter Report  in the third (parliamentary) term;
6. Ensure the enhancement of oversight and coordination on the implementation of the NGP objectives across all spheres of government and provide quarterly progress reports in this regard;
7. Provide the Committee with quarterly reports on the impact of government programmes and projects on job creation;
8. Report, within the next six months, on the impact of the efforts to ensure alignment and integration of economic priorities at all spheres of government, particularly the municipal level;
9. Introduce legislation to strengthen the investigative powers of the Competition Commission when investigating companies concerning abuse of market dominance before the end of the current financial year.
10. Fast-track the work on the expansion of industrial funding to support the development of entrepreneurship, township and rural economy, SMMEs, cooperatives and black industrialists. It is important that the impact of the funding strategies is felt especially in these sectors.

The Committee puts these on the record so that the Ministry of Economic Development continues to ensure their implementation, as some of these still form part of this year’s BRRR report, indicating that greater effort will be necessary to ensure their timeous resolution.

 

 

1. OVERVIEW AND ASSESSMENT OF FINANCIAL PERFORMANCE

 

5.1 Overview of Vote Allocation and Spending (current - 2018/19) 

 

Table 1. The Department’s spending trend per programme (Estimates of National Expenditure, 2015)

		2016/17				2017/18	2018/19
R million		Total	Current   payments	Transfers and subsidies	Payments for capital assets	Total	Total
MTEF allocation
Administration		79.2	77.0	–	2.2	80.7	79.4
Growth Path and Social Dialogue		36.0	35.5	–	0.5	35.6	39.6
Investment, Competition and Trade		559.4	30.5	528.8	0.2	598.0	632.0
Total expenditure estimates		674.7	143.0	528.8	2.9	714.3	751.0

 

 

For the year under review EDD spent 99.77% of the allocated budget as compared to 99.72% in 2014/15. Under-spending has reduced from 0.28% to 0.23% in 2015/16. This constitutes a reduction of 0.05%.

On transfers to agencies, the EDD reports the following:

1. Small Enterprise Finance Agency (sefa) appropriation was reduced from R406m in 2015/16 to R204m in 2016/17. The reason is that the budget in 2015/16 included a final sum from the Economic Competitiveness Support Programme, which was a special grant that expired in that year.
2. The competition authorities have reserves accumulated in part from filing fees that they charge, which were used to defray costs in addition to budget.
3. For the Commission, a significant part of the higher 2014/15 Budget was as a result of special allocations for Market Inquiries.
4. ITAC spent money from their reserves, in addition to their budgetary allocation.
5. IDC transfers were for the special capacity it has created for the PICC and not for IDC investments.
6. Tighter controls will be put in place to address concerns raised by the Auditor-General SA and the Financial Fiscal Commission in respect of public entities for transfer of monies.

 

1. REPORTS OF THE AUDITOR-GENERAL AND THE FINANCIAL FISCAL COMMISSION

 

1. The Auditor-General

 

The Department obtained an unqualified audit opinion for the financial year under review.

 

The following are key issues raised by the Auditor-General:

 

1. Programmes 2 and 3: Usefulness of reported performance information – The Framework for Managing Programme Performance Information (FMPPI) requires that performance targets should be specific in clearly identifying the nature and required level of performance and measurable. Important targets were not specific and measurable. The FMPPI also requires that performance indicators should be well defined by having clear definitions so that data can be collected consistently and is easy to understand and use. Important indicators were not well defined.
2. Programmes 2 and 3 Reliability of reported performance information - The FMPPI requires auditees to have appropriate systems to collect, collate, verify and store performance information to ensure reliable reporting of actual achievements against planned objectives, indicators and targets. The reported performance information was not reliable when compared to the source information.
3. Financial statements, performance and annual reports - The financial statements submitted for auditing were not prepared in all material respects in accordance with the prescribed reporting framework as required by section 40(1)(b) of the PFMA. Material misstatements of disclosure items identified by the auditors in the submitted financial statements were subsequently corrected, resulting in the financial statements receiving an unqualified audit opinion.
4. Leadership - Cognisance is taken that it is not always possible to plan specific, quantitative and detailed projects upfront as a result of the dynamic nature of the economy, which has an impact on the department’s activities and performance environment. However, leadership did not exercise adequate oversight responsibility in certain instances on related internal controls relating to performance reporting as technical indicator descriptions and standard operating procedures were not aligned to the requirements of Framework for Strategic Plans and Annual Performance Plans.
5. Financial and performance management - Management did not adequately implement certain internal controls to allow it to prepare regular, accurate and complete financial reports that are supported and evidenced by reliable information.

 

1. The Financial Fiscal Commission

 

Programme (R'mil)	Audited Outcome			Revised Estimate	Medium Term Expenditure Framework Estimates
	2012/13	2013/14	2014/15	2015/16	2016/17	2017/18	2018/19
1. Administration	55	91	87	83	79	81	79
2. Growth Path and Social Dialogue	21	36	22	28	36	36	40
3. Investment, Competition and Trade	598	645	585	775	559	598	632
Total	673	771	695	886	675	714	751
Real Year on Year Growth		2012/13-2013/14	2013/14-2014/15	2014/15-2015/16	2015/16-2016/17	2016/17-2017/18	2017/18-2018/19
1. Administration		55.78%	-9.30%	-9.68%	-10.72%	-4.08%	-7.10%
2. Growth Path and Social Dialogue		63.60%	-41.32%	20.05%	21.12%	-6.88%	4.98%
3. Investment, Competition and Trade		1.94%	-13.95%	25.54%	-32.25%	0.65%	-0.20%
Total		8.25%	-14.66%	20.94%	-28.55%	-0.31%	-0.72%

The FFC noted the constraints of the current global and domestic economic environment. It advised that the 2016 medium-term budget should reiterate policies that will help prevent economic growth from falling too far and the country from entering into a debt trap. The following key aspects were noted with respect to the EDD:

Table 3: Analysis of allocation trends over the MTEF period (FFC, 2015)

6.2.1 EDD experiences erratic trends of allocations (significant budgetary increases followed by equally large declines). There are concerns around how this affects the ability of EDD to plan and execute those plans.

6.2.2 The quality of performance information in the Annual Report should be improved to allow for oversight over the department’s performance. On strengthening indicators, the department should engage with stakeholders such as National Treasury and the Department of Performance Monitoring and Evaluation to ensure improvements in this regard oversight over the department’s performance.

 

 

1. AN OVERVIEW OF THE PERFOMANCE OF THE DEPARTMENT’S ENTITIES

 

On financial performance and governance, the Auditor-General SA noted that despite the entities obtaining unqualified audit outcomes, none of the entities were successful in maintaining their clean audits, thus marking an overall regression in outcomes.

 

7.1 Competition Commission

 

The Competition Commission is a statutory body constituted in terms of the Competition Act (No. 89 of 1998). In terms of the Act, the Commission is empowered to investigate, control and evaluate restrictive business practices, abuse of dominant positions and mergers to achieve equity and efficiency in the South African economy. Its mandate is to promote and maintain competition in South Africa in order to:

1. Promote the efficiency, adaptability and development of the economy;
2. Provide consumers with competitive prices and product choices;
3. Promote employment and advance the social and economic welfare of South Africans;
4. Expand opportunities for South African participation in world markets and recognise the role of foreign competition in the country;
5. Ensure that small and medium-sized enterprises have an equal opportunity to participate in the economy; and
6. Promote a greater spread of ownership, specifically increasing the ownership stakes of historically disadvantaged persons.

 

To achieve its purpose, the Commission’s core functions, as set out in Section 21 of the Act, are to:

 

1. Investigate and prosecute restrictive horizontal and vertical practices;
2. Investigate and prosecute abuse of dominant positions;
3. Decide on merger and acquisition applications;
4. Conduct formal inquiries in respect of the general state of competition in a particular market;
5. Grant or refuse applications for exemption from the application of the Act;
6. Conduct legislative reviews; and
7. Develop and communicate advocacy positions on specific competition issues.

 

There are six core programmes under which the Commission organised its work during the reporting period. Their core functions, are as follows:

1. Enforcement and Exemptions:  investigating abuse of dominance, vertical restrictive practices and assessing exemption applications.
2. Cartels: investigating collusive practices.
3. Mergers and Acquisitions: analysing and evaluating corporate bundling and unbundling transactions.
4. Legal Services: providing litigation services and legal expertise to the organisation and advisory opinions to the public.
5. Policy and Research: providing economic expertise to the organisation and deepening the understanding of market dynamics, including the undertaking of market inquiries.

The Commission reported that the period under review is the first year of implementation of the newly adopted 2015-2020 strategy. The latter puts more focus on economic sectors that have an impact on the lives of the poor. Amongst its performance highlights, the Commission successfully prosecuted its first predatory pricing case, involving Media24. Procedures were also clarified by the Competition Tribunal and the Courts. In December 2015, draft guidelines were published on public interest on the approach to follow and information required when evaluating such considerations. In addition to the regulation of mergers in the telecommunication sector, the Commission strengthened its international collaboration, hosting a successful 4th BRICS International Competition Conference.

 

Other highlights include:

1. The review of Sasol’s activities in the fertiliser market
2. Review of the Fruit & Veg merger
3. Review of the Commission’s intervention in the cement industry.

 

The Commission further won a hundred percent of the cartel cases prosecuted (exceeding its 70% target). It also finalised 413 merger cases (a significant increase from 2014/15). The Commission reported on the launch of the Retail Market Enquiry, and gave an update in the Private Healthcare Market Inquiry.

The Commission’s expenditure increased by R73 million from R223 million to R296 million during the period. The organisation obtained an unqualified audit opinion. The most notable finding by the Auditor-General was on the prior year irregular expenditure amounting to R745 000.00, whilst a remaining balance relates to supply chain management. The former has been reported to the South African Police Service, whilst the latter is being investigated. Management has since developed a detailed audit finding action plan.

 

7.2 Competition Tribunal

 

The Tribunal is established in terms of section 26 of the Competition Act no. 89 of 1998. The Commission is the investigative and enforcement agency of competition cases. These cases are referred to the adjudicating body which is the Competition Tribunal.

The Tribunal performs the following functions;

1. Adjudicates complaints of unlawful conduct, which includes restrictive practice and abuse of dominance.
2. Imposes remedies
3. Awards costs
4. Grants orders for interim relief
5. Authorizes or prohibits large mergers
6. Adjudicates appeals from Commission's decisions on Intermediate mergers and exemptions

 

For the year under review, the Tribunal managed to achieve and or exceeded 61 per cent (17 out of 28) of its overall targets. One of the serious challenges in the Commission is capacity constraints. The Tribunal does not have its full complement of 11 members. Furthermore, two positions have been vacant since 2014. Its organisational structure allows for 26 employees. However, there were 22 as four of the posts are unfunded.

Mergers increased by 31 cases, from 102 (84 approved) in the previous financial year, to 133 (105 approved) in the year under review.  At the 10th Annual Competition Law Economics and Policy Conference, the Competition Commissioner reported that there is a significant rise in merger cases and that he was concerned about the challenges this will pose on the capacity-constrained Tribunal.

In view of the competition authorities’ success in prosecuting cartels, the issue that has been gaining momentum, is that of follow-on damages litigation or claims for damages to compensate people or companies that were harmed or suffered as a result of anti-competitive conduct. This is the Competition Tribunal’s and Competition Appeals Court’s area of responsibility. However, since the promulgation of the Competition Act, “no court has awarded damages to a claimant for harm suffered as a result of anti-competitive conduct” despite the increase in the number of cases where companies were found guilty against of anti-competitive behaviour.

In the financial year under review the Tribunal imposed fines of R338 million on 20 firms. Of the amount, R337 million was on 19 cases of collusive behaviour. The remainder, R750 000, was for failure to comply with merger notification procedures.

In the abuse of dominance case against Sasol, the Tribunal found the company guilty of charging excessive prices on propylene and polypropylene to the detriment of customers from 2004–2007. A penalty of R534 million was imposed. This would have been a major victory for the competition authorities and a first of its kind on abuse of dominance. The Tribunal’s decision was however overturned by the Competition Appeal Court (CAC), rejecting the Commission’s evidence on cost calculations[5]. Now the case against Media24 is also being appealed on similar grounds.

The Tribunal also imposed public interest conditions – limiting the number of jobs to be lost to a maximum of 60 overall. These job losses are further limited to a maximum of 20 employees per year in each of the three years.

The Tribunal was allocated R19.1 million. It generated a surplus of R307 000. The Tribunal obtained an unqualified report but with findings from the Auditor General. The AG reported that there were deficiencies in the internal controls which led to the following findings; 

1. Non-compliance – There were goods and services worth below R500 000 that were procured without obtaining the required price quotations, as required by Treasury Regulation 16A6.1.   
2. Ineffective prevention of fruitless and wasteful expenditure amounting to R695 000
3. Ineffective prevention of irregular expenditure amounting to R976 000.

 

7.3 Industrial Development Corporation

The Industrial Development Corporation of South Africa Limited (IDC) was established in 1940 by an Act of Parliament (Industrial Development Corporation Act, No 22 of 1940) and is fully owned by the South African Government.

The IDC’s activities currently centre on the National Development Plan (NDP), the New Growth Path (NGP), the Industrial Policy Action Plan (IPAP), the Agricultural Policy Action Plan (APAP) and localisation opportunities associated with the National Infrastructure Plan (NIP). It identifies sector development opportunities aligned with policy objectives and develop projects in partnership with stakeholders. The corporation provides financing to expand existing industrial production capacity, and to introduce new industrial operations and technologies that contribute to strengthening South Africa’s industrial base.

One of the most important outcomes of its industrial financing activities is the facilitation of employment creation, both direct and indirect. The funding also impacts on regional development, including South Africa’s rural areas and less industrialised provinces, as well as economies in the rest of Africa. The IDC supports the economic empowerment of emerging black entrepreneurs, designated groups, women, youth, and generally previously disadvantaged (PDIs) communities, and promotes the advancement of black industrialists.

Sectoral diversity, increased localised production and environmentally sustainable growth are promoted. In addition, either directly or through its subsidiary, sefa, the IDC supports the development of the small and medium enterprise (SME) segment of the country’s economy.

While the primary focus of the funding activities is the private sector, the IDC works closely with various government agencies and sector organisations to coordinate industry development. It also support government’s developmental initiatives by means of research and management of government funds allocated to achieving specific outcomes.

The IDC’s focus on the continent is to contribute to the development and integration of regional value chains by building upon the strengths of different African economies to grow and strengthen their industrial bases for individual as well as regional benefit.

Amongst its performance highlights for the year under review, the IDC counts the following:

1. R14.5 billion in funding approvals in 180 transactions
2. R4.9 billion approved for black-empowered companies
3. R2.9 billion approved for black industrialists
4. R1.2 billion approved for business with women ownership of more than 25%
5. 15 252 jobs expected to be created or saved.

 

Through its 17-month old Project Evolve, the IDC envisages itself being at the centre of identified priority sectors. The project’s Differentiation Approach has identified these as follows:

 

1. Value Chains – proactive industry development by developing and implementing strategies to achieve industry development goals that in turn guide strategies for industries. This will also include playing an active role in influencing policies to enhance development of the industries.
2. New Industries – these are nascent industries or technologies that the IDC will nurture to become sizeable, relevant industries of the future.
3. Special High Impact Sectors – identified by exception, and may require sector strategies and specialist skills.
4. High Impact Sectors – sectors within the IDC mandate that offer a high volume of opportunities , contribute to the IDC development goals but where the IDC does not foresee a proactive role.
5. Industrial Infrastructure – infrastructure that unlocks industrial potential (water, telecommunications, logistics, electricity etc.).

 

The IDC reports that it has maintained its high level of activity, increasing funding and thus playing a counter cyclical role in the economy. For the last five years ending 2016, disbursements totalled R57.8 billion, compared to R26 billion in the preceding 5 year period ending 2011.

 

On subsidiary management, the corporation reports the following:

 

1. The performance of IDC’s largest subsidiaries is poor as they are showing negative profits for the current financial year. There are various initiatives to improve the situation. At Foskor, the asset replacement programme is currently being implemented and satisfactory progress has been made to date. The recapitalisation of Foskor is to assist the company gain operational efficiencies and return to profitability. The lower than expected global prices for phosphoric acid and granular fertiliser are expected to have a material impact on Foskor’s performance against budgets. A review of Foskor plans is therefore underway to evaluate possible responses.
2. On the issue of Scaw Metals, besides the key initiative to find Strategic Equity Partners, Scaw and the IDC have been exploring and implementing options to secure the company’s long-term sustainability. The IDC has a shareholding of 74% in Scaw.
3. The initiatives at sefa include efforts aimed at increasing collection rates that will contribute to impairment reduction, lowering operational costs and improvement of revenue streams; and a complete review of sefa’s operating model, especially its business channels.
4. In addition, the IDC should perform regular monitoring/investigations and quarterly business reviews for all major exposures and develop plans to react accordingly.

On financial performance:

1. The impairment charge to the income statement of R3.6 billion for the year ended 31 March 2016 was double the figure for the 2014/15 financial year.
2. The impairment ratio as a percentage of the book at cost (value at the time of the transaction) increased from 16.7% to 16.9% in 2016. The impairment ratio as a percentage of IDC’s book at market value (the current value) increased more significantly from 8.8% to 10.1%. This is mainly due to the decrease in the market value of the book, together with the increased impairment charge for 2016.

 

The IDC reports that it remains in a strong liquidity position. Growth in loans and advances indicate the organisation’s impact in the economy. It has also continued to obtain good credit ratings from the ratings agencies.

The IDC obtained an unqualified audit opinion for the period under review.

 

7.4 International Trade Administration Commission of South Africa (ITAC)

The International Trade Administration Commission of South Africa (ITAC) is a schedule 3A Public Entity established in terms of the International Trade Administration Act, No 71 of 2002, and came into force on 1 June 2003. ITAC replaced its predecessor, the Board of Tariffs and Trade (BTT) that was established in 1986. The predecessor of the BTT is the Board on Trade and Industries (BTI) that dated back to 1924.

The aim of ITAC, as stated in the Act, is to foster economic growth and development in order to raise incomes and promote investment and employment in South Africa and within the Common Customs Union Area by establishing an efficient and effective system for the administration of international trade subject to this Act and the Southern African Customs Union (SACU) Agreement.

The core functions of ITAC are:

1. Customs tariff investigations;
2. Trade remedies; and
3. Import and export control.

The International Trade Administration Act (ITA Act) makes provision for a Chief Commissioner who serves as the Chief Executive Office. The Chief Commissioner is assisted by a Deputy Commissioner and a maximum of ten Commissioners who can be appointed on a full or part-time basis. There is currently a full-time Chief Commissioner, supported by nine part-time Commissioners. The Commission meets once a month to evaluate investigations conducted by employees and make recommendations to the Minister of Trade and Industry.

 

The financial year 2015/16 saw ITAC receive a record ten applications for tariff increases on primary steel from one company, ArcelorMittal South Africa (AMSA) which is South Africa’s largest steel producer. The ten investigations had to be completed within four months, a turnaround time set for sectors in distress.

 

Eight of these investigations were finalised within a tight schedule of four months without compromising on quality. In all these investigations including the two on other bars and rods and hot rolled steel that exceeded four months, the Commission made recommendations to the Minister of Trade and Industry that sought to promote domestic production, investment and jobs in the whole value chain. These investigations also saw the Commission strengthening the requirements on reciprocal commitments by the primary steel industry taking into account downstream concerns, which has set a standard for future investigations.

 

28 tariff investigations were completed during the 2015/16 financial year. 17 188 import permits were also issued during the period under review. The target for import permits was 16 000.

 

The latest review of the guidelines aimed at strengthening the administration of the Price Preference System (PPS) for Scrap Metal Exports is in its final stages. The policy intends to:

 

1. promote scrap metal beneficiation and to reverse the decline in the metal fabricating consuming industries.
2. allow the domestic industry to have access to affordable quality scrap and to supply inputs into governments infrastructure programme.

ITAC also conducted four Economic Impact Assessments during the period.

 

ITAC’s revenue amounted to R88.6 million for the year. The total expenditure amounted to R92.6 million and the deficit per (General Recognised Accounting Practice) GRAP reporting requirements amounted to R4.0 million for 2015/2016. This deficit is largely funded from previously accumulated surplus.

 

ITAC obtained an unqualified audit opinion in the 2015/16 financial year. Management has developed an Audit Action Plan to address the issues of compliance as raised by the Auditor-General.

 

 

1.       COMMITTEE findings and OBSERVATIONS

 

8.1 Governance, operational and service delivery issues of the Economic Development Department and its entities

 

1. The Committee acknowledges the continuous efforts by the Department in its contribution to the advancement of economic transformation strategies of government, as well as its efforts towards creating a decent work environment and safeguarding jobs under a challenging global and domestic economic environment. The Department is encouraged to find even more innovative ways to ensure that these efforts make meaningful impact on the lives of South Africans, especially the poor and vulnerable.
2. The Committee understands that global growth outlook remained subdued in 2015/16. The New Growth Path was aimed at boosting economic and employment prospects. However, given that this was a mid-term year for the targets set in the New Growth Path, the Committee is concerned about the low economic growth rates, high unemployment and inequality levels that are troubling the country.
3. The issue around vacancies in the Department remains a challenge, including those that have not been filled on a permanent basis at senior management. This may have a negative impact on the work of the Department.
4. In addition, the finalisation of the Department’s organisational structure is long overdue. 
5. The delayed filling of critical posts at the competition authorities continues to put a strain on the delivery capacity of these important institutions. These institutions deal with work of a highly-specialised nature.
6. The audit issues raised by the Auditor-General indicate that there is a general regression in key internal controls in the Department and the entities.
7. The Committee notes and commends the implementation of the Schools Outreach Programme and internships by the Competition Tribunal as per its previous recommendations.
8. The Committee commends the work of the IDC under a challenging, volatile economic environment.

 

1.       COMMITTEE Recommendations

 

The Committee notes and acknowledges, once more, the work done by the Department and its entities during these challenging economic times. The Department is urged to implement the tenets of our policy instruments with more rigour and closer monitoring. This is particularly important as we enter the National Growth Path’s (NGP) six years of implementation. The NGP must continue to be used as a framework with the objectives of strengthening the National Development Plan’s (NDP) 2030 vision, thus ensuring the latter’s prompter realisation.

 

As part of continued monitoring and evaluation, the Committee calls for the review of the progress on implementation of these important instruments thus far.  This especially includes a comprehensive mid-term review of the NGP. Further reviews must be done on the Industrial Policy Framework in its entirety, with a special focus on strengthening efforts towards increasing local content. The Committee calls for the enhancement of efforts on innovation around ICT and other relevant strategic sectors that will ensure the radical transformation of our economy for more growth and creation of sustainable employment.

 

The plans presented by the IDC under Project Evolve are especially encouraging as they seek to unlock potential in new and future industries.

 

The Committee recommends to the National Assembly that the Minister of Economic Development and the Accounting Officer implement the following recommendations:

 

1. Consider recommendations of the Committee in the 2015/16 Budget Vote Report as outlined in Section 3.2 of this report on the strengthening of institutional arrangements and provide a progress report on these to Parliament by the next Budget Vote cycle.
2. Expedite the filling of key posts at the public entities.  A progress report on these must be provided to Parliament by the next Budget Vote cycle.
3. Develop a monitoring and evaluation strategy that will be used to assess, every six months, progress made on targets set in the NGP.
4. Due to the moratorium on vacancies, a special dispensation for the filing of posts at the Regulatory bodies i.e. ITAC, Competition Tribunal and Competition Commission, be prioritised. This is due to the increase in the mergers and acquisition cases before the Competition Authorities.
5. Provide feedback on the implementation and progress of the action plans to address poor audit outcomes during quarterly reporting.
6. Provide quarterly feedback on the status of key controls.
7. Devise a model for measuring the impact of its coordination and facilitation role in all spheres of government and its entities. The Department should report progress in its quarterly reporting to the Committee.
8. Accelerate its coordination and policy alignment efforts in relation to the provincial and municipal economic development. The Department should report more comprehensively on the work done with provinces and municipalities in its quarterly reporting to the Committee.
9. The Department should also update the Committee on possible collaboration with other departments e.g. Small Business Development, Trade and Industry and Science and Technology; and institutions like the SA Bureau of Standards on innovation and advancement. Furthermore the collaboration must develop better ways of empowering women and youth with necessary entrepreneurial skills that will help them start their own business and also empower them to be employable.  
10. In addition, collaborate with such departments like Agriculture, Forestry and Fisheries on programmes to encourage and support the women and youth to take up opportunities in the agricultural and food security sector.
11. The IDC should devise a clear strategy to ensure that information on opportunities for development finance for women is communicated and made available as extensively as possible.
12. Consider legislative prescripts to enable the implementation of the law to support consumer associations to contribute to public interest conditions in civil claims against collusive behaviour.
13. Work with National Treasury to develop a preferential procurement plan for local products and encourage provinces and local governments to procure such products from local producers.

 

10. CONCLUSION

The Committee would like to express its gratitude to the Minister, Mr Ebrahim Patel, MP; the Deputy Minister, Mr Madala Masuku, MP; former Director-General  Ms Jennifer Schreiner, former Acting Director-General, the late Mr Kumaran Naidoo,  the Acting Director-General Mr Malcolm Simpson and the entire team at the Department for their commitment and contribution during the period covered by this report.

Appreciation is also extended to the dedicated entities of the Department, namely; ITAC led by Mr Siyabulela Tsengiwe, the Competition Commission led by Mr Tembinkosi Bonakele; the Competition Tribunal led by Mr Norman Manoim and the IDC led by Mr Geoffrey Qhena, together with the Board Members and staff of all the entities, for their commendable endeavours towards the betterment of the lives of our people.

The Chairperson thanks all Members of the Committee for their active participation during the process of engagement and deliberations; and contribution to the observations and recommendations of this report.

Report to be considered.

 

 

 

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[1] http://www.compcom.co.za/draft-guidelines-for-the-assessment-of-public-interest-provisions-in-mergers-for-public-comment/

[2]Ibid

[3] http://www.comptrib.co.za/publications/press-releases/media24-press-release/

[4] EDD (2016)