ATC100601: Report Revised Industrial Policy Action Plan (IPAP2)

Trade and Industry

The Report of the Portfolio Committee on Trade and Industry on the Revised Industrial Policy Action Plan, dated 1 June 2010


The Portfolio Committee having held public hearings on the revised Industrial Policy Action Plan reports as follows:


1.         Introduction


The revised Industrial Policy Action Plan (IPAP2) is a radical shift to grow a developmental economy by taking a deliberate decision to ensure that investment targets production sectors of the economy to arrest the decline in manufacturing and accelerate employment creation. IPAP2 clearly is an attempt by Government to arrest industrial decline and place South Africa on a new growth path. Within the context of a new growth path, IPAP2 focuses on value-added sectors with the potential for high employment creation and growth multipliers.


Through IPAP2, Government has identified the constraints in achieving a scaled-up industrial policy platform, as manufacturing had a low level of profitability and employment. Some of these identified constraints are:

§         Exchange rate overvaluation and volatility;

§         High cost and limited allocation of capital;

§         Failure to adequately leverage public procurement;

§         Monopolistic pricing of key inputs;

§         Aged, unreliable and expensive rail and port systems;

§         A low skills base to support industry; and

§         Low productivity levels.



2.         Policy Context


In his first Budget Speech, Mr P Gordhan, Minister of Finance, called for a new growth path that addresses unemployment, attains sustainable growth and reduces inequalities within society. This is an attempt to reach South Africa’s developmental agenda to achieve sustainable growth through job creation.


The envisaged growth path contains the following key actions:

§         Creating youth employment;

§         Developing labour-intensive industries;

§         Maintaining public and private investment and increasing domestic savings;

§         Improving government performance and effectiveness with a focus on education;

§         Generating an inclusive economy;

§         Striving to achieve low inflation and a stable exchange rate; and

§         Increasing productivity and competitiveness and attracting foreign direct investment.


IPAP2 is one component of a broader effort to integrate related policies and strategies to place South Africa on a new growth path. The central theme of the “new growth path” - still to be unveiled – purported by Minister Patel would be to enhance the labour-absorbing capacity of the economy and to connect knowledge and innovation to the challenge of jobs and growth[1]. The global financial crisis presents an opportunity for South Africa - in an attempt to recover the job losses - to focus on creating job opportunities and a better social outcome through a developmental economy.



3.         Process


The Minister of Trade and Industry, Dr R Davies, tabled the IPAP2 on 18 February 2010 in Parliament.  IPAP2 was the result of a collective approach among Ministers in the Economic Cluster and included consultation with business, labour, state entities, and academia.


Portfolio committees exercise oversight over their respective departments and agencies in line with their Constitutional mandate as set out in Section 55(2) of the Constitution (No. 108 of 1996) and section 27 (4) of the Public Finance Management Act (No. 1 of 1999). Within the context of our constitutional mandate, the Committee agreed to have public hearings and invited the relevant stakeholders to comment on IPAP2. The rationale behind this decision was for the Committee to critically engage with stakeholders on IPAP2 and to develop a definitive position.


The Committee received oral and written submissions from the respective labour unions on which IPAP2 directly impacts on, business, state-owned enterprises, industry specific bodies relevant to the sectors identified in IPAP2, and academia. The inputs received from stakeholders were generally constructive with some falling outside the ambit of IPAP2 and some representing their narrow interest. This process allowed the Committee to have a wider perspective and to develop a balanced view on the future economic development path of the economy. Below is a summary of the key issues raised in the submissions.



4.         Key issues raised in submissions


The key overarching issues raised during the public hearings were:

§         Employment creation;

§         Equity challenges;

§         Coherence between micro and macroeconomic policies;

§         Leveraging of public procurement;

§         Industrial financing;

§         Competition policy;

§         Developmental trade policy;

§         Manufacturing for domestic and export markets; and

§         Regional integration and global competitiveness.



4.1 IPAP2 and employment creation


A key element of the National Industrial Policy Framework (NIPF) is the “promotion of a more labour-absorbing industrial strategy with the emphasis on traceable labour-absorbing goods and services and economic linkages to promote job creation”[2]. President J Zuma, in his June 2009 State of the Nation Address, recognised that a revised industrial policy could be the catalyst that would set the country on a new path of industrialisation. The revised Industrial IPAP2 along with its building blocks – NIPF and IPAP1 – reflects government’s objectives of stimulating long-term industrialisation and industrial diversification beyond the current reliance on commodities and non-tradable services[3]


The rationale behind IPAP2 is the promotion/expansion of the production sectors in the economy, particularly those with high employment and/or economic growth potential that could promote the local manufacturing of value-added products for both domestic and export markets. IPAP2 also correctly identifies that the distortion of industry has been perpetuated by “Monopolistic pricing of certain minerals and most semi-processed raw materials such as steel and chemicals in the form of import parity pricing.”[4]  The conversion of South Africa’s mineral endowment into human development would be aided by incentives to beneficiate locally.


In his Budget Speech on 17 February 2010, Minister P Gordhan stated that addressing the structural economic balances and affecting the kind of transformation that will lead to the absorption of the unemployed will require the effective implementation of forward looking policies. In addition, the Government will have to make choices with respect to investment priorities, industrial policy options, spending priorities, technology alternatives and trade strategies.


He further purported that industrial policy is about choices that should alter the growth path and shape industrialisation to ensure employment creation and inclusion.  He recognised the importance of a comprehensive industrial plan as the catalyst for growth and emphasised the need for the structural adjustment of the economy which requires state intervention[5]. IPAP2 recognised that manufacturing and other production sectors are the engine for long-term sustainable growth and job creation. The National Union of Metal Workers of South Africa (NUMSA)[6] welcomed the Government’s break from its neo-liberal economic orthodoxy in that it confronts the structural challenges faced by the South African economy. Still, other stakeholders[7] in their submissions to the Committee argued that no country has developed without a focused and well resourced industrial policy.


The Committee welcomed IPAP2 in that it attempts to address unacceptably high levels of inequality that prevail in our society, and that it can be a catalyst for the redistribution of wealth, comprehensive training, skills transfer and the creation of economic opportunities, including the creation of sustainable jobs and the maintenance of existing jobs. In this regard, the promotion and development of the manufacturing sector and encouragement of knowledge-based technologies will contribute to the elimination of poverty, the creation of decent job opportunities and the reduction of unemployment. Furthermore, the Committee stressed that sufficient funds are required to support IPAP2, but with the current budgetary constraints, the reallocation of funds should have an optimal impact on industrialisation and job creation.


4.1.1 Structural imbalance of the economy


The major cause of unemployment is a structural distortion of the economy, which favours capital intensive industries due to the industrial and monetary policies of the apartheid years[8]This distortion was maintained through “monopolistic pricing of certain minerals and semi-processed raw materials such as steel and chemicals in the form of import pricing”[9].


In his submission to the Committee, Prof P Bond[10] asserts that the impact of the global financial crisis highlighted the existing, inherited contradictions of the neo-liberal macro- and microeconomic policies pursued. This distorted the “growth” witnessed in South Africa and therefore requires a correction in the growth path to be pursued by Government[11]


The Minister is his statement to the National Assembly acknowledged that the advances of the past 15 years did not bring about structural changes that would absorbed the marginally unemployed people into new productive, income-earning activities. He has begun to identify the inherited distortions in that IPAP2 recognises that South Africa’s recent growth was consumption driven and not underpinned by production sectors of the economy. A significant decline between 1994 and 2008 within the production sectors – agriculture, mining, manufacturing, electricity, water and construction – compared to the consumption driven sectors was recorded. In his submission, Prof P Bond argues that the high sustained growth experienced before the current financial crisis had not necessarily had a positive impact on job creation. At the peak of our average annual growth at 5.1 per cent between 2005 and 2007, unemployment had not fallen below 22.8 per cent. South Africa’s unemployment is therefore structural in nature and the overall thrust of IPAP2 is to deal with the structural impediments of employment creation.



4.1.3 Manufacturing


Manufacturing has become the most productive sector in the South African economy. The policy decisions of the pre-1994 Government recognised the importance of the manufacturing sector as it encouraged local manufacturing through the establishment of state-owned enterprises (SOEs) to produce key inputs, such as electricity (ESKOM) and steel (ISCOR)[12].  Notwithstanding the success of the manufacturing sector during the 1950s and 60s, deep-seated trends of deindustrialisation were evident by the 1970s. The race-based economic policy was causing structural problems (skills shortages) accompanied by extremely high social costs[13].


With expansion of the manufacturing sector, both in the public and private sector, it became increasingly capital intensive, despite the abundance of labour. As a result of this capitalisation, as well as the economic downturn of the 1980s, South Africa saw a decline especially in the clothing and textile, footwear, industrial chemicals, and non-ferrous base-metal industries.


Employment within manufacturing during the 1990s remained sluggish due to high inflation and interest rates which suppressed demand, while trade liberalisation increased access to global markets as well as competition. Industries that failed to make the adjustment showed a decline in their productivity, while others showed increased productivity and capital investment, as well as higher employment in certain industries[14].


Production in value-added products declined by 12.2 per cent in 2009, but the PMI reflects an improvement towards the end of the year (see Figure 1 below)[15]. This could be ascribed to an increase in inventory levels in the automotive sector, but production remains stagnant in the clothing and textile and furniture sectors[16].

























Figure 1: Growth in the Manufacturing Sector in relation to the Purchasing Managers Index[17] (PMI), 2004 – 2009[18]


IPAP2 identifies manufacturing as the biggest contributor of the production sector[19] (54.3 per cent of all production sectors in 2008).  Performance in this sector has been varied with a steady decline in its productivity and competitiveness. This can be ascribed to the high cost of capital, weak skills base, unreliable and expensive port and rail system, the monopolistic provision and pricing of key inputs into manufacturing and the failure to use public procurement effectively.[20] IPAP2 recognised the divergent performance within the manufacturing sector, with the potential employment creating industries remaining stagnant. Given the trends in the different sectors, the manufacturing sector remains important for employment creation and economic growth[21].


The global financial crisis has had a severe impact on our industrial capacity with a significant decline recorded within the manufacturing sector. The greatest decline in employment was in the retail and manufacturing sectors. This revealed the structural weakness of the economy, as well as the labour-absorption potential of this sector. Manufacturing, especially within the automotive and clothing and textile sectors, and other production sectors have been identified as the engines of long-term sustainable growth and job creation in developing countries.[22]


IPAP2 emphasised the prominence of the production and consumption sectors of the economy, with the explicit belief that industrial focus should be on the “production” sector as the vehicle for growth and employment creation. Despite the importance of developing a knowledge economy, the Information Technology (IT) services received no mention in IPAP2. A concern is that potential productive industries are omitted because they are not labour intensive, and whether job creation should be the sole criteria for Industrial Policy support[23]. The disproportional allocation of industrial funding to the automotive and clothing, textile, footwear and leather sector implies that Government’s focus is on maintaining existing jobs rather than creating jobs[24].


The financial support given to these sectors indicates their overreliance on Government support for their survival. Support for these industries is at the expense of other viable industries, and Government has not yet indicated the full cost of supporting these specific sectors[25]. Recently, employment creation in South Africa has been built around incentive schemes for the preservation and creation of employment[26], which may not be sustainable if the benefitting sectors do not become competitive. 


The Committee agrees with IPAP2’s emphasis on the manufacturing sector being the catalyst for economic growth and job creation. In this regard, Foreign Direct Investment should be encouraged but with an emphasis on the promotion of the industrial development, in both new and existing industries, specifically in economically depressed areas to achieve these goals.



4.2 Coherence between macro and micro economic policies


IPAP2 stressed the need for alignment and stronger coherence between macro- and microeconomic policies to effectively achieve the objectives of job creation and poverty eradication. Macroeconomic policies refer to fiscal policy, which deals with government expenditure and revenue collection, and monetary policy, which deals with the supply of money, the availability of money and interest rates or the cost of money. On the other hand, microeconomic polices refer to policies that improve economic efficiency and equity, usually through judicial and regulatory mechanisms. This type of policy typically focuses on individual sectors of the economy, such as industries, businesses and households but may also institute economy-wide reforms through policies such as tax policy and competition policy.


IPAP2 expresses a dependence on macro-economic policies which are favourable relative to South Africa’s key trading partners in the following aspects, namely:

§         A competitive and stable exchange rate regime; and

§         A competitive real interest rate regime.


In turn, it argues that microeconomic policies can contribute to the stability of macroeconomic variables, such as inflation, mainly by increasing competition within industries and improving efficiencies between industries; thus lowering prices.


In terms of South Africa’s monetary policy, where the South African Reserve Bank focuses on targeting inflation by adjusting interest rates and practising a floating exchange rate regime, Box 1 below illustrates the effect that changes in the interest rate through the exchange rate channel will broadly have on the external economy (i.e. on imports and exports). 


Box 1: The Exchange Rate Channel


In a flexible (floating) exchange rate regime, the effect of a change in the interest rates on the exchange rate and net exports is as follows:


↓Ms → ↑I → ↑FA → ↑R → ↓X → ↓(X-M) → ↓Y



Ms = Money supply

I = Interest rate

FA = Foreign assets

R = Exchange rate

X = Exports

(X-M) = Net exports

Y = National Income (GDP)

 ↑ = Increase

↓ = Decrease


A change in the repo rate affects commercial banks’ interest rates as well as exchange rates, money supply and credit affordability. Through the various transmission mechanisms, changes in the repo rate will eventually influence decisions on spending by individual consumers and Government and investment by private institutions. The end result of a change in the repo rate is a change in the supply and demand for goods and services which put pressure on the prices of these goods and services (inflationary pressure if average prices are rising). The repo rate is being used as an instrument to control inflation and in this process the goods and services market (depicted by aggregate demand and supply) are influenced.


It must be noted that in the South African context, this channel may not be that strong, as the Rand is relatively insensitive to changes in the domestic interest rate. This is contrary to USA, whose interest rates are highly sensitive.

Figure 2 below indicates the relationship between the real effective exchange rate[27] and the real Gross Domestic Product (GDP) growth in manufacturing. The growth in manufacturing seems to be positively correlated to the real effective exchange rate (REER) between 1980 and 1989. However, from 1989 to 2000, there seems to be an inverse correlation between the two. From 2000 onwards, the positive correlation appears again. The SARB also indicated that real GDP growth in manufacturing seems to be more sensitive to changes in local and international income and expenditure.






















Figure 2: Real effective exchange rate and annual growth rate of real GDP in manufacturing, 1980 – 2009[28]


In general, stakeholders supported the view of the alignment between macro and micro economic policies. The Congress of South African Trade Unions (COSATU) asserted its support in that macroeconomic policy should promote IPAP2 and welcomed the move away from macro-economic policy that “claims to promote stability” at the expense of real economic growth. NUMSA calls on the Minister of Economic Development to settle the debate and give clear direction on macroeconomic policy that would be required to realise the objectives of IPAP2.


An alternative view postulated by Prof P Bond is that the unsound macroeconomic management of the economy would not induce an increase in the productive activity of the real economy. He further argues that there would be no reversal in the implementation of macroeconomic policy given the statement by the Minister of Finance during his budget speech on 17 February 2010 wherein the view that the exchange rate regime and inflation-targeting would be retained was reinforced. Prof Bond argues that this would imply the pursuit of high exchange rates, the maintenance of a volatile currency and high interest rates.


With respect to ensuring a stable and competitive currency, COSATU expressed a view calling for the devaluation of the currency to a more competitive level in support of industrial policy. COSATU further argues that developing countries pursuing industrial policy had targeted their respective exchange rates. Mr S Jennings, Chief Executive Officer (CEO) of the PG Group, informed the Committee that the current strong value of the currency has placed the export sector; particularly the automotive component sector was at risk, with further retrenchments planned.


However, Dr E Wessels is of the view that a strong currency is not necessary to “reduce the cost of imported capital goods” within developing countries. He further argues that the inflationary consequence of depreciation has been exaggerated because the overall impact on the economy is determined by the REER, which is measured by the ratio of non-tradable prices to tradable prices. On the other hand, Prof F Tregenna highlighted the constraints to the implementation of IPAP2 as the lack of a clear macroeconomic policy, the strength of the exchange rate, exchange rate volatility, high interest rates and low domestic demand.


The National Treasury’s view of the real exchange rate is that it must depreciate in the long term. This implies that there must be a moderation in the nominal exchange rate coupled with lower inflation and much stronger productivity in sectors exposed to international competition. Therefore, the National Treasury still advocates for the reduction of dissaving and the inflation targeting framework. Although a depreciated exchange rate is helpful to support competitiveness, it cannot ensure that exports will be promoted successfully. It therefore stressed that complementary policies, such as good quality education, infrastructure development, effective enforcement of competition and well designed regulatory frameworks, are required to raise economy-wide productivity. In addition, product and factor market rigidities must be removed to facilitate demand and production adjustments to relative price changes, which is the realm of microeconomic reforms.[29]


In terms of the volatility of the exchange rate, the National Treasury acknowledges that this a concern, particularly for small and medium sized exporters when needing to invest in production capacity and for importers when planning the costs of capital or consumption goods. It therefore suggests that more targeted intervention at these levels should be made to assist firms with the overall costs of hedging. The gradual accumulation of additional foreign reserves by the South African Reserve Bank, as well as the facilitation of the development of hedging instruments would assist in smoothing excessive rand volatility over suitable timeframes. The National Treasury discourages the adoption of a fixed exchange rate due to difficulty to implement and the range of economic costs that will be incurred as a result. This would also imply that South Africa would no longer have monetary sovereignty, as its monetary policy stance would mirror that of the adopted currency. Furthermore, the exchange rate would no longer act as a shock absorber for changes in the terms of trade, as Greece is currently experiencing.[30]


The Committee is of the view that the issues of the volatility of the exchange rate, the interest rate, and its impact on the manufacturing sector should be addressed at the highest level of government. It welcomed the Minister’s response that “there is a sustained and serious engagement on this issue at the highest level”. The success of IPAP2 will in the Committee’s opinion depend to a great extent on the development of the micro-economy and the deepening of the cohesion between the macro-economic and micro-economic policies.            



4.3 Leveraging Public Procurement


Procurement is a critical component of IPAP2. Both business and organised labour have called for the overhaul of the Preferential Procurement Policy Framework Act (PPPFA) (No. 5 of 2000) and have further added that procurement should be used as an instrument for industrialisation. IPAP2 calls for the strategic leveraging of public procurement to achieve industrial objectives[31]. The current implementation of procurement policy reflects the absence of strategic industrial objectives that should benefit local industries[32]. The importance of “leveraging procurement” for industrialisation would be dependent on the shift from “ad hoc procurement practices” towards “fleet type”[33] purchasing arrangements[34]. The intention of leveraging procurement would not be to support uncompetitive local industry but “to facilitate local production of ongoing repeat procurement “fleets”, from locomotive to power-station components”[35].


IPAP2 calls for localisation targets for State-Owned Enterprises (SOE) and government departments pursuing ongoing purchases of capital goods and infrastructure service.  Various strategic procurement groups would be identified for the development of a long-term government procurement plan with the emphasis on ensuring that tenders awarded to foreign companies support increased domestic production and supplier development.


The alignment of the Competitive Supplier Development Programme (CSDP) with the National Industrial Participation Programme (NIPP) would support the movement towards a long-term fleet-procurement process. This according to the Minister of Trade and Industry, Dr R Davies, would improve opportunities for local industries to supply a greater proportion of the inputs needed for the transport, power, and water infrastructure programmes.


At present, procurement promotes a “crony capitalist tendency which is increasingly losing credibility in view of the wealth accumulation by the “new black elite”[36]. Prof S Roberts argues that “instead of addressing this problem head on by ‘in-sourcing’ vital inputs, IPAP2 accepts the premise of massive outsourcing, and merely attempts to gain cheaper inputs and more domestic production. He questions Government’s decision to make coal-fired electricity, nuclear electricity and defence aerospace central to the procurement strategy. He argues that these industries should be phased out for reasons associated with anti-corruption challenges, climate change, and environmental health and safety issues.


COSATU acknowledges that Government’s procurement policy could have a significant impact in transforming the economy and creating decent jobs.  An important element of local procurement linked to a strategy of industrial diversification, is the use of the public infrastructure programme to promote the development of our domestic capital and intermediate goods sectors[37].


Business Unity South Africa (BUSA)[38] welcomes the detailed proposals on leveraging procurement. However, the challenge remains the alignment between the Department of Trade and Industry (DTI) and the National Treasury. Key to the success is achieving the correct balance between the transformation and the promotion of local industries through procurement opportunities. In response to a question regarding the apparent lack of alignment between DTI and National Treasury, BUSA is of the view that many of the proposals contained in IPAP2 would require legislative amendments or a change in approach with regard to tender requirements. For instance, awarding of tenders should take cognizance of the industrial policy requirements for the promotion of local industries notwithstanding the legal imperatives. National Treasury is concerned that some of the proposals may prove to be unconstitutional, however business differs from this viewpoint, therefore there is a call for closer interaction to resolve these uncertainties.


The Federation of Unions of South Africa (FEDUSA) supports the proposal to leverage procurement, as it would ensure that local companies secure a greater share of contracts. This potential would assist in local companies becoming more productive and thereby increasing the supply of decent employment opportunities. FEDUSA however cautions against shifting towards support for industries in the primary sector at the expense of the service sector.


The Ethekwini Municipality in their submission informed the Committee that their Standardisation Policy dictates that all vehicles purchased should be manufactured in South Africa. Ninety-eight per cent of the municipalities’ fleet was produced in South Africa which highlights the potential of the contribution procurement in building and expanding the local industrial base and its capacity.


The Committee welcomed the input from the Ethekwini Municipality with regard to the utilisation of its procurement process, as this contributes to the building of the domestic industrial capacity and strengthens the domestic supply chain. Through the municipality’s transport fleet procurement system, it contributed to the training of artisans, the lowering of vehicle and spare parts prices, and the training of drivers to reduce repairs from misuse. However, the Committee is concerned that municipalities do not see the cost savings potential of a joint procurement process, which would be cost effective and achieve economies of scale.


Mr J Mackenzie, representing the City of Cape Town Municipality, indicated that most of the materials utilised in its Integrated Rapid Transit project, such as steel, aluminium, and glass, was produced and assembled locally. Although some components within the manufacturing process were imported, as the City was required to meet the tight demands for the 2010 World Cup, 60 per cent of the content of manufactured goods was produced locally.


In response to IPAP2, Transnet is migrating to programmatic fleet procurement practices that would provide significant value opportunities for Transnet. The standardisation of the local fleet procurement processes would ensure sustainability and contribute to the local industry’s development[39].


One of the main foci of IPAP2 was leveraging public procurement. The Committee was of the opinion that in addition to this, private sector procurement should be encouraged through strategies that promote buying South African products. Such strategies should be linked to possible import substitution initiatives.



4.3.1 Amending Procurement Legislation


IPAP2 promises greater coordination and standardisation across government and its SOEs in the area of procurement with the aim of creating local industrialisation opportunities around South Africa’s R846 billion public investment programmes. Changes to the current PPPFA would be required to achieve the following objectives:

§         Alignment of discretionary points with broad-based black economic empowerment (BBBEE) codes and local procurement.

§         The elimination of import fronting.

§         The designation of “fleets” and other “critical industries” for domestic production.

§         The allowance of price matching by domestic producers.


IPAP2 requires preferential procurement regulations and legislation to be overhauled through a two-stage process. First, amendment of the PPPFA’s regulations should be fast-tracked, and secondly the broader amendment of the PPPFA.


COSATU in their submission is of the view that the review of the PPPFA and the amendment of regulations should happen simultaneously. Amending the regulations involves aligning the PPPFA with the BBBEE codes as the current BBBEE legislation does not have industrialisation and creation of employment as its primary objectives[40]. BBBEE legislation should be subordinated to the imperatives of the industrial policy[41]. A concern for COSATU is that IPAP2 is silent on the promotion of collective ownership in the form of co-operatives.



4.4 Industrial Financing


The lack of private capital investment within the production sectors of the economy, particularly those that may have a developmental return for the economy, is highlighted in IPAP2. The acknowledgement that the cost of capital is high relative to our trading partners requires an approach that would allow Government to be the catalyst to unblock financial impediments to growth and employment creation. IPAP2 clearly identifies the role for development finance institutions in that it should mainly invest in the production sectors of the economy, where there will also be developmental returns. The Minister concluded that Government intends to develop proposals to enhance access to concessional industrial financing for investment in IPAP2 priorities and other production sectors on terms comparable to those of our major trading partners.


Many stakeholders have highlighted the importance of concessional industrial financing through the Industrial Development Corporation (IDC) and the IDC should be seen as an industrial financing body for IPAP2[42].  BUSA is however not convinced that the IDC would be able to play that role as a key challenge to the success of IPAP2 is that the current approach of the IDC is similar to that of private banks. In other words, its management of risk makes it very difficult, if not impossible, for emerging entrepreneurs to obtain financing from the IDC. During the IDC’s interaction with the Committee, it highlighted that the management of risk remains important.


COSATU argues that Development Finance Institutions should promote a developmental agenda and not be as risk averse as commercial banks. Strong conditionalities for industrial financing should be in place in support of any company[43]. The provision of finance at below market rates for key activities and the acceptance that there would be failure and resource wastage are pivotal for the success of the investment in the production sector[44]. Given limited access to concessional financing on international markets and no forthcoming fiscal injections into the IDC, one can conclude that the lending terms would not be dissimilar to those available commercially in the short-term[45]. This highlights a potentially serious impediment for the successful implementation of IPAP2. In its recent budget report, the Committee called for a significant recapitalisation of the IDC in order to support IPAP2. The Committee had further called for the reviewing of IDC’s legislative framework to align it to achieve the objectives of a developmental state.  


The access to and cost of capital remains a major concern for the Committee. The IDC, in conjunction with other national, provincial and municipal development finance institutions, should be funding IPAP2. In addition, Government should consider the recapitalisation of the IDC.


Concerns around the financing of IPAP2 have been raised by various stakeholders. The Committee is of the view that private sector investment in the production sectors of our economy would be necessary for the success of IPAP2. Furthermore, the Committee is of the opinion that South Africa should consider seeking further alternative funding to implement IPAP2.


No clear consensus could be reached on the use of pension funds as a source of financing for IPAP2. However, there was some agreement that if the use of pension funds was endorsed, a cap would need to be placed on the total percentage of pension funds that could be accessed for this purpose as well as strict criteria outlining the type of projects or programmes that could be financed in this manner. The Committee suggested that further research on the impact of loans and the implication of the use of pension funds were required before these sources were utilised.


The Committee raised some of the challenges experienced by small, medium and micro enterprises (SMMEs) and cooperatives in accessing capital. The perception was that capital was not readily available to previously disadvantaged and vulnerable groups at an affordable cost.  The Committee was of the view that capital should be available to SMMEs and cooperatives taking equity considerations into account.



4.6 Competition Policy


IPAP2 recognises the continued challenges with respect to the monopolistic provision of strategic goods and services, from both private and public entities. South Africa is currently experiencing low levels of effective competition, which imposes huge costs on downstream industries and increases the cost of production.


Competition policy attempts to address both private anti-competitive behaviour and government practices and instruments that influence competition in the market. The absence of effective competition stifles innovation and product improvement with dominant firms taking advantage of their market positions, with little or no off-setting benefits to society[46]. Generally, profit margins are achieved not by innovation and improved productive capacity but rather from the historical position bequeathed to such firms.


IPAP2 focuses on the role of competition authorities, working alongside other regulatory bodies, in monitoring for anti-competitive behaviour by the private sector. Lastly, anti-competitive practices would be targeted, particularly where these concern immediate inputs to downstream labour-absorbing production as well as consumer goods to low-income households[47]. This applied especially to products such as carbon and stainless steel, chemical polymers, fertilisers and aluminium, among others.


In his submission, Prof S Roberts[48] purports that decisions of critical, monopolistic firms influence wider socio-economic outcomes in terms of employment, investment, production, and incomes. These patterns of competitiveness reflect past policy decisions, which entrenched the positions and power of large firms within the South African economy.


He further argued that exports are skewed towards resource and energy based commodities, which make a limited contribution to employment creation. Competition and industrial policy should be complementary and mutually reinforcing to build competitive capabilities through:

§         Understanding market dynamics;

§         Dealing with the conduct of large firms with negative industrial development consequences; and

§         Supporting new entries, through development finance.


COSATU welcomes the focus on competition policy as anti-competitive behaviour acts as a constraint to economic development. The enforcement of outcomes of investigations by the Competition Authorities to eradicate decades long anticompetitive may not have the desired impact as it does not have the necessary capacity to discipline larger firms, and are very time and resource intensive. COSATU is of the view that to address these structural inefficiencies monopolistic firms should be dismantled.


In ensuring the achievement of more competitive outcomes and to address the issue of monopolies, Prof S Roberts proposed amendments to the Competition Act:

§         Classification of import parity pricing as an excessive pricing which is detrimental to the economy;

§         Easier imposition of divestiture orders on abuse of dominance and restrictive practices;

§         Empowerment of the Competition Authorities to impose administrative penalties equal to the period of the anticompetitive conduct and not to be limited to an annual turnover of companies;

§         Additional competition enforcement capacity, to include acting on facilitating conduct for cartels; increased deterrence; ways in which entrants are excluded;

§         Market enquiry provisions which provide more powers to investigate industries where there are anti-competitive outcomes, and recommend the necessary measures; and

§         Complex monopolies – to address ‘conscious parallel conduct’.


According to Dr Wessels, competition policy should be utilised to “prohibit the systematic discrimination practiced by companies that export at lower prices than the prices they charge South African consumers”[49]. Import tariffs should be removed on semi-processed inputs to labour-intensive industries that do not export[50]. The absence of competition, or collusive pricing, by companies in the value-chain and input suppliers, in particular, had constraining effects on value-addition efforts and competitiveness of exporters[51].


The equity principle seeks to balance the efficiency with the support for a developmental economy. This picks up the challenges of small and medium enterprise development, and the promotion of ownership. The high concentration of capital, complex monopolies and conglomerates in South Africa has skewed the economy and left it more vulnerable to anti-competitive behaviour. Given this environment the Committee believes that the Competition Act should be strengthened and capacity increased to give greater power to the implementing agency. The Committee recognises the valuable work that has already been achieved by the Competition Commission and Competition Tribunal.



4.7        Developmental Trade Policy


IPAP2 refers to developmental trade policy as an instrument of industrial policy, primarily through the implementation of tariffs. In this regard, there is general support for the reduction of tariffs on intermediate inputs into manufacturing and other production sectors, albeit on a case-by-case basis. However, the selective use of tariffs should also take into consideration the potential for significant creation and/or retention of decent jobs and for significant import replacement; the difference between bound and applied rates; and the formalisation and strengthening of conditionalities related to tariff increases.[52]


In addition, IPAP2 refers to the more effective enforcement of South Africa’s trade laws against various forms of customs fraud and illegal imports that threaten domestic productive capacity and employment. Furthermore, there is a need to re-orientate South Africa’s standards, quality assurance, accreditation and metrology (SQAM) institutions[53] to ensure access to export markets, given the increasing pressure to overcome non-tariff barriers to trade, and to protect the domestic market from unsafe and poor quality imports.[54] [use of SQAM in relation to other areas on the ground


BUSA welcomes the explicit reference to the SQAM institutions. However, it cautions that these institutions would require sufficient capacity to meet the additional demands placed on it by IPAP2. BUSA is also actively supporting Government’s initiatives to customs fraud.[55]


COSATU also acknowledges the importance of SQAM institutions and calls for these to be “linked to Government’s efforts to encourage import replacement and displacement”. In addition, COSATU emphasizes that Government must embark on detailed impact analyses and sectoral engagements before making new trade offers, especially given the economic conditions due to the global economic crisis.[56]


NUMSA highlights the need for timely and effective implementation of trade policy, especially in terms of tariff reform applications. It mentions that many companies have closed downs and jobs have been lost due to delays in the International Trade Administration Commission’s processing of applications. Furthermore, NUMSA calls for Government to actively engage in trade policy that aims to selectively reverse the liberalization process that poses a threat to the development of a coherent domestic productive base. It also calls for increased surveillance and monitoring of borders by the South African Revenue Service and the South African Police Service, as well as enforce trade agreements with the Southern African Development Community (SADC) to eliminate the scope for imports to flood the South African economy through alternative channels and to avoid dumping.


The Committee stressed that there must be a developmental approach to tariffs, where tariffs are applied strategically to assist the development of local industry where necessary. In this vein, the amount of time taken to respond to tariff reform applications was of concern. The Committee is adamant that these timeframes must be decreased to actively support industry and not undermine their sustainability.




5.         Sectoral Issues


IPAP2 identifies three clusters and 13 sectors, which it intends to support directly. These 13 sectors were clustered as qualitatively new areas of focus, existing IPAP sectors that will be scaled up and broadened or sectors with potential for development of long-term advanced capabilities. Each of these sectors is allocated a number of key action programmes, milestones and lead and support departments and/or entities.


The sectors that were focused on during the public hearing the following:

§         Metal fabrication, capital and transport  equipment, especially steel;

§         Green and energy saving issues;

§         Agro-processing;

§         Automotives, components and medium and heavy vehicles;

§         Plastics, pharmaceutical and chemicals, especially pharmaceuticals;

§         Clothing, textiles, leather and footwear;

§         Biofuels; and

§         Advanced manufacturing.



5.1        Metal fabrication, capital and transport equipment, especially steel


Officially, the Metal fabrication, capital and transport equipment cluster of sectors consists of metal products excluding machinery; machinery and equipment; other transport equipment; and electrical machinery and apparatus. However, IPAP2 included basic iron and steel and basic non-ferrous metals, as these sub-sectors underpin the supply of key intermediate inputs to the broader cluster. The cluster plays a critical role in driving the manufacturing sector’s competitiveness, as it produces products, applications and services used across the entire economy such as infrastructure programmes, construction, general engineering, mining, automotives and packaging.


During the public hearings, the Committee focused on the steel industry, given its widespread impact as a key intermediate input.  The steel industry noted that it is fairly diverse in terms of the products manufactured but also in terms of each sector’s ability to compete globally. 


In ArcelorMittal’s view, the challenges experienced by South African downstream industries are not primarily due to its export parity pricing practices. It attributes these challenges to a number of deficiencies that it identified as disadvantaging these industries, namely:

§         Non-competitive cost structures.

§         Uneconomical production units due to the absence of economies of scale.

§         Old facilities which are inferior to current new technologies.

§         Unfair competition in international markets, as governments in the exporting markets provides subsidies and incentives for steel products.

§         Unregulated imported sub-standard products that compete with quality local products.

§         Other non-trade barriers such as rail and port deficiencies.


Furthermore, it assured the Committee of the primary steel industry’s willingness to support and assist Government to build the economy to achieve a better life for all. It welcomed the IPAP’s support of further investment in industry’s productive capacity and the identification of a number of priority sectors, including the vehicle and component manufacturing industries, which are all steel related. It advocates that the alignment of macro- and micro-economic policies will promote investment in certain sectors and will have a positive impact on steel sales to the construction sector.


Kumba Iron Ore Resources highlighted that it complements IPAP2, as it forms part of a critical value chain that provides inputs to value-added sectors that can have high employment and growth multipliers. It highlighted that South Africa will require the following for IPAP2 to be successful:

§         Job creation and skills development.

§         Sustainable broad-based black economic empowerment.

§         Sufficient and competitively priced energy.

§         Reliable, efficient and affordable transport systems, including rail and ports.

§         Competitive steel sector.

§         Greater transparency of key inputs into productive processes.


Kumba outlined the role it had been playing to contribute to these requirements, as well as the challenges it has been experiencing in this regard. In addition, Kumba has been involved in a number of research and development partnerships to improve mineral beneficiation within its operations, as well as for downstream industries.


Furthermore, Kumba briefly described the history and context of its current commercial dispute with ArcelorMittal regarding the cost of the iron ore it supplies to ArcelorMittal. Kumba argues that even if ArcelorMittal had paid export parity prices for its iron ore, it would still have made substantial profits from its steel sales. In Kumba’s opinion, ArcelorMittal should have raised its prices to match the sharp increase in the basket of international steel prices since February 2010 that it tracks but have instead added the R600 Sishen surcharge as of 1 May 2010.


In his response, the Minister of Trade and Industry highlighted the matter of recent steel price increases implemented by ArcelorMittal due to their dispute with Kumba Resources. He noted that the matter had been referred to the Department by the Competition Commission, which was investigating ArcelorMittal’s recent decision to raise steel prices despite the fact that the cost of its iron ore purchases had not been increased. He assured the Committee that the Department would vigorously pursue options to create the conditions for capacity and competition within key inputs into the economy.


The Committee notes that the dispute between ArcelorMittal and Khumba Resources around the relationship between the lapsed opportunity in obtaining mineral rights, iron-ore and the consequent high steel price is currently in arbitration. Further that the Competition Authority is also investigating the possible presence of any anti-competitive behaviour with respect to the price hike.



5.2        Green and energy saving industries


With the release of IPAP2, Government has given indications that the current supply of energy is not sustainable and that alternative energy sources to sustain the economy should be invested in. IPAP2 outlines the direction in which our industrial capacities are pushed. The DTI notes that the security of energy supply posed a major threat to our industrial base, but recognises the potential to develop new green energy efficient industries and related services.


The Minister of Science and Technology, Ms N Pandor, indicated that Government’s economic sector and employment cluster would finalise a “green economy” plan for submission to the Cabinet in July 2010.  The employment creation potential has been identified in the transport, energy, building, manufacturing, agricultural and forestry sectors.


In their submission, the Environmental Goods and Service (EGS) Forum, represented by Mr P du Plooy, advocated for the creation of conditions for developing the latent potential for investment, jobs and competitiveness in the local green sector. It calls for the development of green industries with both employment creation potential and a significant environmental pay-off. In this regard, the development of new energy sources would potentially contribute to the protection of our natural resources.


IPAP2 recognises the scope of the green industry to drive economic development and provide employment creation opportunities, if the green industry enjoys a preferred status[57]. Information provided by the EGS Forum indicates that the current share of the market is between R15 billion and R22 billion and a minimum of 228 000 people that are engaged in the sector. The EGS Forum[58] argues that the sector has the potential to grow by 10 per cent annually over the next five years and can provide alternative employment opportunities for other sectors that are stagnating.


The Committee acknowledges South Africa’s high carbon footprint, primarily to its use of coal in the production of electricity. It welcomes the government’s promotion of a green economy and green jobs and encourages government to review its policies impacting on the country’s carbon footprint. During the Fifteenth Conference of the parties meeting held in Copenhagen, December 2009, South Africa has re-affirmed its commitment to supporting the reduction of carbon emissions. However, the high cost of implementing mitigation and adaptation measures would, in the Committee’s opinion require technology transfers and financial resources from the developed world.



5.3        Agro-processing


IPAP2 identifies the strong linkages between up- and downstream[59] industries in the agro-processing sector[60]. The food processing sector is the largest manufacturing sector with the potential to increase employment opportunities beyond the million direct and indirect jobs that already exist, if the primary agricultural sector is included. IPAP2 highlighted that the economic impact of the proposed key action programmes would be the retention of 216 000 jobs and the creation of another 66 180 jobs over the ten years.


Agri-SA expressed a view that IPAP2 focused only on horticulture, aquaculture, organic products and niche products. Grain and field groups are listed as uncompetitive and of low value. However, the products listed as uncompetitive and of low value present the greatest potential for the sector[61].


Both IPAP2 and the SAFVCA (South African Fruit and Vegetable Canning Association) recognise the competitive advantage in a number of fruit and beverage sub-sectors which, if fully exploited, would place South Africa amongst the top ten export producers in high-value agricultural products. In terms of SAFVCA’s competitive advantage, it had a reliable supply and quality of fruit and vegetables, strong manufacturing capabilities, experienced exporters with proven track records, and offered premium quality products that have a high nutritional value[62].


The Fruit Canning Initiative, between Government and the industry, created a platform for long-term growth and competitiveness of the industry. This long-term growth is under threat due to the temporary macroeconomic challenges such as the global financial crisis, an export unfriendly exchange rate, competition with subsidised agricultural products and adverse input cost pressures[63].   The creation of an enabling environment and industrial policy intervention would be required to stimulate job creation and support rural development. In the absence of support for the industry, there would be factory closures, deindustrialisation, job losses and an adverse impact on the rural community[64].


The Food and Allied Workers Union (FAWU) is of the view that IPAP2 makes limited reference to the up-scaling of agro-processing and only refers to niche markets. FAWU calls for a move toward more value-added processing to “luxury” foods for the export market.


Agro-processing offers excellent foreign direct investment opportunities, which must be supported and encouraged. Agro-industries are also a mechanism for the sustained empowerment and revival of rural development.


Government should support the upgrading of the quality of produce through adoption and enforcement of quality standards. Assistance should be given to enable products to move along the value chain, especially in respect to increased canning of agricultural products.


Land reform is essential to ensure that agricultural productive capacity is fully utilised, and a review of the principle of the “willing buyer – willing seller” is required.



5.4        Automotives, components and medium and heavy vehicles


IPAP2 identifies the automotive sector as critical to the economy given its multiplier effect. The automotive sector has shown significant production growth but a significant trade deficit still exists. This presents major opportunities to leverage the Automotive Production and Development Programme to strengthen the automotive sector by focusing on key areas which would provide the greater economies of scale in component sourcing[65].


The medium and heavy commercial vehicle (MHCV) sector potential provides the opportunity to resuscitate bus production in South Africa and other MHCV’s. IPAP2 focuses on expanding a high value-added production in the South African component and vehicle manufacturing industries.


The National Association of Automobile Manufacturers of South Africa (NAAMSA) welcomed IPAP2 in that it supports investment in the productive capacity of the economy, deepening and broadening localisation in the domestic automotive industry. The National Association of Automotive Component and Allied Manufacturers (NAACAM) also emphasised that the industry needed more downstream beneficiation, because it is more labour intensive.


NAACAM informed the Committee that economies of scale increased on vehicles and components. Many global suppliers have access to capacity which they used to control the market. The current macroeconomic environment negatively impacts on the motor sector as it encourages imports and limit exports. Concerns for the industry was that employment in this sector had decreased, as less than 30 to 35 per cent of vehicles produced locally were produced with local content[66]. Legislation is required that would compel manufacturers to stipulate their local content ratio. This would assist the industry in becoming an employment creator. More government incentives and encouragement is needed to promote and support a higher local content in automotive manufacturing.


NAAMSA is concerned about the impact of the dispute between Kumba Iron Ore and ArcelorMittal South Africa. This, together with Eskom’s price increases, would have a significant impact on the local component prices. The availability of steel and its price implications is a concern for several vehicle and component manufacturers arising from the dispute. NAAMSA further argues that the combined impact is undermining the competitiveness of the local component and vehicle production sector in international markets.



5.5 Clothing, textiles, footwear and leather


The sectors within manufacturing, especially the clothing, textiles, footwear and leather industries have been under severe pressure for sometime. The sector’s contribution to employment has declined significantly, especially for unskilled and semi-skilled labour, as many factories have had to close down as a result of productivity losses. Due to the sector’s labour-absorption capacity and its current challenges to remain competitive, it required government intervention.  The Minister of Finance allocated an additional R3.6 billion over the next three years to the Department of Trade and Industry for industrial policy interventions related to IPAP2. The clothing and textile sector will be receiving R1.75 billion of this allocation or 48.6 per cent[67].


The clothing, textiles, footwear and leather industry is the most labour intensive sector within manufacturing with R38 billion in annual sales[68].  In its submission, the South African Clothing and Textile Workers Union (SACTWU) welcomes government support through the Clothing and Textiles Production Incentive (CTPI) and Clothing and Textiles Competitiveness Programme (CTCP) as it would assist in stemming the decline in the sector. The objectives of the CTPI and CTCP are to prevent further closures, minimise job losses and to increase the competitiveness of the industry.


SACTWU informed the Committee that the implementation of IPAP2 programmes have commenced in the industry with 36 potential companies in the pipeline due to the Competitiveness programme. In line with a more strategic approach to tariff reduction, clothing duties on 35 key products increased to World Trade Organisation’s (WTO) bound rate levels, with the reduction on duties on certain textiles not produced locally[69].


SACTWU welcomes the commitment in IPAP2 to combat illegal imports which include the following:

§         Under-invoicing;

§         Smuggling;

§         Rerouting via third countries;

§         Misuse of rebates and credits; and

§         Corrupt payments to officials.


Concerns around the readiness of the South African Revenue Services (SARS) in dealing with custom fraud have been expressed[70]. Failure to deal with illegal imports and customs fraud would undermine the initiatives announced in IPAP2[71]. SACTWU acknowledges the focus on fleet procurement but argues that other products especially within the clothing sector should be emphasised.



5.6        Bio-fuels industry


Currently, the majority of South Africa’s primary energy requirement is sourced from fossil fuels making it an economy with intense carbon dioxide (CO2) emissions[72]. The need to reduce fossil dependence and its carbon footprint, as well as diversify its energy supply mix, given the current supply constraints, is of importance to Government.


IPAP2 acknowledges South Africa’s limited participation within the bio-fuel sector, both locally and internationally. It recognises the regulatory barriers locally and the constraints on investment given the current global economic environment. A study commissioned by the then Department of Minerals and Energy in 2006 concluded that South Africa had significant potential to develop a commercially viable bio-fuel sector[73]. IPAP2 recognises the strong linkages with other sectors and its significant labour-absorption potential.


The South African Petroleum Industry Association[74] (SAPIA) supports the establishment of a world class, economically viable, environmentally sustainable bio-fuels industry. It calls for an integrated approach which should include a renewable energy strategy, energy security and bio-fuels as part of the future fuel road map. A concern raised by SAPIA was that the 2007 Bio-fuels Strategy fails to address the practical and economic issues of integrating bio-fuels into the fuels supply chain.


The Southern African Bio-energy Association (SABA) - formerly known as the Southern African Bio-fuels Association – welcomes the inclusion of bio-fuels within IPAP2. A close link exists between renewable energy and agriculture. The scope for crops for bio-fuel production is limited, as South Africa is a semi-arid country, with the fertile areas used for food production. Furthermore, food security versus land reform is a contentious issue. However, if the regional cropland potential of the Southern African Development Community (SADC) was considered, this would facilitate food production[75]. Therefore, SABA strongly advocates for a regional approach for the development of a bio-fuel industry as the cropland potential is larger than Brazil. SABA is advocating the use of sugarcane tops and trash for the production of bio-fuels. SABA informed the Committee that if the conventional harvesting methods and technology are utilised, bio-fuel production from this source would generate 5 000 megawatts of power, equivalent to one Medupi power station.


Currently, the operating cost for developing bio-fuels is high but great employment opportunities exist within the industry. Initial indications suggest that developing the bio-fuel sector would be costly but it could become as cost effective as Brazil overtime. The agricultural and bio-fuel sectors can act as key enablers that could change Africa’s energy map[76]. If the bio-fuels sector developed at a regional level, it could add 5 per cent to SADC’s gross domestic product (GDP), which would create jobs in the region. Agricultural investment in SADC would increase food security as well as energy security. 


Food security must be the pre-condition for the development and support of the Bio-fuels industry in South Africa. The Committee is of the view that a strategy must be in place to manage the oversupply of agricultural products, such as maize, so that food security in Africa is also considered before this is used as a source for bio-fuels production.


In terms of crop production for the bio-fuels industry, the Committee insists that food security must be prioritised over bio-fuel production. Strategies need to be developed and implemented to ensure that the over-supply of crops are first used to promote food security in Africa before being considered for bio-fuel production.



5.7        Advanced manufacturing


The aerospace and defence sector has been identified by the Government in IPAP2 as one of the sectors with potential for development of long-term advanced capabilities. Government views this sector as a catalyst for new development and innovation[77].


IPAP2 views the aerospace and defence sector as a “critical and pervasive generator of new technologies” and that it would be instrumental for future innovation. This contributes to the engagement across the substantial part of manufacturing, services and primary sectors of the economy to advance the industrialisation process and movement towards a knowledge economy.  IPAP2 acknowledges the achievement of global recognition and confidence from global original equipment manufacturers (OEM’s) in aerospace that South Africa has capabilities to extend components and parts manufacturing, as well as to enter the high-value global supply chains on advanced materials such as titanium, avionics and electronics.


In his submission, Mr R Louw[78] expressed a view that IPAP2 did not sufficiently recognise the inherent complexity of aerospace and advanced manufacturing. He further argues that the fragmentation of efforts within the country also introduced risks and that the sophistication of existing South African capabilities was also underrated. In addition, there was a lack of recognition in IPAP2 of the importance of continental African and global partnerships for the advancement of the local industry.


Government initiatives within the sector has a narrow focus, as the aerospace industry is complex and consists of other areas such as general aviation, traffic control, military aviation and other matters[79]. Although the employment opportunities within the sector were of a highly technical nature, low level job opportunities were also created[80].


Another concern raised by Mr Louw was the absence of a coherent integrated skills development strategy. Further Education and Training Colleges (FET), universities and Universities of Technology were underfunded and non-aligned[81]. Funding for the Sector Education and Training Authorities (SETAs), particularly MERSETA[82], should be increased to address the alleged shortage of trained candidates and to meet the skill requirements.



5.8 Pharmaceutical sector


Employment in the pharmaceutical sector has declined by more than 40 per cent between 1999 and 2007[83]. South Africa is the world’s largest market for anti-retrovirals (ARVs) with the highest risk to security of supply. IPAP2 identifies the production of the active pharmaceutical ingredients of key ARVs as a key opportunity, which can potentially reduce the current account deficit and imports[84]. IPAP2 also identifies the potential for significant creation and/or retention of jobs, and security of pharmaceutical supplies within this sector.


The National Association of Pharmaceutical Manufacturers[85] (NAPM) argues that no significant improvement in the trade balance would occur as the trade balance for pharmaceuticals has remained constant since 1994. Job creation potential is not mainly in the pharmaceutical producing sector, as it is highly automated, but importers of pharmaceutical products contribute significantly to employment through distribution networks[86]. NAPM raised a couple of concerns around the following:

§         Procurement.

§         The dominance of certain companies within the sector.

§         The alignment of discretionary points with BBBEE Codes of local procurement as it would limit competition and inflate prices.


In its submission, Aspen Pharmaceutical Holdings informed the Committee that it currently supply 70 per cent of anti-retrovirals (ARV) locally. However, it had a major concern that the public sector imported 53 per cent of all its tenders. This has the potential to cause de-industrialisation, and loss of productive capacity and jobs within the sector.   


The biopharmaceutical industry has the potential to be a major industry in that it has predicted that the majority of medicine produced in future would be biologic in nature[87]. Currently, the biotechnology sector in South Africa is small and is importing all biological therapeutics as final products. The biopharmaceutical is fairly labour and knowledge intensive and if the industry is supported it could retain most of their highly skilled employees. Significant growth prospects exist within the biopharmaceutical industry and with support the local biological manufacturing industry could earn revenue that could be reinvested into the bio-industry in South Africa[88].


Bio-clones develop and produce biopharmaceutical or biological medicines including the active pharmaceutical ingredients for renal failure and cancer biological medications. It informed the Committee that its current strategy is to invest profits into skills development thereby creating employment opportunities. The biopharmaceutical industry has the potential to become a major market player if it receives the necessary financial support and within the next five years it could be able to commercialise the products manufactured. It also called for intervention and support from the Department of Health and National Treasury through the preferential procurement process.



6.         Conclusion


The public and private sector and civil society including organised labour all agreed on the urgent need for an Industrial Policy. This consensus was visible around a number of core issues: employment creation, decent work, the revival of the manufacturing sector, value of green agro industries. The written and verbal submissions emphasized the importance of the re-industrialisation of South Africa in setting us on a new growth path. 


However a number of horizontal and vertical challenges have been identified among them: access and cost of capital, security of energy supply, transport and logistical infrastructure including ports and communications as well as the critical need for co-ordination between departments, spheres of government and state-owned enterprises. 


Other conclusions:


6.1.             The Committee will encourage and promote a regional dimension for IPAP2, as it can contribute to regional integration. South Africa’s trade policy informed by our industrial policy should also promote regional integration, cooperation and economic development. 


6.2.             The Committee is of the view that the transport systems (roads, rail, ports, etc.) and logistical infrastructure must be improved in support of optimum industrial development and global competitiveness. This would assist in reducing the cost of doing business.


6.3.             The Committee also acknowledges that telecommunication infrastructure, including broadband, should be developed throughout South Africa, as it impacts on market access and the cost of doing business. Furthermore, wider availability of and access to information and communications technologies will also positively impact on education and skills development to assist in narrowing inequities in society by improving the employability of future generations.


6.4.             The Committee would like to encourage private sector procurement of locally produced products.


6.5.             The shortage of the critical skills required to make a success of IPAP2 requires a coordinated approach between industry and higher educational structures to ensure that the appropriate skills are produced for a developmental economy. It is essential that skills are identified at different levels to ensure the competitiveness of industry. The lack of coordination among the institutions of higher learning, as well as with industry, remains a challenge for producing the right skills for our economic development. The Committee acknowledges that real economic empowerment is attained through the transfer of knowledge, development of skills and retraining of workers.


6.6.             The Committee is of the view that a skills audit should be commissioned which would lead to the establishment of a national skills register. It acknowledges the challenge to ensure that those individuals practising critical skills without formal qualifications are registered, particularly those in the informal sector. This should be linked to the competency (Recognition of Prior Learning) regulations. The cost of registration may be an impediment to individuals to formally register themselves and should be taken into consideration. This would assist industry in identifying sector specific skills shortages and institutions of higher learning to design and develop curricula to address this shortage appropriately. Currently, a mismatch between skills demand and supply exists that needs to be addressed.


6.7.             Continued support for infant and new industries should be given taking the WTO rules into account while developing their efficiency and competitiveness.


6.8.             The developmental strategies and objectives of municipalities should be aligned to IPAP2, particularly in terms of leveraging procurement and for the provision of bulk services to industry, and that South African Local Government Association (SALGA) should play an active coordinating role in this regard.


6.9.             The role of SMME’s and entrepreneurs in relation to employment creation should be actively explored. The Committee believes that the role of cooperatives and small and emerging enterprises should be emphasised within IPAP2; the Committee should encourage that not only established businesses benefit from the incentives programmes by utilising the BBBEE process. Fair distribution of financial and other resources is required as this can promote and encourage SMMEs. IPAP2 seeks to strengthen the industrial base. Once industry has been strengthened, cooperatives can benefit as part of the supply chain of a well structured industry.


6.10.          To ensure the success of IPAP2, the Committee is proposing a national indaba to promote the objectives of IPAP2 so as to secure increased participation and encourage investment in the production sector of our economy. The DTI should have a broad public awareness programme/drive for IPAP2.


6.11.          There is a need to strengthen and integrate the coordination among the agencies responsible for monitoring the implementation of IPAP2 key action programmes at national, provincial and municipal level. This will be essential to ensure IPAP2’s successful implementation.


6.12.          Where necessary and appropriate, legislative amendments (including regulations) as well as policies should be aligned to enable the implementation of IPAP2.



7.         Acknowledgements


The Committee acknowledges the contributions made by academic and research institutions, organised business and labour, State Owned Entities, industry specific associations and the DTI into IPAP2.  The Committee also wishes to thank its Committee support staff in particular the Committee Secretary, Mr A Hermans, the Content Advisor, Ms M Herling, Committee Assistant Ms A Kleyn and the Researcher, Mr L Mahlangu, for their professional support and conscientious commitment to their work.  The Chairperson thanks all Members of the Committee for their active participation during the process of engagement and deliberations and their constructive recommendations made in this report.



8.         Recommendations


Informed by its deliberations, the Committee recommends that the House request that:


8.1. The DTI submits bi-annual progress reports in February and August of     

           each year to the Committee on the:

a.       Implementation of the IPAP2’s key action programmes, and measures proposed to address blockages identified during implementation.

b.       New incentives and grants that would encourage and support industrialisation and sustainable job creation.

c.       Monthly strategic monitoring of all IPAP2 projects should be put in place by implementing government departments to act as an early warning system to identify any risks facing these projects.

8.2.             The DTI tables a report to the Committee on the review of the current tariff regime and how it could optimally support the domestic manufacturing and job retention strategies.

8.3.             The DTI, in consultation with the Department of Economic Development and the IDC, submits a progress report on the review of the IDC’s mandate and on its recapitalisation to the Committee within three months tabling of this report.

8.4.             The DTI, in consultation with the Department of Economic Development, must present alternative models of financing for industrialisation covering all development finance institutions.

8.5.             The DTI submits a research report on the most optimal feed crop/s for bio-fuel production and the implications thereof.

8.6.             The DTI submits a report on measures being considered to increase the local content of vehicles assembled in South Africa.

8.7.             The DTI submits a report on the envisaged role of provincial and local government in the implementation of IPAP2.

8.8.             The role of state-owned enterprises in support of IPAP2 should be investigated and the implementation thereof defined.



Report to be considered




Agri-SA (2010) Revised Industrial Policy Action Plan (IPAP), Presentation to the Portfolio Committee on Trade and Industry, 3 March.


ArcelorMittal (2010) Presentation to the Parliamentary Portfolio Committee on Trade and Industry on the DTI’s Industrial Policy Action Plan (IPAP2), 17 March.


Aspen Pharmacare Holding Ltd (2010) Invitation to address the Parliamentary Portfolio Committee on Trade and Industry on IPAP2, Submission to Parliament by Aspen Pharmacare Holdings Ltd (Aspen). 10 March.


Bioclones (2010) Presentation to the Committee on Trade and Industry, 17 March.


The Biovac Institutute (2010) Presentation to the Portfolio Committee on Trade and Industry, 17 March.


Bond, P. (2010) Can the “new” industrial policy resolve economic crises and prevent further bursting of SA’ financial bubble? (… in a climate constrained world). Presented to the Portfolio Committee on Trade and Industry, South African Parliament, 2 March.


Brooks, D. (2005) Competition and Development, Economic and Research Department, Series no 39, October, Asian Development Bank.


Bureau of Economic Research (N.d) PMI Survey, Online: [Accessed 20 May 2010]


BUSA (2010) Industrial Policy Action Plan – Submission to the Portfolio Committee on Trade and Industry by Business Unity South Africa (BUSA).


Burnes, R. M. (ed.) (2006) South Africa: A Country Study. Washington: GPO for the Library of Congress, 1996.


CEPPWAWU (2010) Presentation to the Parliament Portfolio Committee on Trade and Industry – Industrial Policy Action Plan (IPAP), 3 March


City of Cape Town (2010) Industrial Policy Action Plan – Public Hearing, 11 March.


COSATU (2010) COSATU submission on the Industrial Policy Action Plan (IPAP2) – Presented to the Portfolio Committee on Trade and industry, 3 March.


Creamer, T. (2010) Industrial plan to include 'stronger' localisation targets. Steel and Engineering Industries Federation of South Africa (SEIFSA), 18 March. Online: [Accessed 22 April 2010]


Economic Sectors and Employment Cluster (2010) 2010/11 – 2012/13 Industrial Policy Action Plan.


Environmental Goods and Services Forum (2010) The Industrial Policy Action Plan – Input for the Environmental Goods and Services Sector, Developed by Turner & Townsend with technical support from World Wildlife Foundation (South Africa), 10 March.


Ethekwini Municipality (2010) Ethekwini Municipality City Fleet, 11 March.


Food and Allied Workers Union (FAWU) (2010) Brief FAWU observation on the IPAP, 3 March.


The Federation of Unions of South Africa (FEDUSA) 2010 Submission to the Portfolio Committee on Trade and Industry on the Revised Industrial Policy Action Plan and Trade Policy.


Holman, J. (2010) Algal biofuels seen as having potential, but much research still needed, 23 April.


IDC (2010) Implementing IPAP – Support for the implementation of the Industrial Policy Action Plan. 12 May


Kumba Iron Ore Limited (2010) Presentation to the Trade and Industry Portfolio Committee, 16 April.


Kganyago, L. (2010) Trade, Industrial Policies and the Exchange Rate: The Economic Impact of the Rand. Presentation at SAIIA’s Workshop on Promoting Dialogue on Trade Reform in South Africa, 23 March.


Louw, R. (2010) Presentation to the Parliamentary Portfolio Committee on Trade and Industry on the Industrial Policy Action Plan 2010/11 – 2012/13. 5 March.


Maasdorp, G (2002) Economic Survey, 1970-2000. In: Jones S (ed) The decline of the South African economy, In association with UNISA, University of South Africa


Minister of Finance (2010) Budget Speech 2010. Parliament of the RSA: Cape Town, 17 February.


Minister of Trade and Industry (2010) National Assembly Statement on IPAP2. Cape Town, 18 February.


National Association of Automotive Component Allied Manufacturers (NAACAM) (2010a) Presentation to the Committee on Trade and Industry, 11 March.


National Association of Automotive Component Allied Manufacturers (NAACAM) (2010b) Presentation to the Committee on Trade and Industry on the revised IPAP in Parliament, 5 March


National Association of Pharmaceutical Manufacturers (NAPM) (2010) Trade and Industry Portfolio Committee, 17 March.


National Treasury (2010a) 2010 Budget Review.


National Treasury (2010b) The Exchange Rate and its Implications. Presentation to the Committee on Trade and Industry, 6 April.


National Treasury (2010) Estimates of National Expenditure


National Union of Metalworkers of South Africa (NUMSA) (2010) Input on the 2010/2011 – 2012/2013 Industrial Policy Action Plan II to the Parliamentary Portfolio Committee on Trade and Industry by the National Union of Metalworkers of South Africa, 3 March 2010


Nel, E, Rogerson C M, Marais L (2006) Restructuring Manufacturing In South Africa's Lagging Regions: The Case Of The Free State South African Geographical Journal (2006) 88 (1) 48 - 57


Peinke, L. (2010) South Africa’s IPAP2 holds the key for local manufacturing. Published 16 March, Frost and Sullivan.


Roberts, S. (2010) Comments on IPAP, 2 March.


Southern African Bioenergy Association (SABA) (2010) Public hearings on IPAP, 16 April. 


South African Clothing and Textile Workers Union (SACWTU) (2010) Public hearings on the new Industrial Policy Action Plan – SACTWU presentation to the Portfolio Committee on Trade and Industry, 3 March.


South African Fruit and Vegetable Canning Association (SAFVCA) (2010) Presentation to the Portfolio Committee: Trade and Industry – Revised IPAP: 2010/2011 – 2012/2013. 5 March.


South African Institute of Steel Construction (SAISC) (2010) Impacts of Industrial Policy Action Plan on the Steel Construction Industry, March.


South African Petroleum Industry Association (SAPIA) (2010) Address to the Portfolio Committee on Trade and Industry on Industrial Policy Action Plan (IPAP), 3 March.


South African Reserve Bank (SARB) (2010a) Presentation by the South African Reserve Bank to the Portfolio Committee on Trade and Industry. 6 April.


South African Reserve Bank (SARB) (2010b) Quarterly Economic Review. In: SARB. Quarterly Bulletin. 16 April.


Southern African Stainless Steel Development Association (SASSDA) 2010 Submission to Parliament, 10 March.


Transnet (2010) Transnet presentation on the Industrial Policy Action Plan to the Portfolio Committee on Trade and Industry, 16 April.


Tregenna, F. (2010) Comments on IPAP, 17 March.


Wessels, E. (2010) Presentation to the Parliamentary Portfolio Committee on Trade and Industry on the DTI’s Industrial Policy Action Plan (IPAP2). 5 March.


Woolfrey, S (2010) South Africa’s new Industrial Policy Action Plan, Tralac Discussion Note, 3 March 2010. Online: [Accessed 14 April 2010].



Annexure 1: List of Acronyms





Broad-based Black Economic Empowerment


Business Unity South Africa


Chief Executive Officer


Carbon dioxide


Congress of South African Trade Unions


Competitive Supplier Development Programme


Clothing and Textiles Competitiveness Programme


Clothing and Textiles Production Incentive


Department of Trade and Industry


Environment Goods and Services


Food and Allied Workers Union


The Federation of Unions of South Africa


Further Education and Training


Gross Domestic Product


Industrial Development Corporation


revised Industrial Policy Action Plan


Information Technology


Manufacturing, Engineering and Related Services Education and Training Authority


medium and heavy commercial vehicle


National Association of Automotive Component and Allied Manufacturers


National Association of Automobile Manufacturers of South Africa


National Association of Pharmaceutical Manufacturers


National Industrial Policy Framework


National Industrial Participation Programme


National Union of Metalworkers of South Africa


original equipment manufacturers


Purchasing Managers Index


Preferential Procurement Policy Framework Act


Real Effective Exchange Rate


Southern African Bioenergy Association


South African Clothing and Textile Workers Union


Southern African Development Community


South African Fruit and Vegetable Canning Association


South African Local Government Association


South African Petroleum Industry Association


South African Reserve Bank


South African Revenue Service


Sector Education and Training Authority


Small, Medium and Micro Enterprises


State-owned Enterprises


Standards, Quality Assurance, Accreditation and Metrology


World Trade Organisation



Annexure 2: Purpose of the Competition Act


The overall purpose of the Competition Act is to promote and maintain competition, in order


‘(a) to promote the efficiency, adaptability and development of the economy;

(b) to provide consumers with competitive prices and product choices;

(c) to promote employment and advance the social and economic welfare of South Africans;

(d) to expand opportunities for South African participation in world markets and recognise the role of foreign competition in the Republic;

(e) to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the economy; and

(f) to promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged persons.’


Source: Government of South Africa: Competition Act, no 89 of 1998





[1] Minister of Economic Development (2010)

[2] Economic Sectors and Employment Cluster (2010)

[3] Minister of Trade and Industry (2010a)

[4] Economic Sectors and Employment Cluster (2010)

[5] Tregenna (2010)

[6] NUMSA (2010)

[7] COSATU (2010) and Tregenna (2010)

[8] Wessels (2010)

[9] Wessels (2010)

[10] Bond (2010)

[11] Bond (2010)

[12] Byrnes (2006)

[13] Maasdorp (2003)

[14] National Treasury (2010a)

[15] National Treasury (2010a) and SARB (2010b)

[16] National Treasury (2010a)

[17] PMI refers to a weighted index considering business activity, new sales orders, employment, supplier deliveries and inventories for surveyed businesses (Bureau of Economic Research).

[18] South African Reserve Bank (SARB) (2010b)

[19] The production sectors consist of agriculture, forestry and fishing; mining and quarrying; manufacturing; electricity, gas and electricity and construction.

[20] Minister of Trade and Industry (2010a) Speech

[21] Nel et al (2006)

[22] Woolfrey (2010)

[23] Woolfrey (2010)

[24] Woolfrey (2010)

[25] Woolfrey (2010)

[26] ArcelorMittal (2010)

[27] The real exchange rate calculates whether a country’s competitiveness has actually changed by comparing the prices of a basket of the first country’s goods against the prices of the same basket of goods in the other country against the two countries’ exchange rate. An effective exchange rate refers to a basket of currencies. (SARB 2010a)

[28] SARB (2010a)

[29] Kganyago (2010)

[30] Kganyago (2010)

[31] Economic Sectors and Employment Cluster (2010)

[32] Economic Sectors and Employment Cluster (2010)

[33] The term “fleet type” refers to products that are procured by the public sector on an ongoing basis.

[34] Creamer (2010)

[35] Creamer (2010)

[36] Roberts (2010)

[37] COSATU (2010)

[38] BUSA (2010)

[39] Transnet (2010)

[40] COSATU (2010)

[41] COSATU (2010)

[42] Peinke (2010)

[43] COSATU (2010)

[44] Tregenna (2010)

[45] Creamer (2010)

[46] Brooks (2005)

[47] Economic Sectors and Employment Cluster (2010)

[48] Roberts (2010)

[49] Wessels (2010)

[50] Wessels (2010)

[51] Food and Allied Workers Union (FAWU) (2010)

[52] Economic Sectors and Employment Cluster (2010)

[53] The SQAM institutions are the South African Bureau of Standards, the National Regulator for Compulsory Specifications, the South African National Accreditation System and the National Metrology Institute of South Africa.

[54] Economic Sectors and Employment Cluster (2010)

[55] BUSA (2010)

[56] COSATU (2010)

[57] Environmental Goods and Service Forum (2010)

[58] The EGS forum consists of stakeholders involved in a variety of environmental sub-sectors, such as water, air quality, waste, energy and climate change management, as well as environmental research, policy and trade and investment.

[59] Upstream industries refer to links to agriculture across a wide variety of farming models and products, while downstream industries refer to products that are marketed across both wholesale and retail chains, as well as through a diverse array of restaurants, pubs, shebeens and fast-food franchises. (Economic Sectors and Employment Cluster 2010)

[60] Agro-processing sector is defined in statistical terms as the food processing and beverage manufacturing sub-sectors only.

[61] Agri-SA (2010)

[62] SAFVCA (2010)

[63] SAFVCA (2010)

[64] SAFVCA (2010)

[65] Economic Sectors and Employment Cluster (2010)

[66] NAACAM (2010)

[67] National Treasury (2010c)

[68] South Africa Clothing and Textile Workers Union (SACTWU) (2010)

[69] SACTWU (2010)

[70] SACTWU (2010)                                                                  

[71] Baard (2010)

[72] Holman (2010)

[73] Economic Sectors and Employment Cluster (2010)

[74] SAPIA memberships (BP Southern Africa, Chevron South Africa, Engen Petroleum, PetroSA, SASOL Limited, Shell South Africa, Total South Africa)

[75] SABA (2010)

[76] SABA (2010)

[77] Economic Sectors and Employment Cluster (2010)

[78] Rudolf Louw is a director of the National Aerospace Centre of Excellence

[79] Louw (2010)

[80] Louw (2010)

[81] Louw (2010)

[82] MERSETA is the Education and Training Authority responsible for the manufacturing, engineering and related services sectors. This includes the metal and engineering, auto manufacturing, motor retail and component manufacturing, tyre manufacturing and plastics industries.

[83] Economic Sectors and Employment Cluster (2010)

[84] Economic Sectors and Employment Cluster (2010)

[85] NAPM is the oldest and longest standing trade Association for the Pharmaceutical Industry which represents small, medium and larges and listed companies (NAPM 2010)

[86] NAPM (2010)

[87] Biovac (2010)

[88] Biovac (2010)


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