ATC200623: Report of the Portfolio Committee on Trade and Industry on its oversight visit to the Western Cape on 11 February 2020, dated 19 June 2020

Trade, Industry and Competition

Report of the Portfolio Committee on Trade and Industry on its oversight visit to the Western Cape on 11 February 2020, dated 19 June 2020

 

The Portfolio Committee on Trade and Industry having visited two projects funded by the Industrial Development Corporation (IDC), namely the Cape Town Film Studios and the Noodle Factory, and a project funded by the National Empowerment Fund (NEF), namely RISE Apparel/Uniforms (Phakamile Industries), in the Western Cape 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, scrutinises and oversees Executive action. The National Assembly through the Portfolio Committee on Trade and Industry oversees the work of the Departments of Trade and Industry (DTI) and of Economic Development (EDD), as well as their entities, to ensure that national priorities such as the creation of decent employment are met.

 

The IDC and the NEF are development finance institutions within the EDD and the DTI respectively. The IDC is mandated to finance projects that will contribute to industrial development, while the NEF’s mandate is to finance projects that will contribute to economic transformation and is not limited to manufacturing projects.

 

1. Purpose of the visit

Oversight visits provide the Committee with the opportunity to determine whether reporting by the Departments and their entities are a true reflection of its reported service delivery. The purpose of the Committee’s visit on 11 February 2020 was to see projects funded by the IDC and the NEF and to engage with the beneficiaries regarding the impact of the entities’ funding, involvement and any challenges facing the beneficiaries to operate and compete effectively.

 

The Committee identified two projects funded by the IDC and one funded by the NEF based on their proximity to each other and the type of facility. The three projects were the Cape Town Film Studios; Rise Apparel/Uniforms (Phakamile Industries), a clothing manufacturing company; and the Noodle Factory, an agro-processing company.

 

 

1.2   Delegation

The following Members of Parliament participated in the oversight:

 

• Mr M Cuthbert (Democratic Alliance),
• Ms J Hermans (African National Congress (ANC)),
• Ms P Mantashe (ANC),
• Mr S Mbuyane (ANC),
• Ms R Moatshe (ANC),
• Ms N Motaung (ANC),
• Mr F Mulder (Freedom Front Plus),
• Mr D Nkosi (ANC) (Chairperson),
• Mr W Thring (African Christian Democratic Party), and
• Ms Y Yako (Economic Freedom Fighters)

 

The Committee was supported by the following members of staff:

 

• Ms Z Madalane, Researcher,
• Mr T Madima, Committee Secretary,
• Ms Y Manakaza, Committee Assistant, and
• Ms M Sheldon, Content Advisor.

 

1. 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.

 

 

1. Cape Town Film Studios

 

1. Overview

The Cape Town Film Studios (hereafter referred to as “the Film Studios”) was selected as a signatory project for the IDC’s 75th anniversary. The Studios is also regarded as the most successful film studio in the developing world. It offers a world-class, custom-built, Hollywood style, film studio complex with state-of-the-art facilities, such as its five sound stages, workshops, backlot sets, and deep-sea and beach tanks, and supporting services. The Studios informed the Committee that it had hosted about 42 productions with an economic impact of about R15 billion since inception and had created approximately 88 000 full-time equivalent jobs during its first eight years of operation.

 

Furthermore, they informed the Committee that there was a significant increase in the number of jobs created and the Gross Domestic Product contribution when a film moves from a location-based project to a studio-based project. This was due to the increased length of production time spent in the studio compared to a location; the increased spend on production costs including indirect spending on accommodation, travel, tourism, etc.; increased number of direct and indirect jobs.

 

The Film Studios has been funded and supported through a successful public-private partnership which includes the DTI, the IDC, Wesgro and the City of Cape Town. The IDC had invested about R70 million in the studios in 2010 and then a further R14 million for the construction of the water tank facility.

 

1. Matters arising

In spite of the success of the Film Studios, a number of concerns had been raised during the visit which are captured below:

 

1. Capacity of the industry

The Studios management and other stakeholders in the industry informed the Committee that there was an increased demand for content such as live streaming entertainment, from companies such as Netflix and Amazon Prime, which is disrupting the way the industry has been functioning. As a result, the global capacity of film studios was unable to effectively service all planned productions. They noted that currently, the Film Studios had to forego productions due to a lack of physical capacity. The unintended consequence for South Africa’s film industry is that while other countries’ industries are growing exponentially, South Africa’s growth has been minimal. This was placing the ability of production service providers at risk of securing follow-up work if they were unable to source additional studio capacity for particularly larger productions. It was also noted that South Africa has the potential to increase the number of film studios.

 

1. Support for local productions

Wesgro informed the Committee that a number of local productions had been hosted by the Film Studios, such as The Long walk to Freedom. Smaller, local productions were being accommodated at the studios in between the bigger productions and were charged lower rates. However, the Film Studios expressed a concern that the absence of programmes that would encourage, develop and nurture local stories/content into films is impeding the development of the local film industry.

 

1. Skills development and transfers

The Film Studios requires a number of skills to support a production. These include technical film-making and post-production skills, such as sound engineering, camera operation, animation, special effects and editing; wardrobe and prop production; and set development, including set design, construction, etc. The Film Studios has used locals and in the process transferred the necessary skills to them, thereby growing the local skills set for the film industry. The skills development is mainly focused on the pre-production phase when the set and wardrobes need to be prepared before shooting commence. This process also provides these individuals with opportunities to establish businesses within carpentry, construction etc. Furthermore, it also provides opportunities to use local service providers for catering and transport.

 

Wesgro emphasised that the nature of most jobs in the industry were dependent on productions for a specific period. During the downtime period individual are being further trained. Wesgro noted that remuneration of the workforce is substantial which buffers them during the downtime.

 

1. Film and Television Incentives

One of the issues inhibiting the attraction of productions is the current Film and Television (TV) Incentive. Incentives are used globally to compete for film and TV productions. The current cap on the incentive is R50 million, which is not competitive compared to incentives being offered in other jurisdictions and given the budget of these international productions. The incentive is also structured for film production. However, the industry has moved onto the “Age of TV”. This requires the ability to compete for series that can have more than one season. This can result in recurring work for the industry but requires the industry to work harder to maintain that relationship. Some of the TV series’ budgets are around US$90 million and the incentive translates to about US$3,5 million, which is about 3,9% of the total budget. Production companies have approached the DTI to raise the cap to R100 million in special cases where the magnitude of the budget warrants this; thus being able to secure the high budget productions. However, it is unclear when and on what basis this can be done.

 

While South Africa has a number of factors that play in its favour within the sector, the incentive should be effectively used to raise its competitiveness, as South Africa's location is not necessarily convenient. Currently, the domestic industry's market share was about 1% of the number of global productions, while tourism had a share of 3%. They were of the view that the market share should at least match that of tourism. The industry proposed that the incentive cap be increased or that the incentive be converted into a tax rebate to make the industry a little more competitive.

 

Furthermore, the DTI excludes pilots for TV series from the incentive programme, as these are considered to be speculative. However, the industry argued that these pilots spend as much as a film does and it is irrelevant to the production companies whether this is only for one episode of a series that may not continue. The likelihood is that when you shoot a successful pilot at a particular location, the TV series will continue there. They noted that on average three out of ten pilots are selected for full production in Hollywood. The industry was of the view that the incentive should be granted on a value basis rather than on the type of production, which should create an environment to grow the domestic industry.

 

The industry acknowledged that the incentive programme is driving transformation within the industry. However, the sustainability of this is dependent on the ability of the industry to grow its market share. Therefore, the incentive should be crafted in a manner to stimulate this growth.

 

1. Impact of changes to the Copyright legislation

Wesgro noted that the film and TV industry is a risky business, as there is a large upfront investment made without certainty that the production will be successful. The industry will therefore tend to invest in locations that mitigate its risks. Consequently, it considers the financial and tax systems, as well as the laws protecting copyright, among others. Currently, certain provisions of the Copyright Amendment Bill creates some uncertainty for industry players. There was an opinion that the Bill does not align with the way copyright legislation is drafted globally. The Bill attempts to create a new model for certain aspects of copyright that have a number of pre-existing models that work well elsewhere; such as artists' rights under the French model or shared responsibility under the Canadian model. This is not to say that South Africa should not explore new models. The fear is that this uncertainty with the new legislation will increase the risk for locating productions in South Africa and drive away investment.

 

 

1. Visit to RISE Apparel/Uniforms

 

1. Overview

RISE Apparel/Uniforms is a clothing manufacturing company based in Philippi, Cape Town. It is 100% black, female owned and managed. It offers functional clothing such as uniforms, corporate wear and protective clothing under the RISE Uniforms brand. RISE Uniforms started trading informally in 2007, and only formally registered in 2010. It reported that it had 52 employees, of which 81% were black females.

 

It had approached the NEF in 2017 for funding of R5 million for the purpose of purchasing equipment necessary to expand its clothing manufacturing business. This funding was necessitated due to the company securing a contract from Pick n Pay under its Enterprise and Supplier Development Programme[1]. This was done in partnership with the Western Cape Department of Economic Development and Tourism with a 60:40 split to reduce the cost of capital to entrepreneurs in the province.

 

Currently, Pick n Pay and Boxer are its main clients to whom uniforms are supplied in bulk.

 

1. Matters arising

The following matters were raised by Rise Uniform:

 

1. Ease of accessing finance

The owner shared her experience when trying to expand her business. Initially, the business had been manufacturing school and other uniforms on a small-scale before it was awarded a tender by Pick n Pay for uniforms. The tender meant that the business was operating at full capacity and could not take on any other clients. In spite of the growth in turnover and employment, commercial banks and even government mainly deemed her business too risky to invest in it, as it only had one client. However, the unwillingness to invest meant that her business could not expand its client base to reduce its risk. She was of the view that this attitude towards small enterprises was an impediment to their growth and may disincentivise them from growing their market share with larger corporates.

 

Fortunately, the NEF was willing to look beyond the fact that she had one client and spent time understanding the business model, what the future plans for expansion were and verifying the contract and information with Pick n Pay. The NEF also put conditions on the disbursement of finances to reduce its risk. This included that R850 000 would be retained until the business was able to secure a second client.

 

With the extension and further allocation of work to Rise Uniforms from Pick n Pay, there is a need for a further expansion. This would include additional productive capacity, and an appropriate storage facility, as well as to invest in improving the working conditions for the employees. Therefore, with support from the NEF, RISE Uniforms has submitted an application for funding under the Black Industrialist Programme.

 

1. Technical assistance for entrepreneurs

While the NEF provided financial assistance, it continues to play a mentoring role to the business with weekly communication to get feedback on operations and whether there were any challenges or concerns. It has also allocated an accountant for three days a week and has provided a back office. Furthermore, the NEF and accountant have been working with the business on how to expand its client base and to diversify its business model.

 

1. Partnerships/collaboration with other stakeholders

The owner noted that there are often untapped opportunities from creating partnerships with both smaller and larger clothing manufacturers. For instance, the NEF investment has enable Rise Uniforms to purchase embroidery and screen-printing equipment. This has created an opportunity for the company to offer these services to smaller clothing manufacturers, where Rise Uniforms has a competitive edge. In addition, Rise Uniforms are outsourcing work to smaller manufacturers.

 

Furthermore, there are opportunities for the company to access export markets and mass manufacturing by partnering with larger clothing manufacturers and/or warehousing companies and being included in their value chains.

 

1. Working conditions and employee benefits

The owner agreed with the Committee that providing a safe working environment is important. She acknowledged that the lack of air-conditioning could negatively impact on workers’ health and their productivity. However, the ability to address the matter would be dependent on the ability to make further capital investments.

 

She explained that as the business’ turnover and production are increasing, she is expanding her workforce. Currently, the business offers workers a pension and funeral cover. Furthermore, she is looking at improving their remuneration package by including employee benefits, such as medical aid.

 

The business has also been creating new jobs for individual even where they do not have the necessary skills to work in the industry. These individuals are then offered on-the-job training.

 

 

1. The Noodle Factory

 

1. Overview

The Noodle Factory was founded in 2012 in Philippi, Cape Town. It is the first facility in South Africa to produce instant noodles. Initially, the owner of the company had been importing the instant noodle cakes. However, due to the 2008 global financial recession, the continued importation of the product was no longer financial viable. Consequently, he started investigating the possibility of manufacturing this locally. In 2009, the company approached the IDC with its proposal having failed to secure commercial funding for this project. The IDC approved R4,8 million for this venture at the end of 2010, which became fully operational in February 2012. A second round of funding had also been provided through the IDC and the Black Industrialist Programme in 2017. This funding has enabled the company to streamline its production and increase its capacity to fill growing local and international orders, such as for Shoprite and other corporate brands.

 

Currently, the Noodle Factory has the capacity to produce 1 million units a day and employs 447 people. It has achieved the necessary food safety accreditations and supplies local retail chains and various brands.

 

1. Matters arising

The following matters were raised by the management of the Noodle Factory:

 

1. Importance of IDC for venture capital funding

The owner of the Noodle Factory noted how difficult it had been to secure commercial funding for the manufacturing of instant noodles, as they had not been produced domestically at the time and was considered to be a high risk for financing. From 2009 to 2010, he had engaged with the IDC to secure funding for this project. While the IDC is willing to invest in venture capital, this is subject to a rigorous due diligence process to ensure the viability of such projects. As a result of this investment, the factory was initially able to create 25 jobs, which grew to 110 jobs. Once the demand for its product had increased, it was able to access the Black Industrialists Programme through the IDC and the DTI. The commissioning of the new production line resulted in permanent employment for 447 individuals. Thus, the IDC, along with other incentives, plays an important role in addressing the market failure to supply funding for start-ups.

 

One of the conditions that the IDC placed on the company was for it to acquire the relevant food safety certification to increase its trading opportunities. The Noodle Factory has attained HACCP[2], ISO[3] 17021 and FSSC 22000[4] certification.

 

1. Economies of scale

One of the key factors in determining the success of a business is its ability to leverage economies of scale to cover capital costs and lower overall production costs. This requires competitive production capacity, as well as access to markets to sell more products. While the IDC and other incentives have assisted with improving productive capacity, the company initially struggled to gain substantive market access. Its gain in market access was supported by the relevant food safety standards that it maintained as well as leveraging large retailers and corporate brands to displace their imports with local production. However, the owner noted that there was still substantive resistance to purchasing locally with a number of companies still importing instant noodles from Asian countries.

 

1. Impact of load-shedding

The factory has a generator but with its additional production line, it is not able to continue operating at full capacity during load-shedding. Furthermore, the cost of load-shedding includes the cost of operating the generator but also the loss of products as the oil used to cook the noodle cakes must be maintained at a specific temperature for food safety purposes. The cost of operating the generator is not a planned cost and as such is not factored into the price being charged to clients. Therefore, this erodes the profit margin for the company and other businesses. Greater certainty around load-shedding could alleviate some of these losses, as businesses could plan accordingly.

 

 

1. Conclusions

 

The Committee raised the following issues:

 

1. The Committee welcomed the Industrial Development Corporation’s investment within the film industry and its concomitant positive impact on job creation and on small businesses, which support the film industry.

 

1. However, the Committee was concerned that failure to increase the physical capacity of the Cape Town Film Studios and to develop other domestic studios would most likely lead to minimal growth in the industry, which potentially could have a negative impact on its ability to attract additional work and thus its job creating capacity.

 

1. The Committee noted the industry’s acknowledgement of the positive impact of the Film and TV incentive programme on transformation. However, it was concerned that the sustainability of this growth would be dependent on the growth in the South African film industry’s global market share.

 

1. The advent of a number of live streaming service providers has led to an increased demand for content to be produced in a shorter space of time. This has exceeded the global supply of film studios and provides an opportunity for South Africa to grow its global market share, as well as the number and size of domestic film studios and production companies.

 

1. While the Committee acknowledged the fiscal constraints and the need to spread the Film and TV incentive to a wide number of stakeholders, it was of the view that the incentive programme should be reviewed to consider either using a tax incentive or adjusting the cap to factor in the type of production and the amount being spent on it in South Africa. This was critical given the indirect economic benefits of foreign productions.

 

1. The Committee welcomed the Cape Town Film Studios’ contribution to producing local films and television series, but it acknowledged the concerns raised by the Film Studio that the absence of programmes that nurture the development of local content into films may impede the development of the local film industry.

 

1. Furthermore, the Committee welcomed the Film Studios’ contribution to the transfer and development of a variety of skills to local communities, which includes skills such as carpentry, construction and costume production.

 

1. The Committee noted the challenges raised by RISE Uniforms and the Noodle Factory about accessing credit from commercial and development financial institutions. There is a need for financial institutions, in particular development financial institutions, to relook at their risk models for assessing small, medium and micro enterprises.

 

1. The Committee welcomed the approaches by RISE Uniforms and the Noodle Factory to build partnerships with other companies to improve their competitiveness and economies of scale; thus, growing their businesses and job creation in the process.

 

1. The Committee acknowledged the technical assistance offered by the National Empowerment Fund and the Industrial Development Corporation to assist in developing RISE Uniforms and the Noodle Factory respectively.

 

1. The Committee was concerned about the non-compliance with the occupational health and safety conditions at the RISE Uniforms’ factory, in particular the lack of ventilation and an air cooling system.

 

1. The Committee noted the challenges raised by the Noodle Factory regarding the impact and cost implications of loadshedding due to the loss of production time and inputs.

 

 

1. Acknowledgements

 

The Committee acknowledges the management of the Cape Town Film Studios, RISE Apparel/Uniforms and the Noodle Factory for their cooperation and willingness to share their experiences and lessons learnt.

 

The Committee also wishes to thank its support staff in particular the committee secretaries Mr A Hermans and Mr T Madima, the content advisor, Ms M Sheldon, the researcher, Ms Z Madalane, and the committee assistant, Ms Y Manakaza, 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.

 

 

1. Recommendation

 

Informed by its deliberations, the Committee recommends that the House requests that the Minister of Trade and Industry should consider engaging the Minister of Sports, Arts and Culture to initiate a programme to nurture the development of local content, including indigenous stories, to translate this into film and television production.

 

Report to be considered.

 

 

References

 

FSSC 22000 (n.d.) Scheme. Available: < https://www.fssc22000.com/scheme/>.

 

U.S. Food and Drug Administration (2018) Hazard Analysis Critical Control Point (HACCP). Available: <https://www.fda.gov/food/guidance-regulation-food-and-dietary-supplements/hazard-analysis-critical-control-point-haccp>.

 

 

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[1] This Programme aims to develop, mentor, and provide support to small-scale suppliers while securing its own value chain. 

[2] HACCP refers to Hazard Analysis Critical Control Point, which “is a management system in which food safety is addressed through the analysis and control of biological, chemical, and physical hazards from raw material production, procurement and handling, to manufacturing, distribution and consumption of the finished product.” (U.S. Food and Drug Administration 2018)

[3] ISO refers to International Organization for Standardization.

[4] FSSC 22000 refers to the Foundation Food Safety System Certification 22000, which offers a complete certification Scheme for the auditing and certification of Food Safety Management Systems and/or Quality Management Systems. (FSSC 22000 n.d.)