ATC110414: Report Budget Vote 36: Trade and Industry

Trade and Industry

Report of the Portfolio Committee on Trade and Industry on Budget Vote 36: Trade and Industry, dated 14 April 2011

 

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

 

1. Introduction

 

The budget is informed by the government’s commitment to the implementation of a labour absorbing economy through the re-industrialisation of South Africa using the manufacturing sector to drive the New Growth Path and steer a strategic trade policy, while striving to reduce its carbon footprint. It recognises that only through productive investment, regional and continental integration underpinned by standards and quality assurance measures can South Africa promote both comparative and competitive edge for local goods in pursuit of a developmental State and an equitable global trading system.

 

The Portfolio Committee of Trade and Industry through the engagement with Minister Dr Rob Davies, and his department led by the Acting Director-General, Mr Lionel October, unpacked, analysed and evaluated the implications of the 2011-2012 budget within the policy framework outlined by President Zuma in the State of the Nation Address and supported by the budget allocations tabled by the Minister of Finance, Mr Pravin Gordhan.

 

1.1.       Relationship of the State of the Nation Address to the Department of Trade and Industry’s objectives

 

In his 2011 State of the Nation Address (SONA), President Zuma emphasised the creation of decent work as “the centre of our economic policies”, and called on all sectors, especially government, to increase their efforts to achieve this goal. The New Growth Path (NGP) is the overarching policy framework within which to achieve decent employment. The 2011 SONA highlighted strategic priority areas to unlock the country’s employment potential, with manufacturing being the relevant priority area given the Department of Trade and Industry’s (DTI) mandate[1].

 

Other strategic policy priorities:

 

·         Manufacturing and Job Creation: One of the six priority areas identified by President Zuma in the 2011 SONA is job creation. The DTI, through its flagship programme, the revised Industrial Policy Action Plan (IPAP2), will primarily contribute to the achievement of employment creation as set out in the NGP[2]. President Zuma reiterated that R20 billion in tax allowances or tax breaks will be granted to promote investment, expansions and upgrades in the manufacturing sector.[3]

·         Small, Medium and Micro Enterprises (SMMEs) and cooperatives: SMMEs were identified as a critical component of employment creation. A commitment to continued financial and non-financial support to SMMEs and co-operatives was expressed. The DTI’s Empowerment and Economic Development Division is specifically focused on ensuring that equity prevails while developing and empowering SMMEs and cooperatives, particularly through the Small Enterprise Development Agency (SEDA). Some of the other initiatives that support SMMEs include technical consulting support by the South African Bureau of Standards (SABS), and incentives administered by The Enterprise Organisation Division, such as the Small and Medium Enterprise Development Programme and the Cooperatives Incentive Scheme.

 

·         International Trade Relations: The African continent remains a key strategic priority in pursuing economic interest and promoting regional integration. Internationally, the consolidation of and the broadening of existing economic and trade cooperation with the South through the India/Brazil/South Africa (IBSA) partnership, and the Brazil, Russia, India, China and South Africa (BRICS) membership remain key priorities in promoting South Africa’s economic interests globally. In addition to these trading relations, South Africa will continue to strengthen its traditional trading markets, e.g. with the European Union and United States.

 

1.2. Constitutional Mandate of the Committee

 

Portfolio committees exercise oversight over their respective departments and agencies in line with their Constitutional mandate set out in section 55(2) of the Constitution (No. 108 of 1996) and section 27(4) of the Public Finance Management Act (No. 1 of 1999).

 

1.3. Process

 

The Portfolio Committee on Trade and Industry met on 18 and 22 March 2011 to consider the DTI’s Medium Term Strategic Framework 2010 – 2014. The Minister, Dr R Davies, and Acting Director-General, Mr L October, provided the context within which the Medium Term Strategic Framework has been developed for the DTI and presented the Strategic Plan for the DTI. The position of the Committee after its deliberations is captured in this report.

 

2. Policy context

 

Key goals of economic policy remain economic growth, poverty reduction and the creation of decent work. Past economic policies have emphasised macroeconomic policies that have stabilised the economy. However, despite positive economic growth since 1994, the benefits of this growth have not translated into jobs. Thus, it has become increasingly important to pursue the cohesion of macro- and microeconomic policy.

 

In the 2010 – 2013 IPAP2, the government recognised the need to bring about cohesion between macro- and microeconomic policies, which was later fleshed out in the NGP released in November 2010. The “overarching policy framework is to deliver on the outcome of creating decent employment through inclusive growth[4]”. The policy’s principal target is to create five million jobs over the next 10 years. This Framework reflects government’s commitment to prioritising employment creation in all economic sectors. It identifies strategies that will enable South Africa to grow in a more equitable and inclusive manner while attaining South Africa’s developmental agenda.

 

One of the key drivers of the NGP is the IPAP2, which focuses on promoting the productive sectors of the economy. This is critical as growth in productive sectors is the backbone of job creation, as well as fixed capital formation as they assist in stabilising the economy.

 

The 2011 SONA highlighted strategic economic priority areas, which are:

 

·         Infrastructure, through the massive expansion of transport, energy, water, communications capacity, and housing, underpinned by a strong focus on the domestic industry to supply the components for the build-programmes.

·         The agricultural value chain, with a focus on expanding farm-output and employment and increasing the agro-processing sector.

·         The mining value chain, with a particular emphasis on mineral beneficiation as well as on increasing the rate of minerals extraction.

·         The green economy, with programmes in green energy, component manufacturing, and services.

·         Manufacturing sectors in IPAP2.

·         Tourism and certain high-level services.

 

The invitation to join BRICS is significant because it creates opportunities for South Africa and the African continent to grow their economies and for South Africa to expand its trade. South Africa recognises on its own that it cannot compete with BRIC countries; however, as part of the African continent (1 billion people), it compares favourably with the individual market sizes of Brazil (190 million people), Russia (141.9 million people), India (1.2 billion people) and China (1.3 billion people). In terms of the contribution to the global gross domestic product (GDP), Africa’s contribution was 5.42 per cent in 2010[5]. In 2000, the BRIC countries contributed 18 per cent to global GDP compared to 65 per cent for developed countries[6]. By 2010, BRIC countries contributed more than 27 per cent to global GDP[7]. It is projected that by 2040, BRIC countries could surpass the combined economies of developed countries[8]. The emergence of China, India and Brazil as global economic powers and the move towards a technologically advanced economy have shifted the balance in the global economy towards the emerging economies leading to refocusing in policy-making. The country faces challenges in finding a balance between trade and regional integration to promote sustainable economic growth, job creation, and decent work. However, South Africa can now develop sufficient economies of scale to compete with these emerging markets through building a regional economic base, followed by a continental base.

 

Smarter coordination among government departments and stronger partnerships with the private sector and organised labour is required to mobilise resources to achieve the aims of the NGP. The NGP proposes major improvements in government, with a call for the slashing of unnecessary red tape, improving competition in the economy and stepping up skills development. The framework identifies a “development package”, i.e. a coordinated set of actions across a broad front, consisting of macroeconomic strategies, microeconomic measures and stakeholder commitments to drive employment and economic growth.

 

South Africa has acknowledged that industrialisation is a key instrument to promote economic development.  The previous budget adopted a policy, which shifted the focus from a commodities and consumption led growth path to developing domestic industrial sectors through IPAP2. The DTI, in support of the NGP objectives, through the IPAP2, will focus on employment outcomes by aligning industrial incentive programmes, emphasising labour-absorption priorities and supporting vulnerable industries. The DTI will align industrial financing and incentives to industrial policy objectives in order to place the economy on a new labour-absorbing growth path.

 

Industrial policy will drive strategic trade policy. The Committee supports the strategic approach to adjusting tariffs and imports based on evidence-based case-by-case requirements to avoid a negative impact on local agro-processing and manufacturing. This developmental approach should stimulate industries within the economy by strategically adjusting tariffs to enhance the competitiveness of industries both locally and internationally.

 

The country is pursuing a policy of regional economic integration within the Southern African Development Community (SADC) as well as supporting the strengthening of the other regional economic communities (RECs) within Africa. The DTI will intensify the promotion of regional integration through the pursuit of a SADC-East African Community (EAC)-Common Market for Eastern and Southern Africa (COMESA) Tripartite Free Trade Agreement (FTA). The objectives of NEPAD (New Partnership for Africa’s Development) have created an enabling policy framework for the interaction of the RECs.

 

Internationally, South Africa is still treated as a developed country at the World Trade Organisation level, despite its efforts to be reclassified as a developing country. This has severe implications on South Africa’s ability to renegotiate its rate of tariff liberalisation, which places strain on its economy as well as the member countries of the Southern African Customs Union (SACU).

 

Implicit in the context of a developmental state and industrial development driving trade strategies is the greater prioritisation of consumer protection which requires a stronger regime. In this regard, the Consumer Protection Act (No. 68 of 2008) fully came into effect on 1 April 2011. The Act establishes the new Consumer Protection Commission, strengthens consumer rights and empowers the consumer voice. The enforcement of this Act will also place the onus on business, including local manufacturers and local importers, to provide better quality goods and services that are competitive and could stimulate a demand driven environment for consumer goods and services.

 

The new Companies Act (No. 71 of 2008) was recently amended. The purpose of this piece of legislation is to reduce the cost of doing business in South Africa, while maintaining accountability for companies that have an impact on areas of public interest.

 

3. Department of Trade and Industry’s Strategic Plan and Budget

 

The Acting Director-General’s briefing outlined the strategic objectives and key interventions as outlined in the Medium Term Expenditure Framework (MTEF) for 2011 – 2014. The five intervention areas have been identified as[9]:

 

·         Industrial Development,

·         Trade, Investment and Exports,

·         Broadening Participation,

·         Regulation, and

·         Administration and Coordination.

 

The Department’s total budget allocation for the 2011/12 financial year in nominal terms[10] is R6.8 billion, about 9.6 per cent higher than the previous year’s adjusted allocation of R6.2 billion[11]. In real terms[12], this represents an increase of 4.6 per cent. The Department’s budget as a percentage of the 2011/12 national allocation by vote is 1.36 per cent. This compares to 1.32 per cent in the previous financial year. The overall budget allocation depicts an increasing budget for the Department, in line with the renewed focus on job creation and the recognition that productive sectors play a key role in securing economic growth and sustainable employment opportunities.

 

The allocation over the MTEF period for the financial years 2011/12 to 2013/14 increases by an average annual rate of 6.9 per cent. The increase in expenditure over the MTEF period reflects the continuation of the incentive measures by the Department to promote industrial development.[13]

 

In terms of the economic classification, 82.5 per cent or R5.6 billion of the DTI’s budget consists of transfers or subsidies, mainly to public corporations, private enterprises and departmental agencies and accounts, compared to 81.2 per cent in 2010/11 (See Appendix 2 for a list of transfers and subsidies per division). A further 17.3 per cent has been allocated to current payments consisting of the compensation of employees (51.4 per cent of the current payments allocation), and goods and services (48.6 per cent of the current payments allocation).

 

In terms of allocations to various programmes (see Appendix 1), the Enterprise Organisation Division receives the largest share of the budget (R3.5 billion), followed by the Industrial Development (R1.3 billion) and the Empowerment and Enterprise Development Divisions (R839.7 million). These divisions combined constitute 81 per cent of the total allocated budget, while the remaining five share 19 per cent of the total budget. The budget share allocations to the Enterprise Organisation and the Industrial Development Divisions are mainly the allocated funding for the promotion of industrial development.

 

Most divisions’ budgets increased in nominal terms, with the exception of the Trade and Investment South Africa (TISA) Division’s budget, which declined by 12.9 per cent since 2010/11 and declined by 16.9 per cent in real terms. Given the understanding that foreign direct investment is important for domestic economic growth, the Committee was concerned that TISA’s budget has declined from R351.5 million in 2010/11 to R306.1 million in 2011/12. The Division has shifted its focus to the Export Development and Promotion sub-programme in terms of the funding for the interest make-up scheme for exporters through the Export Credit Insurance Corporation. However, funding has shifted from the Investment Promotion and Facilitation, and International Operations sub-programmes. The latter sub-programme’s budget has declined by 18.4 per cent due to efficiency savings at some foreign offices and the merging of certain foreign trade mission offices with the South African embassies.

 

In real terms, most divisions’ allocated budgets increased by more than 6 percent with the exception of the Empowerment and Enterprise Development Division, which increases by 1.2 per cent from 2010/11 to 2011/12, the Administration programme, which increases by 0.4 per cent from 2010/11 to 2011/12, and the International Trade and Economic Development programme, whose allocated budget declined by 1.08 per cent from 2010/11 to 2011/12.

 

The Administration Division’s budget allocation mainly consists of current payments. The main reasons for the slight increase in its allocation were due to an increase in the compensation of employees, and relatively substantial increases in line items such as advertising, communication services, business and advisory, and legal services.

 

The International Trade and Economic Development Division has two sub-programmes, namely International Trade Development and African Economic Development. The latter sub-programme has received a slight real increase of 0.5 per cent, while the former a real decrease of 2.3 per cent. The compensation of employees increases by 10.5 per cent in nominal terms due to increased staff capacity, while the expenditure on goods and services has declined by 13.2 per cent in nominal terms. There has been a 71 per cent decline in the allocation for legal costs for international legal proceedings since 2010/11.

 

The Empowerment and Enterprise Development Division has had a moderate nominal increase of 6.1 per cent, mainly due to increases in its Enterprise Development and Regional Economic Development sub-programmes (94.7 per cent of the Division’s budget allocation). These sub-programmes deal with support to SMMEs and co-operatives, as well as spatially balanced economic development and productivity improvements within underdeveloped regions of South Africa. The third sub-programme, Equity and Empowerment’s budget allocation has declined by 0.8 per cent. In terms of economic classification, the most substantial increase was within transfers and subsidies (89.9 per cent of the allocated budget), due to the transfer to the Small Enterprise Development Agency’s Technology Programme (44.7 per cent nominal increase). All other institutions and programmes received minimal nominal increases, with the exception of the Support Programme for Industrial Innovation, which declined by 9.5 per cent.

 

The increase in the Industrial Development Division’s budget allocation is due to a 32.2 per cent increase in its Customised Sector Programmes sub-programme’s budget (61.5 per cent of the Division’s budget). There is a shift in the budget from general strategies and programmes for industrial competitiveness to more specific high impact sector strategies. The largest proportion of the budget is allocated towards transfers and subsidies (91.6 per cent). These increases are mainly experienced in the following programmes: the Clothing and Textile Production Incentive, National Cleaner Production Centre, Aerospace Industry and the SQAM institutions.

 

The Consumer and Corporate Regulation Division’s allocated budget will increase by 18.5 per cent. This relatively large increase is due to the Consumer Protection Act and the new Companies Act coming into effect during the 2010/11 financial year. The National Consumer Commission received an allocation of R24.8 million for its establishment in 2010/11, which increased by 33 per cent to R33 million in 2011/12. The National Consumer Tribunal is now tasked with implementing the Consumer Protection Act over and above its legislative mandate to deal with the National Credit Act, and as a result its budget allocation increased by 30.7 per cent to R28.8 million in 2011/12. An amount of R10 million has been allocated for the establishment of the Companies and Intellectual Property Tribunal and the Companies and Intellectual Property Commission budget increases from R9 million in 2010/11 to R14 million in 2011/12 to complete its conversion from CIPRO and to execute its additional functions.

 

The Enterprise Organisation Division’s budget allocation increases by 12.4 per cent. The following sub-programmes’ budget allocations have increased: Competitiveness and Export Incentives (10.6 per cent), Manufacturing Incentives (43.6 per cent), Services Sector Incentives (30.2 per cent), Product and Systems Development (1.9 per cent) and Business Development and After Care (68.9 per cent). The other two sub-programmes’ budget allocations have declined i.e. Broadening Participation Incentives (29.4 per cent) and Infrastructure Development Support (27.2 per cent). The Division’s main expenditure is transfers and subsidies (96.4 per cent of the budget). The main increases were within the following incentive programmes: Business Process Outsourcing, Enterprise Investment Programme, Automotive Production and Development Programme and Critical Infrastructure Programme.

 

This budget share allocation of the higher level programmes appear to be aligned to the DTI’s key strategic priorities. The changes in budget share allocations also reinforce the shift in focus to industrial policy that leads to strategic trade policy. The IPAP2 resources are allocated within the DTI as well as other lead Departments, therefore the allocation to this Plan should be considered holistically.

 

The Committee requested a costed operational plan so that the budget allocations are clearly captured and directly linked to the outputs, performance targets and outcomes in the Medium Term Strategic Plan 2011-2014, in particular the first year of the MTEF period. Only in this format will it be possible for the Committee to exercise its informed oversight on the departmental budget. This will assist with the Committee’s obligations in the Budget Review Recommendation Report.

 

The following sub-sections address key issues arising from the discussions of the DTI’s Strategic Plan 2011 – 2014.

 

3.1. Industrial Development

 

The Minister of Trade and Industry, Dr R Davies, presented to the Committee a report on the implementation of the first nine months of the IPAP2 and its impact. He highlighted that the R14 billion in investment commitments have been made by automotive assemblers and components suppliers, which is one of the significant outcomes of IPAP2. The Minister also indicated that the initial investment within the sector will create approximately 3 500 jobs with further investment potentially creating 20 000 jobs, which is in line with the NGP. IPAP2 laid the foundation in developing systems and overhauling the necessary frameworks, such as procurement, which is one of the cornerstones for the successful implementation of IPAP2.

 

IPAP2 is a key pillar of the NGP, which focuses on sectors of the economy with high value-adding, employment and growth potential. In order for IPAP2 to succeed, it requires a comprehensive and integrated action, which includes the following[14]:

 

·         Macroeconomic policies that support more competitive and stable real exchange and interest rates.

·         Industrial financing that is directed towards labour-intensive and value-adding sectors.

·         Leveraging of procurement to raise domestic production and employment in a range of sectors.

·         Developmental trade policies, such as tariffs and standards, which are deployed in a selective and strategic manner.

·         Competition and regulatory policies aimed at competitive inputs for productive investment and affordable foods and services for poor and working class households.

·         Alignment of skills, technology and innovation policies to sectoral priorities.

 

3.1.1. Public Procurement

 

A significant achievement of IPAP2 is in relation to the procurement framework which impacts on the supply chain development systems of government departments, public entities and state-owned enterprises (SOEs), namely the Public Preferential Procurement Framework Act (PPPFA) (No. 5 of 2000). The PPPFA regulations were amended by an inter-departmental team comprising the National Treasury, the Economic Development Department and the DTI, and will be promulgated by the National Treasury. This will lead to a clearer alignment of preferential procurement with the Broad-based Black Economic Empowerment (BBBEE) codes of good practice, the leveraging of public procurement through the designation of specific sectors or subsectors for local production with a specified level of local content being required. An implicit objective of leveraging public procurement is that local manufacturers must become more competitive and not demand excessive premiums for locally produced products. SOEs, through the Competitive Supplier Development Programme (CSDP), are introducing localisation into the supply chain management process. The DTI is of the view that leveraging of procurement together with support for industry development, i.e. addressing the supply side constraints through financing the upgrading of facilities or for the creation of new enterprises, is an essential part of IPAP2.

 

The Committee acknowledged the success in Transnet’s procurement of 100 locomotives from General Electric for its Locomotive Fleet Renewal Programme, where Transnet has secured an agreement with General Electric that 90 locomotives will be assembled locally. A concern for the Committee is the support mechanisms by government to ensure that local industries benefit from such investment and the impact on SMMEs and cooperatives through opportunities to manufacture some of the components. Although the DTI indicates that publications of regulations are eminent, it did not provide any timeframes for promulgation, which is a concern for the Committee.

 

Public sector expenditure on infrastructure is estimated to cost about R808.6 billion over the MTEF period[15]. The Committee emphasised that infrastructure development projects can be a catalyst for leveraging public procurement, as infrastructure development offers an opportunity to build domestic capacity in manufacturing. However, proper planning and communication by the public sector is required to ensure that domestic manufacturers and suppliers are given sufficient lead time to meet the infrastructure demands for socio-economic development.

 

3.1.2. Industrial Financing

 

The DTI reported significant progress with respect to industrial financing, as there was an introduction of, continuation and or investigation of programmes and/or incentive measures for industrial development. Examples of these are listed below.

 

·         In reviewing its business model and balance sheet, the IDC[16] identified R70 billion over the next five years for investment in the NGP and IPAP2 sectors, which may vary depending on economic conditions.

·         The Enterprise Investment Programme created 10 211 direct jobs. The new 12(i) tax incentives announced by government is aimed at attracting large manufacturing investments. This will provide, in nominal terms, a R20 billion tax allowance but in real terms R5.6 billion, as it is essentially an allowance off the prevailing corporate tax rate.

·         The DTI also announced the completion of phase 1 of a study on long-term sources of concessional industrial financing with phase 2, policy proposals, to be completed in 2011/12.

·         In response to the Committee enquiring about the consolidation of all Development Finance Institutions (DFIs), the DTI informed the Committee that the process of implementing the merger between Khula Finance Limited, the South African Micro-finance Apex Fund (SAMAF) and the Industrial Development Corporation’s (IDC) small business unit is being discussed. It should be noted that other DFIs have different mandates and are not all subject to the consolidation process, as outlined in the 2011 SONA.

 

3.1.3. Standards, Quality Assurance, Accreditation and Metrology

 

The Standards, Quality Assurance, Accreditation and Metrology (SQAM) institutions are often referred to as the technical infrastructure system. SQAM is critical to ensure that goods and services comply with certain quality, health and safety standards. The importance of the SQAM institutions and practices with regard to compliance was re-emphasised, acknowledging its potential contribution to develop new industries and also to resuscitate certain industries.

 

In terms of international trade and regional integration, SQAM institutions can play a role in minimising the effects of non-tariff barriers through adopting a more universal set of standards and ensuring an effective quality accreditation system. Regional standards can ensure expansion of intra-African trade, and promote trade in external markets.

 

In the pursuit of a free trade area, the Committee enquired how the Department will ensure that goods entering South Africa will be in compliance with our standards. The DTI informed the Committee that it is working with the South African Revenue Service to ensure that illegal products do not enter our markets. Important for the Department is to ensure that standards are not used as a barrier to entry but that the development of regional standards for goods should be high on the trade agenda.

 

The increasing emphasis on climate change-related non-tariff barriers must be considered by South Africa within its conventional productive methods through “green industries” to reduce its relatively high carbon footprint. Currently, the South African Bureau of Standards (SABS) is developing a range of enabling standards for various industries and products, especially in relation to the “green industry”. With respect to the “green industries”, enabling standards for local manufacturing of solar water heaters, wind energy turbines, energy efficient lighting, appliances and products, electric batteries and alternative fuel vehicles were concluded.

 

3.1.4. Steel Industry

 

The high input cost of steel for upstream industries remains a serious concern for the Committee due to the monopolistic power held by ArcelorMittal South Africa (AMSA). During the 2001 unbundling of Iscor into Kumba Iron Ore and eventually AMSA, an agreement was made that Kumba Iron Ore would continue to supply AMSA with iron ore at cost plus 3 per cent to allow them to provide steel at a developmental price to upstream industries. However, AMSA is not honouring this agreement, despite the public obligation to support a developmental steel price.

 

In 2010, an Inter-Departmental Task Team, consisting of the Departments of Trade and Industry, of Mineral Resources, and of Economic Development, was convened to give effect to the original intent of the unbundling agreement and to make recommendations on appropriate policy tools to ensure the national developmental obligations of the 2001 unbundling are given effect over the long term. The DTI informed the Committee that the Task Team submitted its recommendations to Cabinet. However, the Committee is concerned about government’s ability to enforce this public obligation on the private sector. The Committee supports the introduction of smaller steel plants to enhance competition in the industry. Furthermore, the Committee is of the view that the export of iron ore without beneficiation must be capped.

 

3.1.5. Skills Development

 

Skills development and its alignment with key sectors are of great importance for the success of IPAP2. In collaboration with the Department of Higher Education, specific skills programmes are being developed to ensure that the appropriate skills are delivered for the economy.

 

The revised IPAP2 for 2011/12 – 2013/14 will continue with the implementation of strategies within the key performance areas. However, some areas of intervention require further up scaling such as skills development, the green industries, and technology development. Additional sectors identified are the oil and gas sector, as well as the boat building sub-sector.

 

Some of the key skills development and capacity building initiatives being implemented include:

 

·         African Programme on Rethinking Development Economics, a dedicated certificate and honours courses developed with the University of Witwatersrand.

·         IPAP National Artisan Development Programme (NADP) for priority sectors.

·         Support of the National Centres of Excellence to integrate sector competitiveness and skills needs.

 

3.2. Trade Policy

 

In his 2011 SONA address, President Zuma emphasised that the African continent remains a key strategic priority in pursuing economic interest and in the promotion of regional integration. At the centre of this strategy is the diversification of trade from our traditional partners towards Africa. In pursuit of this is the consolidation of the Southern African Development Community (SADC) FTA, the implementation of the five-point plan for SACU, and the conclusion of the Trilateral SADC-EAC-COMESA FTA. South Africa developed a position on the tripartite FTA, which was adopted by the SACU and SADC. The intention is to have free trade areas between RECs within Africa to deepen integration, thereby expanding our market and improving our developmental objectives. Progress has been made with regard to the SACU-India Preferential Trade Agreement (PTA) with the envisaged conclusion in 2013/14.

 

Some of the biggest impediments to trade in Africa are infrastructure and other non-tariff barriers such as standards, misrepresentation of the origins of imported goods and capacity at customs borders. The development of cross-border infrastructure to facilitate trade is being pursued through South Africa’s Spatial Development and Development Corridor Initiatives.

 

In the Committee’s previous budget report, it highlighted the need for “determining new mutually beneficial relations in trade and investment with key countries of the South to support the national industrial development objectives, and consolidating trade and investment relations with the North agreement is of strategic importance to achieve a developmental economic outcome”[17].

 

In relation to BRICS, South Africa will continue deepening relations but will focus on the technical barriers to trade. The Committee is fully supportive of the DTI’s pursuit of productive investments, skills and technology transfers and the promotion of the export of more value-added South African goods. With respect to China, South Africa is not pursuing a free trade agreement but wants to gain preferential access for its value-added goods into the Chinese market. Currently, South Africa is reviewing its Bilateral Investment Treaty Policy, as many treaties signed are in conflict with our developmental objectives.

 

In terms of relations with traditional partners, the United States of America remains an important market for South Africa and attaining a single stage transformation of products (e.g. the local conversion of imported yarn to fabric or imported fabric to yarn) is a key objective here. The DTI hopes to conclude the Economic Partnership Agreement (EPA) with the European Union in a manner that is acceptable for South Africa. The EPA, as it is currently drafted, will harm regional integration and limit the policy space of the region. The DTI’s objective is to have a trade agreement which will expand trade in goods, therefore requiring an effective trade agreement. The Committee emphasised that the extension/deepening of the Africa Growth and Opportunity Act (AGOA) of the United States must be pursued to encourage investment within South Africa before 2015.

 

The 17th Conference of the Parties (COP17) of the United Nations Framework Convention on Climate Change (UNFCCC) will be held in South Africa this year. South Africa should ensure that the trade dimension of COP17 is not lost within the climate change debate. Attempts are afoot to use environmental standards as a form of protectionism, but COP17 should remain focused on achieving a sustainable energy future ensuring the development of and opportunities for our manufacturing sector. The Committee acknowledges that with the challenges of reindustrialisation and the increasing demand for energy (mainly coal) there is negative impact on its carbon footprint and a need to develop more sustainable energy sources. The development of “green industries” will contribute to mitigating this risk.

 

3.3. Broadening participation

 

Creating an enabling environment for competitive and sustainable SMMEs is important in broadening economic participation. The core objective of black economic empowerment was to de-racialise the economy but it is often associated with elite empowerment, which has been exacerbated by the misalignment between the BBBEE and PPPF Acts in terms of public procurement. There is thus a need to broaden participation in the domestic economy of those previously excluded and the DTI emphasised that the focus must be on broadening productive participation in the economy. The DTI will continue to create the necessary opportunities for BBBEE entrepreneurs within the productive sector of the economy, especially local manufacturing, which will broaden the entrepreneurial base. The Committee looks forward to the tabling of the BBBEE Amendment Bill. The allocation for the broadening participation intervention area is R984.4 million.

 

3.3.1 Small, Medium and Micro Enterprises (SMMEs)

 

The DTI informed the Committee that it will implement the recommendations of the SMMEs initiatives review report. Through the Black Business Supplier Development Programme (BBSDP), the DTI intends to increase growth within the SMME sector. This will be the vehicle to broaden black economic empowerment as investment in the productive sectors of the economy will create jobs and will be in line with a key objective of the NGP. The DTI should create an enabling environment for emerging entrepreneurs to shift investment into the productive sectors of the economy, especially manufacturing. Through the Support Programme for Industrial Innovation (SPII), SMMEs are encouraged to develop innovative, competitive products and processes. This is supported by the Technology and Human Resource for Industry Programme (THRIP) which strengthened the numbers and skills of appropriately trained people.

 

For SMMEs to be successful, they should get the necessary support through several measures including business incubation[18]. Needed is active partnership and cooperation with SMMEs to develop the necessary skills and improve enterprise development. The Committee welcomed the support for SMMEs but the concerns remained with respect to its effectiveness. The SMMEs can be an important catalyst for job creation with support via the SEDA Technology programme and the expansion of the Centre for Entrepreneurs. A major concern for the Committee is the visibility and accessibility of SEDA by providing the necessary non-financial support to SMMEs, especially in the rural areas. DTI informed the Committee that in order to address this concern is to expand the incubation and mentorship programme. SEDA also established branches in all provinces and have mobile units assisting. A review process with regard to support programme for SMMEs is underway to ensure that SMMEs are effectively supported and become involved in manufacturing. The Committee urged that more support should be given to SMMEs as they could be a vehicle to broaden job creation, economic growth and black economic partnership.

 

The Committee welcomed Transnet’s procurement of 100 locomotives, with 90 to be assembled in South Africa in line with the IPAP2 objectives. Important for the Committee is what mechanisms are in place to support our industries so that, in future, local manufacturing capacity is developed to produce the locomotive locally. The Committee enquired whether the 12(i) tax incentive could be broadened to include SMMEs. The DTI indicated that it could be one of the options under consideration as part of the review process of programme supporting SMMEs.

 

3.3.2 Co-operatives

 

Co-operatives remain an important vehicle in addressing the challenges of job creation and broadening economic participation. Co-operatives have played a major role in developed economies, especially within the agricultural sector. Technical and financial support is important to ensure that co-operatives contribute to the deepening of the local manufacturing base. The DTI informed the Committee that the Co-operatives Amendment Bill and Strategy were presented to Cabinet with a request for further consultation on the Bill.

 

The Committee is concerned that the concept and intention of co-operatives is misunderstood by government and the public. This has led to ineffective support by government and a high attrition rate. The development of co-operatives can play a vital role in achieving the economic objectives of growth and job creation.  

 

The Committee is of the view that appropriate accountability measures and adequate financial and non-financial support for co-operatives are essential for the development and sustainability of co-operatives.

 

3.4. Regulation

 

The creation of a fair regulatory environment that enables investment, trade and enterprise development in an equitable manner is important. The harmonisation and the alignment of legislation for the protection of the consumer are important in achieving this goal. Key interventions envisaged by the Department are to develop policy and review legislation with respect to Intellectual Property and published regulations with respect to the Gambling, National Credit, Estate Agency and National Lotteries Acts. The establishment of the National Consumer Commission and the Companies and Intellectual Property Commission will enhance the regulatory environment. A concern for the Committee, given the increased emphasis on regulatory bodies, is whether sufficient budget was allocated to these new bodies to fulfil their respective roles.

 

4. Conclusion

 

The Committee would have liked more time for the deliberation process during this phase of the Appropriation Bill 2011-2012 within the MTEF. However, other legislative and the local government election commitments constrained the time available. Nevertheless, the Committee took a strategic decision to effectively embark on all Budgetary Review and Recommendation Report processes involved in the quarterly tracking of the implementation of service delivery and performance targets.

 

The steel industry remains a critical sector that can contribute towards South Africa achieving its economic objectives. The Committee had not yet received the Inter-Departmental Task Team’s report on the recommendations to ensure that the national developmental obligations related to the 2001 unbundling Iscor agreement. However, the Committee intends to undertake an oversight visit to Kumba Iron Ore Limited and have another joint meeting with the Portfolio Committee on Mineral Resources before its completion of the report on the strategic implications of the steel industry to the achievement of the objectives of IPAP2.

 

The Committee fully supports the beneficiation of primary commodities which will strengthen the up- and downstream value-added chain. South Africa can no longer pursue the increasing rise in the export of primary commodities, especially iron ore.

 

With the adoption of the new South African Trade Policy and Strategy Framework, the Committee envisages strengthening the links with the DTI through participating as observers at critical bilateral and multilateral trade negotiations, as well as negotiations pertaining to bilateral investment treaties. This would ensure clearer Parliamentary understanding of positions taken during the negotiating process to achieve a developmental outcome.

 

A key concern for the Committee is the perceived ineffectiveness of the Small Business Advisory Council, the Foundation of African Business and Consumer Services, and the National African Federated Chamber of Commerce in representing SMMEs. The Committee recommends that these bodies increase their support to SMMEs and increase their advocacy for matters concerning the sector.

 

With regard to co-operatives, the Committee emphasised the need to benefit from experiences of successful local and international co-operatives in reviewing our support model. As part of its oversight responsibilities, the Committee intends to process the Co-operatives Amendment Bill in a manner that ensures that the objectives of supporting the development of co-operatives are met.

 

Vulnerable groups should continue to be factored into filling of departmental and board vacancies and within the DTI’s empowerment programmes.

 

The Committee noted the increased emphasis on the regulatory bodies such as the National Consumer Commission, and the Companies and Intellectual Property Commission[20] over the MTEF period. Important for the Committee is to determine whether these regulatory bodies have sufficient funding to fulfil their mandates including filling vacant funded posts. The Committee envisages engaging with the abovementioned regulatory bodies, as well as the National Lotteries Board, the National Gambling Board and National Liquor Board, amongst others.

 

The bilateral, multilateral and other trading agreements should be tracked and extended timeously when in the country’s interest.

 

During its visit to Geneva, the Committee noted the presence/dominance of officials from various countries of the South at the multilateral organisations and the influence it has on determining the trade agenda. South Africa needs to increase the number of specialists in key areas within multilateral institutions.  The Committee would thus encourage the development and capacity building of officials to represent the developmental agenda of the country and Africa within critical multinational institutions, such as the World Trade Organisation and the World Intellectual Property Organisation. There is also a strong need to strengthen relations with the Department of Higher Education and expand partnerships with tertiary institutions, such as that negotiated with the University of Witwatersrand, to facilitate appropriate skills development in this regard.

 

5. Acknowledgements

 

The Committee would like to thank participants from the Ministry of Trade and Industry and the DTI for their co-operative relationship with the Committee. The Committee would like to thank the former Director-General, Mr T Matona, for his sterling work during his tenure and wishes him well in his new endeavours. The Committee would also like to thank the Members of the Committee and the Committee staff for their contributions in developing this report.

 

6. Recommendations

 

The Portfolio Committee on Trade and Industry having considered the 2011 proposed Budget Vote 36: Trade and Industry recommends that the House approves the said Budget Vote in terms of the Money Bills Amendment Procedure and Related Matters Act (No. 9 of 2009) (the Money Bills Act).

 

The Committee further recommends that the DTI submits the following reports:

 

6.1     The status and achievements associated with the KPAs indicated within the 2010 – 2013 IPAP2.

6.2     A report on the measures being implemented for the agro-industries in rural areas, as this sector has the potential to be the largest employer and developer of the local rural economy.

6.3     The inter-departmental task-team report on Iron Ore and Steel.

6.4     A full report on the achievements of the annual sales and investment milestones associated with the National Industrial Participation Programme by obligor.

6.5     A report on how it intends to address inter-departmental co-ordination which can be a potential risk to implementing IPAP2.

6.6     A report on direct and indirect jobs being created per sector supported by the DTI’s programmes.

6.7     A status report on developments on regional trade agreements and the integration process within SACU and SADC by August 2011.

6.8     A skills development plan for multilateral institutions and trade missions.

6.9     The BEE Advisory Council recommendations on ways to improve the state of BBBEE performance in the economy and to address challenges in the implementation of the policy.

6.10   The costed operational plans of the National Consumer Commission, the National Consumer Tribunal, the Companies and Intellectual Property Commission and the Companies and Intellectual Property Tribunal.

6.11   The Gambling Commission’s report on the socio-economic impact of gambling in South Africa.

6.12   A quarterly costed operational plan tracking its planned expenditure, outputs, performance targets and outcomes against its actual expenditure and performance.

6.13   On the progress regarding the filling of vacant funded posts by August 2011.

 

 

Report to be considered.

 

 

References

 

China Daily (2011) BRICS: working together to shape the future. Available: http://www0.chinadaily.com.cn/cndy/2011-04/14/content_12322993.htm [Accessed 14 April 2011].

Department of Trade and Industry (2011a) Medium Term Strategic Plan 2011-2014.

Department of Trade and Industry (2011b) Departmental Business Plan for 2011/12 Financial Year.

Department of Trade and Industry (2011c) IPAP2 Progress and Progression: 2010/11 IPAP2 Nine Month Implementation and 2012/13 IPAP2 Overview. Presentation to Portfolio Committee on Trade and Industry on 22 March.

Department of Trade and Industry (2011d) Industrial Policy Action Plan 2011/12 – 2013/14: Economic Sectors and Employment Cluster.

International Monetary Fund (2011) World Economic Outlook Database. April.

Naidoo, S. (2011) BRICS Summit: Laying the foundations, Financial Mail, 15 April: 40-1.

National Treasury (2011a) Budget Review 2011.

National Treasury (2011b) Estimates of National Expenditure 2011: Budget Vote No 36: Trade and Industry.

Portfolio Committee on Trade and Industry (2010) Report of the Portfolio Committee on Trade and Industry on Budget Vote 35: Trade and Industry, dated 23 April 2010.

World Bank (2011) World Bank Development Indicators. Available: http://www.google.com/publicdata?ds=wb-wdi&met=ny_gdp_mktp_cd&tdim=true&dl=en&hl=en&q=global+gdp#met=ny_gdp_mktp_cd&idim=country:ZAF&tdim=true [Accessed: 14 April 2011]

Zuma, J. (2011) State of the Nation Address. Joint sitting of Parliament. Cape Town, 10 February.

 

Appendix 1: Description and Budget per Programme/Division

The Department of Trade and Industry has eight programmes. These programmes are[21]:

Programme

Purpose

2011/12 Budget

(R thousand)

2011/12 Budget Share (%)

Nominal Change (%) 2010/11-11/12

Administration

To provide strategic leadership for the Department and its agencies, and to ensure the successful implementation of the Department’s mandate through sustainable and integrated resource solutions and services that are customer centric.

466 270

6.9

5.2

International Trade and Economic Development

To build an equitable global trading system that facilitates development, by strengthening trade and investment links with key economies and by fostering African development, including through regional and continental integration and development cooperation in line with the New Partnership forAfrica’s Development.

129 679

1.9

3.7

Empowerment andEnterpriseDevelopment

To lead the development of policies and strategies that create an enabling environment for small, micro and medium enterprises, and enhance the competitiveness of local and provincial economies, to achieve inclusive shared equity, growth and job creation.

839 695

12.4

6.0

Industrial Development

To facilitate industrial development supported by government procurement that creates an enabling environment for competitiveness, growth and job creation.

1 266 895

18.7

11.4

Consumer and Corporate Regulation

To develop and implement coherent, predictable and transparent regulatory solutions, which facilitate easy access to redress and efficient regulation for economic citizens.

 

231 671

3.4

18.5

The EnterpriseOrganisation

To stimulate and facilitate the development of enterprises through providing incentive measures that support investment, job creation and regional economic development, such as through industrial development zones.

3 469 114

51.1

12.4

Trade and Investment South Africa

To increase export capacity and support direct investment flows through strategies for targeted markets and an effectively managed network of foreign trade offices.

306 131

4.5

-12.9

Communications and Marketing

To facilitate greater awareness of the Department’s role and increase the uptake of its products and services.

77 441

1.1

21.0

Total

 

6 786 896

100

9.6

 

Appendix 2: List of Transfers and Subsidies per Division[22]

Programme

Institution/ Incentive Scheme

Expenditure item/ specialised programme

Budget allocation (R thousand)

Budget share

2011/12

Nominal change (%)

2010/11-2011/12

2010/11

2011/12

2012/13

2013/14

Admin

Industrial Development Corporation

Fund for Research into Industrial Development, Growth and Equity

600

630

650

686

0.01

5.00

CCRD

World Intellectual Property Organisation

Current payments

 3 000

2 918

 4 000

 4 220

0.05

-2.73

CCRD

Companies and Intellectual Property Commission

Current payments

 8 982

13 990

 4 158

 4 387

0.25

55.76

CCRD

Companies and Intellectual Property Tribunal

Current payments

10 000

10 000

10 000

0.18

CCRD

National Gambling Board

Current payments

22 000

23 605

25 000

26 375

0.42

7.30

CCRD

National Consumer Tribunal

Current payments

22 059

28 833

32 500

35 233

0.51

30.71

CCRD

National Consumer Commission

Current payments

24 800

32 988

41 577

43 864

0.59

33.02

CCRD

National Credit Regulator

Current payments

46 000

53 042

54 000

57 915

0.95

15.31

CCRD

Total

126 841

165 376

171 235

181 994

2.95

30.38

EED

South African Women Entrepreneurs' Network

Current payments

 7 500

7 700

 7 900

 8 335

0.14

2.67

EED

National Productivity Institute

Workplace Challenge

 8 000

8 000

 8 200

 8 651

0.14

0.00

EED

Industrial Development Corporation

Isivande Women's Fund

10 500

10 700

10 900

11 500

0.19

1.90

EED

Industrial Development Corporation

Support Programme for Industrial Innovation

55 000

49 789

52 740

54 860

0.89

-9.47

EED

 

Small Enterprise Development Agency

Technology Programme

76 000

110 000

113 000

119 215

1.96

44.74

EED

National Research Foundation

Technology and Human Resources for Industry Programme

 

151 000

155 000

157 000

165 635

2.77

2.65

EED

Small Enterprise Development Agency

Current payments

400 121

413 290

423 631

446 941

7.38

3.29

EED

Total

708 121

754 479

773 371

815 137

13.47

6.55

IDD

French Institute of South Africa

African Programme on Rethinking Development Economics

 2 000

2 200

0.04

10.00

IDD

South African Bureau of Standards

Upgrading of vehicle testing facility

7 000

0.12

IDD

South African Bureau of Standards

Infrastructure

174 240

93 180

48 000

1.66

-46.52

IDD

South African Bureau of Standards

Small Business Technical Consulting

 1 017

1 078

 1 132

 1 144

0.02

6.00

IDD

United Nations Industrial Development Organisation

Current payments

 4 000

4 800

 5 000

 5 275

0.09

20.00

IDD

Centurion Aerospace Village

Current payments

 5 000

10 000

15 000

15 800

0.18

100.00

IDD

National Foundry Technology Network

Metals

 6 500

7 000

21 000

18 154

0.12

7.69

IDD

Council for Scientific and Industrial Research

Aerospace Industry

 9 901

20 791

21 352

21 226

0.37

109.99

IDD

South African National Accreditation System

Current payments

18 239

20 623

29 427

31 660

0.37

13.07

IDD

Council for Scientific and Industrial Research

National Cleaner Production Centre

32 082

40 141

41 225

41 678

0.72

25.12

IDD

Intsimbi National Tooling Initiative

Current payments

32 400

15 000

49 168

54 434

0.27

-53.70

IDD

Industrial Development Corporation

Customised Sector Programmes

51 092

57 427

56 421

57 041

1.03

12.40

IDD

National Metrology Institute of South Africa

Current payments

55 266

62 581

76 221

83 533

1.12

13.24

IDD

National Regulator for Compulsory Specifications

 

Current payments

27 142

37 173

79 170

100 829

0.66

36.96

IDD

South African Bureau of Standards

Research Contribution

178 845

181 496

186 396

188 446

3.24

1.48

IDD

Industrial Development Corporation

Clothing and Textile Production Incentive

400 000

600 000

750 000

758 250

10.71

50.00

IDD

Total

997 724

1 160 490

1 379 512

1 377 470

20.72

16.31

ITED

ProTechnik Laboratories

Capital payments

 1 000

1 000

 1 000

 1 055

0.02

0.00

ITED

ProTechnik Laboratories

Current payments

 2 250

2 350

 2 400

 2 532

0.04

4.44

ITED

Organisation for the Prohibition of Chemical Weapons

Current payments

 3 400

4 000

 4 000

 4 220

0.07

17.65

ITED

World Trade Organisation

Current payments

 8 600

9 000

 9 500

10 023

0.16

4.65

ITED

Development Bank ofSouthern Africa

Regional Spatial Development Initiatives

16 500

17 500

18 500

19 518

0.31

6.06

ITED

Total

31 750

33 850

35 400

37 348

0.60

6.61

TEO

Small and Medium Manufacturing Development Programme

Current payments

 2 226

1 300

 1 335

 1 408

0.02

-41.60

TEO

Sector Development Programme

Current payments

3 108

 3 192

 3 368

0.06

TEO

Richards Bay Industrial Development Zone Company

Capital payments

20 000

60 682

42 018

30 000

1.08

203.41

TEO

Cooperatives Incentive Scheme

Current payments

41 617

44 414

45 478

47 704

0.79

6.72

TEO

East London Industrial Development Zone (Pty) Limited

Capital payments

198 000

171 282

150 000

100 000

3.06

-13.49

TEO

Black Business Supplier Development Programme

Current payments

105 621

88 058

94 221

101 653

1.57

-16.63

TEO

Export Market and Investment Assistance

 

Current payments

123 998

138 258

141 451

148 131

2.47

11.50

TEO

Business Process Outsourcing

Current payments

63 060

143 064

143 951

176 268

2.55

126.87

TEO

Critical Infrastructure Programme

Capital payments

80 680

118 540

181 742

191 738

2.12

46.93

TEO

Small and MediumEnterprise Development Programme

Current payments

577 248

341 243

294 197

276 878

6.09

-40.88

TEO

Film and Television Production Incentive

Current payments

245 873

260 305

281 550

302 310

4.65

5.87

TEO

Coega Development Corporation

Capital payments

714 000

383 718

417 858

308 195

6.85

-46.26

TEO

Enterprise Investment Programme

Current payments

246 700

674 542

803 894

887 108

12.04

173.43

TEO

Automotive Production and Development Programme

Production Allowance

547 000

916 800

1010 354

1081 748

16.37

67.61

TEO

Total

2 966 023

3 345 314

3 611 241

3 656 509

59.73

12.79

TISA

Export Consultancy Trust Fund

International Bank for Reconstruction and Development(World Bank)

 5 542

5 875

 6 169

 6 541

0.10

6.01

TISA

Export Consultancy Trust Fund

International Finance Corporation

 5 542

5 875

 6 169

 6 541

0.10

6.01

TISA

Proudly South African Campaign

Current payments

25 500

7 000

10 000

10 550

0.12

-72.55

TISA

Export Credit Insurance Corporation

Current payments

120 488

121 517

123 824

131 185

2.17

0.85

TISA

Total 

157 072

140 267

146 162

154 817

2.50

-10.70

TOTAL 

4 988 131

5 600 406

6 117 571

6 223 961

100.00

12.27

 

 

 


[1] Zuma (2011)

[2] Department of Trade and Industry (2011d)

[3] Zuma (2011)

[4] DTI (2011a)

[5] Own calculations based on estimated GDP data at current prices from International Monetary Fund (2011)

[6] China Daily (2010)

[7] China Daily (2010)

[8] Naidoo (2011)

[9] DTI (2011a)

[10] Nominal terms refer to the actual or absolute value of the number, while real terms removes the effect of inflation from the value.

[11] National Treasury (2011b)

[12] When taking the forecasted Headline CPI (Consumer Price Index) inflation for the 2011/12 financial year (4.8 per cent) into account (National Treasury 2011a).

[13] National Treasury (2011b)

[14] DTI (2011c)

[15] National Treasury (2011a: 55)

[16] Although the IDC reports to the Economic Development Department, it still maintains a link to the DTI’s strategic objectives, such as the financing of IPAP2. Furthermore, the IDC receives funding from the DTI to manage certain incentive measures and programmes.

[17] Portfolio Committee on Trade and Industry (2010)

[18] This aims to assist the establishment and development of small, medium and micro enterprises.

 

[20] This body will replace Companies and Intellectual Property Registration Office once the Companies Act comes into effect.

[21] Department of Trade and Industry (2011a) and own calculations based on figures from National Treasury (2011b)

[22] DTI (2011b)

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