ATC121024: The Budget Review and Recommendation Report of the Portfolio Committee on Trade and Industry, dated 24 October 2012.

Trade and Industry

The Budget Review and Recommendation Report of the Portfolio Committee on Trade and Industry, dated 24 October 2012

The Budget Review and Recommendation Report of the Portfolio Committee on Trade and Industry, dated 24 October 2012.

The Portfolio Committee on Trade and Industry, having assessed the service delivery performance of the Department of Trade and Industry, against its mandate and targeted priorities of the Industrial Policy Action Plan, manufacturing and strategic trade to accelerate employment and productive economic growth, submits its report.

This report consists of three parts: Part I introduces the Committee’s Report on the Budgetary Review and Recommendation Report (BRRR). Part II provides a detailed description and analysis of the Department’s expenditure and the implementation of policy priorities against identified performance indicators over the last 18 months. Part III provides an overview of entities engaged with during the 2012/13 financial year. Part IV includes the Committee’s conclusions and recommendations.

PART I: INTRODUCTION

1. Overview

The purpose of this report is to provide an analysis of the performance of the Department of Trade and Industry (DTI), and identified entities over which the Committee performs oversight, against predetermined objectives. This report attempts to provide an assessment of the financial and non-financial performance of the DTI and the identified entities for the 2011/12 financial years, and the first six months of the 2012/13 budget allocation within the context of the three-year Medium-Term Expenditure Framework (MTEF).

The budget is informed by the national policy priorities as outlined in the State of the Nation Address. It is driven by the policy commitment to inclusive economic growth to attain social cohesion and job creation. The Budget Review and Recommendation Report (BRRR) is a move towards increased parliamentary participation in the budgetary process. This gives effect to the constitutional powers to amend the budget in line with the fiscal framework as outlined in the Money Bills Amendment Procedure and Related Matters Act (No. 9 of 2009).

The DTI’s key priorities are to develop an enabling environment for industrial development that drives strategic regional and international trade and investment to create sustainable jobs. The industrial policy calls for an increase in the coherence of micro- and macro-economic policies. The industrial policy is impacted upon by the macro-economic fundamentals (i.e. interest rates and the exchange regime) which should be favourable relative to its key trading partners; while micro-economic policies contribute to improving economic efficiency and equity for individual businesses, particularly for small, medium and micro enterprises, to improve their global competitiveness.

In terms of international trade and regional integration, South Africa has embarked on improving South-South relations and deepening integration in Africa . This has been evident by South Africa joining BRICS ( Brazil , Russia , India , China and South Africa ) and the developments around the Tripartite Free Trade Area [1] . However, South Africa will maintain its strong links with its traditional trading partners, in particular the European Union.

The Department was responsible for 15 entities and 46 Acts [2] . These include the newly-established Companies and Intellectual Property Commission, Companies Tribunal and National Consumer Commission, which were established during the 2011/12 financial year. The DTI also informed the Committee that the Estate Agency Affairs Board has been transferred to the Department of Human Settlements, which will reduce the number of Acts it implements.

1.1 The role of the Committee

Section 5 of the Money Bills Amendment Procedure and Related Matters Act requires the National Assembly, through its Committees, as an integral part of its oversight role, to annually assess the performance of each national department. A Committee must submit a report of this assessment known as a Budgetary Review and Recommendation Report (BRRR). The overarching purpose of the BRRR is for the Committee to make recommendations on the forward use of resources to address the implementation of policy priorities and services as these may require additional, reduced or re-configured resources for the Department.

The BRRR process enables the Committee to exercise its legislative responsibility to ensure that the Department and its entities are adequately funded to fulfil their respective mandates. However, as the Budget Office has not yet been established, the Committee was unable to make detailed budgetary recommendations. The Committee looks forward to when the Budget Office becomes operational to expedite this process.

1.2 The Department

The DTI’s work is governed by a broad legislative framework [3] . The DTI’s vision is to develop “A dynamic industrial, globally competitive South African economy, characterised by inclusive growth and development, decent employment and equity, built on the full potential of all citizens”. The DTI’s mission is to promote structural transformation, towards a dynamic industrial and globally competitive economy; provide a predictable, competitive, equitable and socially responsible environment, conducive to investment, trade and enterprise development; broaden participation to strengthen economic development; and continually improve the skills and capabilities of the DTI to effectively deliver on its mandate and respond to the needs of South Africa’s economic citizens.

In terms of the Acts the DTI also administers and is responsible for the following fifteen agencies:

· Companies and Intellectual Property Commission (CIPC)

· Companies Tribunal (CT)

· *Estate Agency Affairs Board (EAAB)

· Export Credit Insurance Corporation of South Africa (ECIC)

· National Credit Regulator (NCR)

· National Consumer Commission (NCC)

· National Consumer Tribunal (NCT)

· National Empowerment Fund (NEF)

· National Gambling Board (NGB)

· National Lotteries Board (NLB)

· National Metrology Institute of South Africa (NMISA)

· National Regulator for Compulsory Specifications (NRCS)

· Small Enterprise Development Agency (SEDA)

· South African Bureau of Standards (SABS)

· South African National Accreditation System (SANAS)

* The EAAB was transferred to the Department of Human Settlements in May 2011. The EAB was always self-funded and hence no funds were transferred from the DTI.
PART II: DTI’s FINANCIAL AND NON-FINANCIAL PERFORMANCE

2. Strategic Priorities and Measurable Objectives of the Department

2.1 Strategic Plans of the Department

For the period under review, the DTI outlined the strategic objectives and key interventions as outlined in the MTEF for 2012 – 2015. The five intervention areas or themes are [4] :

· Industrial Development,

· Trade, Investment and Exports,

· Broadening Participation,

· Regulation, and

· Administration and Coordination.

The Department identified four key strategic outcome-orientated goals to ensure alignment of the DTI’s programmes to government-wide priorities and outcomes. These goals are to [5] :

· Facilitate transformation of the economy to promote industrial development, investment, competitiveness and employment creation;

· Facilitate broad-based economic participation through targeted interventions to achieve more inclusive growth;

· Build mutually beneficial regional and global relations to advance South Africa ’s trade, industrial policy and economic developmental objectives; and

· Promote a professional, ethical, dynamic, competitive and customer-focused working environment that ensures effective and efficient service delivery.

2.2 Measurable objectives of the Department

In assessing progress in this area the Committee reviewed the Auditor General’s (AG) 2010/2011 [6] report on performance information and concluded that many of these findings have been addressed by the DTI and its entities during the 2011/2012 financial year. Hence the Committee welcomed the seventy five per cent progress achieved. However, the AG determined that outstanding performance information challenges are due to targets unsuitably developed at the planning phase [7] .

In the Committee’s opinion planning issues of measurability, validity, accuracy and completeness in performance information, assume greater significance when seen as directly related to outputs and outcomes. A system of regular, realistic reporting especially in relation to priority areas should be institutionalised so that underperformance that impacts on service delivery can be addressed at an earlier stage.

2.3 Key interventions for 2012/13 period

The DTI has implemented measures to address the decline and shedding of jobs as a result of the global financial crisis. Steps taken by government have stabilised the economy but challenges within the manufacturing sector remain. Targeted industrial support has borne fruit with particular successes in the Automotive; Clothing, Textiles and Leather and Footwear; and Business Process Services sectors.

To build on these successes and to reverse the de-industrialisation trend, create jobs and stimulate economic growth, the following targeted interventions will be implemented in the 2012/13 financial year through the Industrial Policy Action Plan (IPAP):

· The announcement of the designation of a further three subsectors for local procurement under the Preferential Procurement Policy Framework Act.

· Support for the technical competencies via the Technology and Human Resources for Industry Programme will continue in the chemical, information and communication technology (ICT), metal and minerals, agriculture, biotechnology and energy sectors.

· The support of 20 new projects to the value of R36 million through the Support Programme for Industrial Innovation (SPII).

· The introduction of the Manufacturing Competitiveness and Enhancement Programme (MCEP), as announced by the Minister of Finance in his Budget Speech, to provide adequate support for the manufacturing sector.

With respect to trade, investment and exports, the DTI intends to finalise the negotiation of the Economic Partnership Agreements during the MTEF period. In addition, the DTI is committed towards a developmental approach for regional and continental integration.

The DTI has set clear targets with respect to small business support with the establishment of 44 incubators during this financial year. This includes incubators that will be established in partnership with other major private sector companies. The Enterprise Investment Programme will provide assistance to the small business sector with the Tourism Support Programme supporting the tourism sector with an expected investment of R6.3 billion and R4.2 billion respectively. The DTI will implement an approved action plan developed as a result of the SMME (small, medium and micro enterprises) review report.

With regard to broadening participation, the DTI is in the process of finalising the National Strategic Framework on Gender and Women Economic Empowerment. In addition, it seeks to support 60 new projects linked to women-owned enterprises through the Isivande Women’s Fund. The up-scaling of the Cooperative Inventive Scheme is underway with clear targets set. These schemes target the informal sector or the second economy. The DTI also announced that they would be finalising the informal sector strategy and developing specific programs to support the informal sector. The DTI also recognised the importance of developing a specific programme targeting youth unemployment and intend to finalise a strategy around youth enterprise development in this financial year.

Significantly in this International Year of Co-operatives (2012), as declared by the United Nations, the Committee is currently considering the Co-operatives Amendment Bill. This sector was recognised as a catalyst for economic empowerment and job creation and the Committee is of the view that it will create an enabling environment for the development of co-operatives. It emphasised the need to differentiate between SMMEs and co-operatives as two separate types of business entities requiring different forms of support.

2.4. Progress made on the 2012/13 key interventions

At the end of September 2012, the DTI made the following progress based on the draft second quarter report on the abovementioned 2012/13 key interventions:

· Designated products : The DTI had submitted sector designation templates to the National Treasury for set top boxes for digital television, oral dosage tender for pharmaceutical products and school and office furniture.

· THRIP : The THRIP had approved support for 1 257 students (57.2 per cent of the target) and 609 researchers (71.6 per cent of the target).

· SPII : Sixteen projects were approved (80 per cent of the target) and contributed R32.2 million to support industrial innovation (161 per cent of the target).

· MCEP : Only 26 enterprises were approved for the MCEP (18.6 per cent of the target), which was implemented during this financial year. The reason for this delay was that many clients had been awaiting the amendment of the guidelines before submitting their applications.

· SADC-EU EPA : A second draft report was produced. The Minister had also updated the Committee on the progress made with these negotiations. Although significant progress had been made, further engagements were required on export taxes, agricultural safeguards and customs cooperation, while complex technical work on rules of origin continued.

· Regional and continental integration : Tripartite Free Trade Area negotiations were underway and the negotiating principles had been agreed to. The SACU market access offers and request had been in the process of being developed.

· Enterprise Investment Programme – TSP : The uptake was slow during the first half of the year. The DTI has proposed a corrective action to review the incentive. Only 41 projects were approved (13.7 per cent of the target) to the value of R416 million (9.9 per cent of the target). These projects should lead to 426 jobs being created (6.9 per cent of the target).

· National Strategic Framework on Gender and Women Economic Empowerment : The Strategy has been finalised and submitted for the Deputy Minister’s approval. This should have been launched nationally and provincially, as well as a marketing campaign, by September but the process was delayed due to consultations and quality improvements related to the Framework.

· Isivande Women’s Fund : Only 7 projects were approved (11.7 per cent of the annual target). The DTI indicated that this was due to discrepancies between the target set on projects between the Industrial Development Corporation (IDC) and the Fund manager and the target between the DTI and the IDC.

· Cooperative Inventive Scheme : Only 69 enterprises of the targeted 490 enterprises were approved (14.1 per cent). However, a turnaround plan has been developed and contract posts requested to address the backlog in considering applications as some applications are incomplete and have been referred back to the co-operative.

· Informal Sector Strategy : A discussion document has been developed for stakeholder input.

· Youth Enterprise Development Strategy : The Strategy has been presented to the Economic Cluster. However, there has been a delay in its approval by the Minister.

3. Department’s 2012/13 Budgetary Allocation

In terms of its MTEF budget allocation, the Department of Trade and Industry has been allocated a total budget of R9.1 billion for the 2012/13 financial year, R10.4 billion for the 2013/14 financial year and R11.1 billion for the 2014/15 financial year. The 2012/13 budget represents a nominal increase of R2.2 billion or 32.2 per cent compared to the 2011/12 financial year (see Table 1). In real terms, this increase reflects a R1.7 billion or 24.9 per cent increase. Furthermore, the DTI’s budget will increase by 13.9 per cent and 7.4 per cent in nominal terms during the 2013/14 and 2014/15 financial years respectively. The total share of the DTI’s budget allocation is 0.9 per cent of the total government’s budget of R969.4 billion for the 2012/13 financial year compared to 0.8 per cent in the 2011/12 financial year [8] .

Table 1: Budget allocations and percentage changes of the budget estimates from 2011/12 to 2012/13 (R million)

Programme

Budget

Budget Share (%) 2011/12

Budget Share (%) 2012/13

Nominal % change in 2012/13

Real % change in 2012/13 [9]

R million

2011/12

2012/13

Administration

659.3

608.7

9.6

6.7

-7.67

-12.82

International Trade and Economic Development

144.8

133.5

2.1

1.5

-7.83

-12.94

Broadening Participation

865.7

879.9

12.6

9.7

1.64

-4.02

Industrial Development: Policy Development

1 311.0

1 482.9

19.1

16.3

13.10

6.81

Consumer and Corporate Regulation

229.7

244.7

3.3

2.7

6.55

0.60

Industrial Development: Incentive Administration

3 320.9

5 437.6

48.3

59.8

63.74

54.62

Trade and Investment South Africa

345.1

304.8

5.0

3.4

-11.68

-16.60

TOTAL

6 876.5

9 092.1

100

100

32.2

24.85

Source: National Treasury (2012a) and own calculations

The 2012/13 allocation increase of R2.2 billion is primarily due to additional allocations in terms of incentives linked to industrial development. These include the manufacturing development incentives [10] (an additional R1.4 billion was allocated), the capital investment incentives for special economic zones (an additional R500 million was allocated) and the clothing and textile production incentive (an additional R150 million was allocated). [11]

The Department’s programmes/divisions have been slightly reorganised this financial year. Firstly, the Communications and Marketing Division was merged with the Administration programme. Secondly, the Industrial Development Division (IDD) and The Enterprise Organisation have been reorganised and renamed as the Industrial Development: Policy Development and Industrial Development: Incentive Administration Divisions respectively. Thirdly, the Empowerment and Economic Development Division was renamed as the Broadening Participation Division.

In terms of allocations to various divisions, the Industrial Development: Incentive Administration Programme/Division is allocated the largest share of the budget (R5.4 billion or 59.8 per cent of the total budget allocation). The second largest share is allocated to the Industrial Development: Policy Development Programme/Division (R1.5 billion or 16.3 per cent of the total budget allocation) followed by the Broadening Participation Programme/Division with a share of R879.9 million or 9.3 per cent of the total budget allocation. These three programmes combined constitute 85.8 per cent of the total budget allocation while the remaining four programmes share 14.2 per cent of the total budget allocation.

The spending focus over the medium term period is aligned to the broader government priority outcomes of decent job creation and economic development through industrial development as included in the New Growth Path. Other national priorities which the Department contributes towards include inter alia: development of productive infrastructure; investment priorities; developmental trade strategies; inclusive economic growth; promotion of alternative (energy) technologies and increased competitiveness. The above issues will be discussed below within the context of the respective divisions responsible for these.

In terms of the economic classification, the Department has allocated 85.5 per cent (R7.8 billion) of the R9.1 billion to transfers and subsidies, a nominal increase of 40.5 per cent since 2011/12. The current payments’ allocated share of the total budget allocation has declined from 18.8 per cent (R1.3 billion) of the 2011/12 budget allocation to 14.3 per cent (R1.3 billion) of the 2012/13 total budget of R9.1 billion, while payments for capital assets only received 0.2 per cent (R14.1 million) of the budget allocation compared to 0.48 per cent of the budget allocation (R32.9 million) in 2011/12. [12]

Consultants are appointed to provide specialist legal services, actuarial and econometric research related in particular to IPAP and incentives. Spending on consultants for business and advisory services, as well as professional services, is expected to increase over the MTEF from R102.2 million in 2011/12 to R107.9 million in 2014/15, at an average annual rate of 1.8 per cent. However, this allocation declines in the 2012/13 and 2013/14 financial years to R95.2 million and R95.1 million respectively. [13]

4. Analysis of Section 32 Expenditure Reports (Financial Expenditure for First Half of 2012/13)

Section 32 of the PFMA requires that National Treasury publishes a statement of actual revenue and expenditure with regard to the National Revenue Fund. Committees are required to analyse the Section 32 reports in order to determine and examine spending trends and patterns of the Department to identify under-spending and/or over-spending (if any). This data is published at departmental level and only gives a breakdown of expenditure in terms of economic classification, i.e. current payments, transfers and subsidies and capital expenditure. Therefore, the Section 32 reports offer limited information to analyse the DTI’s financial and non-financial performance for the current year. The Committee has thus requested the DTI to submit its quarterly management accounts to provide a more detailed record of expenditure.

The financial data for the period from 1 April to 30 September 2012 is considered below. This consists of the appropriated budget for 2012/13, the projected budget for the first six months and the actual expenditure in terms of the programme and economic classification for this period.

4.1 Expenditure by programme

Table 2 provides the year to date expenditure by programme. The Department spent R4.1 billion or 45.6 per cent of the total available budget by the end of the first half. Planned expenditure by this point in the year was R4.2 billion – equivalent to 46.5 per cent of the total available budget. The Department has therefore underspent by R77.7 million or 1.8 per cent.

In terms of the programmes, the Administration and Consumer and Corporate Regulation programmes under-spent by 6.3 per cent and 13.9 per cent respectively; while the International Trade and Economic Development and Trade and Investment South Africa programmes over-spent by 0.7 per cent and 4 per cent respectively.

Table 2: 2012/13 Year to Date Expenditure by programme (R million)

Programme

Revised budget 2012/13

Projected Expenditure 30 Sept 2012

Actual Expenditure 30 Sept 2012

Variance (%)

% Budget available

Administration

607.3

303

283.8

6.34

53.27

International Trade and Economic Development

134.2

58.7

59

-0.66

56.04

Broadening Participation

879.6

461.2

451.8

2.04

48.64

Industrial Development: Policy Development

1 483.8

1 103.4

1 091.8

1.06

26.42

Consumer and Corporate Regulation

244.7

143.3

123.3

13.92

49.61

Industrial Development: Incentive Administration

5 437.6

2 040.6

2 018

1.11

62.89

Trade and Investment South Africa

304.8

115.9

120.6

-4.01

60.43

Total

9 092.1

4 226.1

4 148.3

1.84

54.37

Source: DTI (2012)

The reasons for these variances are:

· Administration : The under-spending is largely made up of research consultants costs, which cover 89.5 per cent (R17 million) of the R19 million under-spent. These consultants were either in the process of being appointed or invoices have not yet been submitted for payment.

· International Trade and Economic Development : The over-spending was largely due to increased activity in international engagements and this amount was only 0.3 per cent in relation to the total budget.

· Consumer and Corporate Regulation Division : The under-spending was mainly due to transfers to the NCC and the Consumer Tribunal, which total R12 million of the R20 million, not being paid. The transfer of R6 million to the Consumer Tribunal had not been made as the institution was being established. With respect to the NCC, the DTI had taken a decision to transfer funds based on expenditure incurred until it was satisfied that the relevant financial controls were in place. Furthermore, there division had under-spent on compensation of employees by R6 million. This was due to recent restructuring, which is awaiting approval from the Department of Public Service Administration.

· Trade and Investment South Africa : The over-expenditure was incurred due to the DTI's foreign mission offices, which the Department of International Relations initially pays and then claims the expenditure from the DTI. Historically, DIRCO claims were 5 months in arrears and the DTI based its cash flow requirements on this trend. As at 30 September 2012, the claims have been reduced to 3 months in arrears. It should be noted that despite the over-spending, the expenditure to date is only 39.6 per cent of its allocated budget.

4.2 Expenditure by economic classification

The overall variation from the financial plans mainly relates to over-spending of 0.3 per cent and 19.7 per cent on compensation of employees and payments for capital assets respectively, due to the annual general increase paid in August 2012 and the replacement of old computer equipment. Table 3 provides the year to date expenditure by economic classification.

Furthermore, there was slight under-spending of 2.5 per cent and 2.1 per cent related to goods and services and transfers and subsidies respectively. The main reason for the under-spending for goods and services was due to delays related to business and advisory consultants. These payments are expected to occur later in the year than planned upon completing agreed milestones. In terms of transfers and subsidies, there were some shifts between under- and over-spending between different incentives. However, the following areas were significantly under-spent (DTI 2012d):

· Automotive Production and Development Programme (R30.7 million): Claims had not yet been processed and first required verification and approval by the division.

· Critical Infrastructure Programme (R30.1 million): There were outstanding compliance issues before the projected amount could be paid.

· National Foundry Technology Network – Metals (R10.5 million): There are outstanding financial statements from the CSIR, which are required before the transfer can be made.

Table 3: 2012/13 Year to Date Expenditure by economic classification (R million)

Economic classification

Revised budget 2012/13

Projected Expenditure 30 Sept 2012

Actual Expenditure 30 Sept 2012

Variance (%)

% Budget available

Compensation of employees

714

324.3

325.2

-0.26

-54.45

Goods and services

582

267.8

261.1

2.53

-55.14

Interest and Rent on land

0

0

0.001

0.00

n/a

Payments for Financial Assets

0

0

1.9

0.00

n/a

Payment for capital assets

20.6

6.8

8.2

-19.74

-60.19

Transfers & subsidies

7 775.5

3 627

3 552

2.07

-54.32

TOTAL

9 092.1

4 226.1

4 148.3

1.84

-54.37

Source: DTI (2012d)

5. Analysis of the Department of Trade and Industry’s Annual Report and Financial Statements

5.1 Economic Context

The period under review took place against a backdrop of a fragile global recovery under threat by the sovereign debt crisis in Europe . A significant decline in the world’s real gross domestic product was experienced from 5.2 per cent in 2010 to 3.8 per cent in 2011. This impacted negatively on global trade resulting in a decline in the tradable sectors. South Africa ’s major trading partner, the European Union, as well as China , experienced a slowdown in growth which negatively affected South Africa ’s trade performance. Trade diversification therefore becomes critical with a significant increase in exports to the BRICS countries being evident. A concern for South Africa is that exports are still dominated by commodities and not by value-added products. The decline in trade volumes and an increased import demand resulted in an increased trade deficit in the fourth quarter of 2011 [14] .

5.2 Policy context for the period under review

The DTI’s 2011/12 budget was 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 (NGP) and steer a strategic trade policy, while striving to reduce its carbon footprint. It recognised that only through productive investment, regional and continental integration underpinned by standards and quality assurance measures can South Africa promote both a comparative and competitive edge for local goods in pursuit of a developmental State and an equitable global trading system.

In his 2011 State of the Nation Address (SONA), President J 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 [15] .

Other strategic policy priorities articulated by President J.G. Zuma were: [16]

· Manufacturing and Job Creation : One of the six priority areas identified by President Zuma in the 2011 SONA was 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 [17] . 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.

· SMMEs: were identified as a critical component of employment creation. The DTI confirmed its continued commitment to financial and non-financial support to SMMEs 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 SEDA. Some of the other initiatives that support SMMEs include technical consulting support by the SABS, and incentives administered by The Enterprise Organisation Division, such as the Small and Medium Enterprise Development Programme incentives scheme. The Committee also agreed with the Minister that small businesses have benefited significantly from working closely with big business in most countries, including South Africa and that further measures will be put in place to boost this “symbiotic partnership”.

· Cooperatives: were also identified as a critical component of overcoming poverty and creating employment. However unlike SMMEs they are a collective business structure. Coops would also be an instrument for youth employment which would draw them into the mainstream economy and stimulate entrepreneurship and economic growth. The Committee welcomed the support in the form of administration of government incentives, provision of training and improvement of working condition in the cooperatives sector.

· International Trade Relations : The African agenda remains a key strategic priority in pursuing South Africa ’s economic interests in the international community. Our priorities include promoting and deepening regional economic integration. In this regard the Southern African Custom Union should become a more active instrument for economic development and co-operation in South Africa and in the region. South Africa continues to consolidate and broaden existing economic and trade cooperation with the South through the India-Brazil-South Africa (IBSA) partnership, and the BRICS membership which 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 . The Committee welcomes the DTI’s continued strategic stance and actions on international trade relations which complements trade in Africa with infrastructural development and cooperation. The Committee commends the DTI for driving a developmental agenda at the World Trade Organisation and agrees that it should support the continued pursuit of the Doha Development Agenda.

5.3 Engagement with the DTI on its 2011-12 Annual Report .

During the briefing on the DTI’s 2011-12 Annual Report, the Minister of Trade and Industry, Dr R Davies, informed the Committee that the overarching responsibility of the DTI, through its implementation of its IPAP, is to contribute to the NGP. This is through placing emphasis on the productive sectors of the economy such as manufacturing and value-added production. The Minister highlighted the improved performance of key programmes within the automotive, clothing, business processing and film industries.

Through the Automotive Investment Scheme (AIS) R15 billion worth of commitments had been secured, as well as the undertaking by the Foschini Group, Truworths Ltd and Woolworths to procure from South African SMMEs [18] . The Minister informed the Committee that Government procurement was realigned to ensure that government spending supports domestic industries in the following sectors: rail rolling stock such as locomotives, wagons and carriages, power pylons, busses, clothing, textiles, leather, and footwear, canned vegetables, and set-top boxes for lower income households. These designations were made in terms of the regulations of the Preferential Public Procurement Framework Act (PPPFA) that requires organs of state to procure from local sources using different criteria. The Minister further emphasised the need for localisation and welcomed recent commitments by the private sector and other social partners on a framework for a new accord on localisation.

Over the medium term, the Minister emphasised the need for South Africa to reposition itself globally, identify dynamic opportunities and support infrastructure development by encouraging localisation. Regional integration programmes could provide the necessary impetus to broaden integration beyond existing regional economic dynamics. The need exists for South Africa to diversify its trade from its traditional markets to high growth markets.

The Director-General, Mr L October, briefed the Committee on the 2011/12 Annual Report based on its five strategic objectives listed in Section 2.1.

5.3.1 Industrial Development

The Director-General informed the Committee that the implementation of the Automotive Production Development Programme (APDP) contributed to the stabilisation of the sector by focusing on domestic production, localisation and downstream manufacturing. This resulted in significant commitments of R15 Billion from the original equipment and component manufacturers. The Committee welcomed the announcement of a new player in the automotive sector, namely China ’s First Auto Works committing an investment of $100 million for a truck and assembly with construction already commencing in the Coega Industrial Development Zone.

Significant interventions during the period under review were Government’s commitment to use government procurement to leverage localisation. The first round of designations has seen a significant increase of local content that would contribute to revival of the local manufacturing sector. The Director-General informed the Committee that work to designate pharmaceutical products was approved by the Minister and awaits the Department of Health’s endorsement. This has resulted in the expansion of the local pharmaceutical manufacturing facilities by R2 to R3 billion.

The Business Processing Services sector saw significant investments in customer call centres which contributes to jobs being created in the short-term with further investment projected to create 11 000 additional job [19] . The Monyetla training programme contributed toward the training of 3 400 youth of whom 70 per cent were placed in employment by the Business Process Outsourcing (BPO) consortium.

The Clothing and Textile Competitive Incentive Programme (CTCIP) resulted in the local retailers undertaking to procure locally. Through the incentive programme, the DTI assisted just under 3 000 companies with 48 000 jobs being created in the process. The Committee welcomed this positive turn around in a high labour absorption industry that had been under threat of decline.

5.3.2 Trade, Investment and Exports

The Director-General informed the Committee that the DTI through its efforts to promote productive investment in South Africa facilitated R40.91 billion in investment projects. These investment projects included in the green field manufacturing plants by multinationals such as Unilever, Proctor and Gamble, Kimberley Clark, Nestle, FAW Motors, Kiran Global Silica and LG. [20] . Through the trade investment initiatives, market access increased which led to exports to the value of R6.43 billion.

The Committee welcomed the progress made with regard to regional industrial development within the Southern African Customs Unions (SACU) as indicated last year with eight sectors identified for cross-border complementarities and value-chains. The Director-General further highlighted the development of a common position within SACU on rules of origins in relation to clothing and textiles to the Southern African Development Community (SADC). South Africa successfully advanced the position to consolidate the SADC FTA (Free Trade Area) with the extension of regional integration through the Tripartite FTA.

On the bilateral front, co-operation memoranda of understanding were signed with partner countries in Africa with trade and investment facilitation missions being undertaken with fast growing economies on the continent. The DTI facilitated private sector involvement within BRICS through actively working with business associations, which resulted in major investments in South Africa . The DTI informed the Committee that the top 10 investment projects and top 10 value-added export products were submitted to China as South Africa needs to increase its value-added exports and change its trade basket.

5.3.3 Broadening participation

The DTI informed the Committee that it has, through the Technology Incubation Programme, “created 295 new SMME’s and supported 1089 SMME’s” [21] . Women-owned enterprises have received significant support through the Programme. In respect of the incubation programme, the DTI received 44 proposals from the private sector with additional funds allocated for the 2012/13 financial year for the Incubation Support Programme.

With respect to broad-based black economic empowerment, the DTI informed the Committee that significant progress has been made to ensure the transformation and the creation of productive entrepreneurs. The DTI also informed the Committee that in conjunction with the University of South Africa and of the Witwatersrand , it has developed and launched a B-BBEE Management Development Programme with 74 students to graduate from the programme.

5.3.4 Regulation

The Intellectual Property Laws Amendment Bill had been adopted by Parliament but has not yet been assented to by the President. Other Acts adopted and assented to are: The Companies Amendment Act, 2008 which was hailed by the financial and economic community broadly both nationally and internationally as a significant step into the Twenty First Century. The Consumer Protection Act came into effect in 2011 to champion the rights of consumers while retaining the integrity of the business and industrial sectors. These two Acts led to the establishment of the Companies and Intellectual Property Commission, the National Consumer Commission, the Companies Tribunal, the Take-over Regulation Panel and the Financial Report Standards Council.

The DTI also informed the Committee that it had established the necessary business rescue mechanism that would assist companies to turnaround instead of heading for liquidation. So far, 652 applications for business rescue had been received and 104 practitioners accredited.

The DTI informed the Committee that it had commenced a work programme with regard to the transfer of the Estate Agency Affairs Board (EAAB) to the Department of Human Settlements.

5.4 Financial Statements for 2011/12

The actual expenditure for the year under review was R6.8 billion against the total voted budget of R6.9 billion, or 1.1 per cent against the total appropriated budget as shown in Table 4.

Table 4: Expenditure per programme for the financial year 2011/12 (R million)

Programme

Total Appropriated budget 2011/12

Actual expenditure

Variance

Variance (%)

Administration

569.9

563.9

6

1.05

International Trade and Economic Development

139.2

132.9

6.3

4.53

Empowerment and Enterprise Development

896.2

887.5

8.7

0.97

Industrial Development

1 333.1

1 321.7

11.5

0.86

Consumer and Corporate Regulation Division

225.4

218.6

6.9

3.06

The Enterprise Organisation

3 301.2

3 283.5

17.7

0.54

Trade and Investment South Africa

330.1

317.4

12.7

3.85

Communication And Marketing

81.2

75.5

5.7

7.02

Total

6 876.5

6 801

75.5

1.10

Source: DTI (2012: 93-95)

5.5 Auditor General’s Report

The Department received an unqualified Audit report with emphasis on matters and additional matters. These pertained to (DTI 2012: 90-92):

· Significant uncertainties related to the disclosed contingency liabilities for lawsuits and incentive grants, which have not been provided for in the financial statements.

· Restatement of corresponding figures for contingent liabilities, accruals and key management personnel due to errors discovered during 2012 for the previous year’s financial statements.

· Material impairments and losses of R35.5 million, which the Auditor-General noted for public information. This largely related to incentives debtors that were incurred pre-1994 and were written off in 2011/12.

· Non-compliance with procurement and contract management requirements existed for goods and services below the value of R500 000 and for employees performing remunerative work without the permission from the relevant authority.

· Proper asset management control systems were not implemented.

· Reasonable steps were not taken to prevent irregular and fruitless and wasteful expenditure. There had been R59.5 million irregular expenditure of which R0.28 million was condoned and R0.162 million fruitless and wasteful expenditure during the financial year, of which R0.16 million had been condoned.

· There is no written overtime policy.

5.6 HR Related Information

The DTI has 1 338 posts, of which 1 225 posts had been filled at the end of March 2012, i.e. a vacancy of 8.4 per cent. It also employed an additional 98 contractors, who fall outside of the establishment. The following employment equity statistics prevailed within the DTI on 31 March 2012:

Table 5: Employment equity statistics at end of March 2012

Category

Number

Percentage

Employees with disabilities

35

2.6

Black employees

1 155

87.3

Female employees

762

57.6

Senior management – black

171

83.4

Senior management – female

91

44.4

Senior management - total

205

Source: DTI (2012: 214-215) – Annual Report

The DTI had taken disciplinary action against 56 of its employees during the 2011/12 financial year. This was mainly related to failure to obey lawful instruction (30.4 per cent of cases) and non-compliance (26.8 per cent of cases).

5.7 Key issues raised by the Committee

The following issues were highlighted during the Committee engagement with the DTI’s 2011-12 Annual Report:

5.7.1 Status on Gambling Legislation : In response to the inquiry about the status of gambling legislation, the Minister informed the Committee that the DTI was in the process of reviewing the report submitted by Parliament and that the DTI will submit the revised Lottery Policy for Cabinet’s consideration.

5.7.2 Administered Prices: The Committee raised concern regarding continuous increases in the price of electricity by local authorities, as well as supply outages, as the current situation could have an adverse effect on current and future investment. The Minister informed the Committee that the DTI is actively involved in ensuring that the cost of electricity does not curtail investment. A continuous rise would have a negative impact on the manufacturing sector and it could lead to an outflow of productive activity from small towns. The DTI is engaging with Eskom on the matter and it should develop other mechanisms to become more energy efficient through the provision of an incentive to encourage energy saving.

5.7.3 The impact of the global economic slowdown on local economic recovery: The Committee acknowledged that the current global economic conditions impact on the local economic recovery specifically in relation to job creation. It welcomed the slogan “continuous improvement” as this is reflected in the continual progress made by the DTI in delivering on its mandate given the current conditions. A concern for the Committee was the measures put in place to address the negative growth currently experienced locally and whether this will see the start of the recovery or “the flight of the flamingoes”.

The Minister informed the Committee that “continuous improvement” was one of the observations of the National Planning Commission that small improvements sought from inputs of the relevant stakeholders can contribute to the increased performance of the department. The job creation target of the NGP for the first year reflects this modest approach. An acceleration of the structural changes to address the slow economic growth is required but, according to the Minister, is not only in the realm of the DTI. The DTI is creating an enabling environment for public and private stakeholders to encourage investment in the local economy through incentives.

The impact of the contraction of growth especially in Europe has had a significant impact on the South African economy. Europe is still South Africa ’s major trading partner and a contraction in the European economy will have a negative knock-on effect. South Africa needs to reposition itself not only towards the BRIC countries, but should also seek dynamic opportunities globally. South Africa should increase its value-added production capacity and increase its presence in Africa . A knowledge economy is critical, which is part of the NGP, to place South Africa on the path to recovery. We should ensure that multi-nationals established their productive activities within South Africa

The Committee welcomed the DTI’s ability to rapidly adjust to a changing global environment and how it has positioned South Africa to ensure maximum benefits are derived as a result of policy implementation.

5.7.4 Designation of local products: The Committee welcomed the designation of local products which has led to an increase in local content of products. A concern for the Committee is the perceived lack of urgency among some quarters of the economy and how it could be addressed. The Minister is of the view that one cannot compel private sector to buy-in to the localization programme but through the establishment of an accord could ensure an increase in the local content of products.

5.7.5 Investment in the Green Economy: Government took a decision to upscale its effort in green energy production to support the manufacturing sector. Currently, the construction phase for wind and solar energy has started. The DTI also informed the Committee that the Blending Regulations have been promulgated with National Treasury finalizing the incentive. This could potentially create 70 000 direct and indirect jobs.

5.7.6 Foreign Direct Investment (FDI): Although the figures presented are encouraging, it does not indicate the jobs created as a result of this investment. The DTI informed the Committee that currently 42 000 jobs are linked to investment with a bias toward providing incentives for more labour-intensive projects.

5.7.7 Approach to regional integration: The Minister informed the Committee that due to prevailing conditions, high level of complementarity of economies is needed, which does not currently exist in Africa . At present, African economies are basically producers and exporters of primary commodities which do not have the production structures or the infrastructure that can link economies. A developmental integration approach is required to address the real economic conditions before the creation of institutional arrangements.


PART III: OVERSIGHT OF ENTITIES

As the Committee deals with a large number of entities, it has decided to deal with a selection of entities’ annual reports on a rotational basis. This selection is driven by prioritised issues. For the current financial year, the Committee decided to analyse the service delivery performance of the NEF, the NCC and the NRCS for the period under review, and assess the efficiency and the effectiveness of the Department’s use and forward allocation of available resources. It also performed oversight over the CIPC, and the NCR during the current financial year. The critical issues identified are captured below:

6. National Empowerment Fund (NEF)

6.1 Overview of the NEF

The purpose of the NEF is to promote and facilitate black economic participation in the economy through financial and non-financial support to black empowered businesses. This includes job creation and supporting business ventures owned and/or run by black individuals. In addition, it is meant to promote wealth creation among black individuals through the development of a culture of savings and investment.

It achieves this by offering a range of products and services. These include financial support offered to businesses to assist with start-ups, acquisitions and expansions and non-financial support to ensure sustainability.

6.2 Investment performance

The NEF’s performance is based on the participation by black women, level of job creation and investment in priority growth sectors as outlined in the NGP and the IPAP. The value of the NEF’s approved deals has exceeded the targeted value of approvals for the first time by March 2012. Since inception, only 3.2 per cent of applications were approved to the value of R3.7 billion, of which 330 approvals are available for disbursement to the value of R2.7 billion and R2.25 billion have been drawn.

The main sectors being invested in are services (14 per cent), construction and materials (13 per cent), media (9 per cent) and transportation (8 per cent). Manufacturing, as a sector, received 7 per cent of all investment since inception; however, there were further investments in agro-processing, chemicals and pharmaceuticals, textiles and the motor industry with a cumulative investment of 13 per cent. Although the NEF reports that investment in Mpumalanga and Limpopo had increased since the opening of the regional offices, the main provincial investments had still been concentrated in Gauteng (51 per cent), KwaZulu-Natal (20 per cent) and the Western Cape (11 per cent), with the least investment value in Free State (0.2 per cent), Northern Cape (1 per cent) and North West (1 per cent).

The NEF also indicated that they are expected to be financially sustainable but risks reducing the current capital under management, if the key performance indicators set for the medium term expenditure framework are not met. This will undermine its financial sustainability in the long run and impede its ability to increase financial support offered to black-owned enterprises.

6.3 Performance Results against the Annual Performance Plan

Based on a comparison with the performance indicators initially set in the NEF’s 2011/12 – 2014 Strategic Plan, some of the NEF’s indicators and targets had been adjusted during the financial year. NEF (2011: 67 and 2012: 30-34)

The NEF reported on 30 targets in the Annual Report of which ten were not achieved. Source: NEF (2012: 30-34)

6.4 Financial Performance

6.4.1 Audit opinion

The NEF received an unqualified audit opinion from its independent auditors with no matters of emphasis and/or additional matters. The independent auditors’ also established that there were no material findings in terms of the usefulness and reliability of the NEF’s performance reporting against its Annual Performance Plan.

6.4.2 Balance sheet

The NEF currently has net assets of R5.3 billion, a slight decline of 0.41 per cent since 2010/11. The total current liabilities are R44.2 million for the current financial year. These are more than adequately covered by the cash and cash equivalents with current liabilities being equivalent to 2 per cent of cash available. Note 27 highlights potential cash outflows that were not reflected in the 2011/12 balance sheet but would impact on the 2012/13 financial year. This includes undrawn investments of R300.9 million and investments approved and committed but not yet contracted for of R879.9 million. The abovementioned payments of over R1 billion would be made from cash reserves.

The concern is the long term sustainability of the NEF’s capital given the financial support that it must provide in future. The capital available for future disbursements is based on the cash and cash equivalents and the investments available for sale, which equates to R3.7 billion.

Furthermore, the NEF has increased its equity in associates by 96.1 per cent since 2010/11 to R201.9 million. Net originated loans have also increased by 30.4 per cent since 2010/11 to R1.1 billion. About R109.3 million was written off during 2011/12 compared to R93.9 million in 2010/11.

6.4.3 Income statement

The NEF’s revenue declined by 6.7 per cent from R359.5 million in 2010/11 to R335.5 million in 2011/12. This was primarily due to reduced interest received from cash, originated loans and other investments. It, however, recovered an additional R1.1 million in bad debts since 2010/11 and received R3.3 million from enterprise development funding.

Its administrative expenses amounted to R191.9 million, an increase of 24.7 per cent since 2010/11. The administrative expenditure was mainly due to staff costs of R108.6 million, which increased by 25.4 per cent since 2010/11, as the staff complement increased by 25.6 per cent from 125 employees in 2010/11 to 157 in 2011/12. This was followed by professional fees of R26.8 million, a growth of 68.7 per cent since 2010/11.

There had been an increased net loss on the disposal of investments from R0.6 million in 2010/11 to R15.1 million in 2011/12. Furthermore, there was an impairment charge of R105.1 million in 2011/12 compared to R102.7 million in 2010/11. Before fair value adjustments, the net income had declined by 72.4 per cent since 2010/11.

6.5 Key issues

The following issues emerged during the Committee’s deliberations:

· The impact of investment on actual economic activity and its multiplier effect : At present the NEF does not have the necessary information which indicates the impact of investment vis a vis employment and general impact on economic development within a particular area.

· The role of the NEF in identifying areas for investment : The NEF does play a role in identifying the relevant role-players depending on the type of project it wants to invest in. Currently, it was supporting a dairy co-operative in Limpopo that was able to sell milk in bulk to Clover.

· The cost associated with beneficiation of rare metals as opposed to export without value-addition: The NEF expressed a view that it could not comment on merits and demerits of beneficiation, as the NEF are merely an implementer of policy.

· The role of the state in the market place and the identification of winners: With regard to government being an active participant in the market, the NEF was of the view that market failures occur; the market therefore requires state intervention to address these failures. The market cannot resolve all problems and where opportunities for partnerships exist within the private sector the NEF becomes involved.

· The criteria used by the NEF in the allocation of funds : The NEF funds business across the racial divide as per its mandate. The Committee must also note that investment is based on the application received. The NEF is not in a position to provide the necessary answer on the number of transactions in the “coloured” community, but the investment portfolio in the Western Cape is approximately 15 per cent.

· The number of business still operating and the profit margins associated with these businesses: The NEF informed the Committee that of the 384 transactions approved approximately 300 were still in existence and operating successfully. The NEF has a post-investment unit that monitors businesses on an ongoing basis. If challenges are identified the NEF provides the necessary mentorship to ensure the sustainability of the businesses. Most of the businesses that did not succeed were in the SMME sector which, according to the NEF, could not withstand the impact of the global economic downturn.

· The status of the 100 young managers that received training in France : The NEF informed the Committee that it does not have a mechanism that follows-up on the skills training initiatives. It welcomed the Committee’s guidance on the matter and would in future ensure that it implemented the necessary mechanisms.

· Memorandum of Understanding (MOU) : The NEF informed the Committee that it seeks further partnerships, such as the MOU with the Ministry of Trade in Investment in the United Kingdom which targets UK-owned subsidiaries in South Africa to develop new black-owned suppliers within their value chains. In this regard, it has been in discussion with the Department of International Relations and Co-operation to identify such partners in China , Brazil and France . Currently, the NEF is looking at a potential MOU with companies in France that are involved in renewable energy, space and nuclear energy industry.

· Rationale for reclassification and recapitalisation : The CEO informed the Committee that although the NEF accounts reflect R4.4 billion, this represents committed funds. Hence, capitalisation is a concern for the NEF and it could either request additional funds from Government or raise funds on the market.

The Committee focussed at some length on the NEF because of the strategic role it plays both financially and in terms of its partnership development and value-add and welcomed their vigorous approach to transforming the economic landscape.

7. The National Consumer Commission (NCC)

7.1 Overview of the NCC

The National Consumer Commission (NCC) was established by the Consumer Protection Act (No. 68 of 2008) and became operational on 1 April 2011. According to the Act, the NCC’s functions include the:

· Development of codes of good practice relating to the provisions of the Act.

· Promotion of legislative reform through consultation with provincial consumer protection authorities, national organs of state and consumer protection groups, alternative dispute resolution agents and suppliers.

· Promotion of consumer protection within organs of state.

· Enforcement of the Act including the investigation and evaluation of any prohibited conduct and offences, issuing and enforcing compliance notices.

· Research to increase knowledge of the nature and dynamics of the consumer market.

· Promotion of public awareness of consumer protection matters.

· Liaison with other regulatory authorities on matters of common interest.

· Advice and recommendations to the Minister.

7.2 Non-financial performance

The NCC set eleven priority initiatives for the 2011/12 – 2013/14 periods. Overall, there was a tendency to not clearly report on actual performance against the set targets and measures. The priority initiatives where there were challenges are outlined below (NCC 2012: 113-135):

7.2.1 Advocacy, education and awareness:

· The consumer protection awareness rate (Measure 1.1) was meant to establish a baseline of consumer awareness but measures the number of consumers reached.

· The number of targeted public engagements was not met due to budget constraints and lack of provincial support and political and traditional tensions.

7.2.2 Complaints handling system:

· The target for the percentage of complaints timely and successfully resolved has increased from 60 per cent as set out in the Strategic Plan to 90-95 per cent of complaints received. The reporting on this measure was unclear to whether the new target was actually met.

· The actual performance outlined for Measure 2.3, number of accredited alternative dispute resolution practitioners, did not appear to relate to one another.

7.2.3 Enforcement and compliance:

· The reporting regarding Measure 3.2, percentage of investigated complaints (filed cases by the NCC) successfully settled through litigation, did not relate to the target or the measure. This measure was also altered in the Annual Report.

· In terms of Measure 3.3, the NCC only reflected on three investigated complaints but did not relate these to the time taken to finalise them, as the measure related to the timeliness of finalisation.

· It appeared that Measure 3.4 had not been achieved given the reported actual performance, as the target referred to achieving approved guidelines. The NCC did not appear to have any procedure regarding the provision of clarifications and advisory opinions.

· It was unclear whether the NCC had developed three codes of practice according to Section 93(1) (Measure 3.5), only one seemed to have been completed but this had been reported as an achievement.

7.2.4 ICT infrastructure and network:

· It was unclear whether the targets were actually met.

7.3 Financial management

7.3.1 Auditor-General’s Report

The Auditor-General’s opinion was unqualified in terms of the financial statements, namely that the statements fairly represented the financial position of the NCC. However, he raised a number of areas of non-compliance with laws and regulations and internal control matters.

7.3.1.1 Compliance with laws and regulations:

· Annual financial statements, performance and annual report : There had been material misstatements on the initial financial statements received by the Auditor-General’s office but these had been subsequently corrected.

· Audit committees : The audit committee had not reviewed the effectiveness of the NCC’s internal control systems and the institution’s compliance with legal and regulatory provisions. In addition, the committee had not met with the Auditor-General annually, as required.

· Internal audit : There had been no evaluation of the effectiveness and efficiency of internal controls.

· Procurement and contract management : There had been non-compliance with Treasury regulations.

· Expenditure management : Reasonable steps had not been taken to prevent irregular expenditure of R8.5 million (25.5 per cent of total expenditure).

· Asset management and liability management : No weekly bank reconciliations were performed.

7.3.1.2 Internal control:

Reported findings were limited to those resulting in the legal non-compliance issues raised above. These related to:

· Leadership : The accounting authority had not ensured sufficient oversight over financial reporting, legal compliance and related controls.

· Financial and performance management : Management had not exercised adequate monitoring to prevent legal non-compliance, and had not implemented proper record keeping.

· Governance : Governance structures were established late so could not adequately perform their functions. For example, the audit and risk committee only met on 16 and 30 March 2012.

7.3.1.3 Other reports:

Two investigations had been on-going. The first was by the Department of Trade and Industry (DTI) on the procurement of the office accommodation lease of the NCC. The second was by the Public Protector South Africa regarding allegations of irregular procurement and recruitment.

7.3.2 Financial performance

The NCC received a transfer of R35.4 million from the DTI. This consisted of the budgeted transfer of R32.99 million, another transfer of R1.8 million and transferred assets of R0.5 million. However, the NCC spent R33.5 million, leaving a surplus of R2.1 million (6 per cent of total revenue).

Expenditure was mainly related to employee related costs of R19.9 million (59.3 per cent of total expenditure), followed by other operating costs of R10.1 million (30 per cent of total expenditure) and administration expenditure of R2.97 million (8.9 per cent of total expenditure). The other 0.8 per cent of the total expenditure related to amortisation and depreciation and finance costs.

Employee related costs include employees, the remuneration of the members of the audit and risk committee and the executive management’s remuneration. The executive management’s total remuneration consisted of 23.7 per cent of this budget.

The notes on the administration and other operating costs do not provide much further detail on the actual amounts spent on sub-categories. A further breakdown was only available for travel and subsistence costs, which was R0.47 million or 4.7 per cent of other operating expenses.

In terms of irregular expenditure, the total unrecoverable expenditure was R8.5 million, of which:

· R0.5 million (6.1 per cent of irregular expenditure) was due to non-compliance with procurement processes for goods and services between R10 000 and R500 000.

· R0.1 million (1.5 per cent of irregular expenditure) was due to two suppliers not having valid tax clearance certificates.

· R7.5 million (87.6 per cent of irregular expenditure) was linked to an invitation from competitive bids not being advertised for 21 days.

· R0.4 million (4.8 per cent of irregular expenditure) was not condoned by the accounting authority.

7.3.3 Human resources

Based on the human resource information provided on pages 102-104 of the revised Annual Report, it is unclear what the status of the NCC’s human resources was at the end of the financial year. These discrepancies include that:

· The number of positions filled at the end of March 2012 was unclear, as the NCC’s reported statistics offered a few possibilities ranging from 26 permanent staff to 33 permanent staff and 42 contract workers.

· The number of posts in the NCC’s organisational structure was uncertain. The NCC indicated 120 posts in their Annual Report; while the 2012 Estimates of National Expenditure [22] indicates 131 funded posts for the approved establishment at 30 September 2011.

· Some of the headings of the tables did not correspond with the data reported on in these tables. For example, one heading referred to the annual turnover rate per occupational band while the table contained data related to the action taken based on misconduct.

Other human resource concerns were the:

· High proportion of contract workers, 56 per cent of 75 staff members [23] .

· Number of managers (4) that had disciplinary action taken against them.

· Number of employees that were engaged in misconduct such as being absent without leave and negligence of duty.

There was no racial breakdown of staff provided. Furthermore, the NCC had exceeded its target of gender distribution of 50 per cent of female staff [24] and 2 per cent of staff were disabilities provided.

7.4 Key issues

The following issues emerged during the Committee’s deliberations:

· The methodology used in determining the reach of the public awareness programmes: The NCC acknowledged that numbers indicated may not accurately reflect the actual reach of the consumer awareness programme, as they were based on the medium’s estimated number of subscribers. Currently, the NCC did not have an accurate measure to determine the number of people reached through advertising and radio campaigns.

· The issue of counterfeit goods: The NCC informed the Committee that in terms of the Act it is only required to ensure compliance related to country of origin labelling and its mandate did not extend to counterfeit goods.

· The exclusion of pregnant women by medical aid practitioners: The NCC had completed its report on the matter and this issue of discrimination has been referred to the Equality Court . The NCC is awaiting the decision of the Equality Court on the matter.

· The relationship between the NCC and the National Consumer Tribunal (NCT): The NCC recognised the importance of resolving the difficulties that existed between the NCC and the NCT. Meetings had been arranged to address these matters

· Funding of the standing advisory committee: The NCC informed the Committee that it was in the process of reviewing the financial assistance provided to members of the standing advisory committee. Currently, members were involved voluntarily and do not receive subsistence and travel allowance nor financial assistance with respect to transport (ground and air) and accommodation.

· Investigation into the tow truck industry : No research had been done with regard to the tow truck industry but a holistic investigation into the motor industry was underway which would include the tow-truck industry.

· The misalignment of performance indicators : The NCC assured the Committee that it was in the process of revisiting its strategic plan in conjunction with the DTI to develop appropriate indicators and targets to ensure alignment with its core mandate.

The Committee is of the opinion that co-operative governance principles should be strengthened between the NCC and its public sector partners and other Commissions, in particular the National Consumer Tribunal. Systems should be robust and financial management requirements should be complied with in terms of the PFMA to enhance the positive work done for consumers to protect their rights.

8. The National Regulator for Compulsory Specifications

8.1 Overview of the National Regulator for Compulsory Specifications

The National Regulator for Compulsory Specifications of South Africa (NRCS) was established by the NRCS Act (No. 5 of 2008). It forms part of South Africa ’s standards, quality assurance, accreditation and metrology (SQAM) technical infrastructure. In September 2008, it had taken over the regulatory functions previously performed by the South African Bureau of Standards (SABS).

The NRCS’ mandate is to administer compulsory specifications in the interests of public safety and health or for environmental protection for imported, manufactured, sold and some exported products. It does this primarily in terms of three Acts, namely:

1. National Regulator for Compulsory Specifications Act (No. 5 of 2008),

2. Trade Metrology Act (No. 77 of 1973), and

3. Building Regulations and Building Standards Act (No. 103 of 1977).

Its core functions are to:

1. Approve regulated products and issue test reports or certificates of conformity before these products may enter the market.

2. Inspect and if required sample products at the premises of the manufacturers, importers and retailers.

3. Sample and test products on suspicion or proof of non-compliance and issue directives to stop sales where compulsory specifications are not met.

4. Enforce recall, corrective action, destruction and/or notification of the media and public if non-compliance is proved.

Its main divisions and departments relate to its core functions and/or regulated industries. These are the:

1. Legal Metrology division,

2. Regulatory, Research and Development division,

3. Perishable Products, Food and Associated Industries division, and

4. Non-perishable Products division, which includes the Automotive; Chemicals, Mechanical and Materials; and Electro-technical departments.

8.2 Reasons for the qualified opinion

In the year under review, the NRCS has obtained a qualified audit opinion as compared to an unqualified audit opinion achieved during the 2010/11 financial year. The Auditor-General attributes the qualified opinion to two areas, namely revenue from services rendered from exchange transactions and asset management.

The NRCS was found to have contravened the accrual accounting policies (Generally Recognised Accounting Practice (GRAP) 9) by not having an adequate system to identify and recognise all revenue from services rendered from exchange transactions. Therefore, it cannot be assured that the revenue from exchange transactions was actually R33.1 million. It should be noted that the NRCS was operating without a Chief Financial Officer for a substantial part of the 2011/12 financial year. This position was only filled in August 2012.

In terms of asset management, the Auditor-General found that the NRCS:

· Was using assets that initially cost R6.3 million, which appear in the financial statements at a zero net carrying amount. The usual practice would be to revalue the assets if they are still in use.

· Had not indicated the physical/useable conditions of assets on the asset register; therefore, the Auditor-General could not confirm assets to the value of R7.7 million. The report highlighted that adequate asset management controls had not been implemented.

· Had a discrepancy of R1.3 million between the values of assets in the financial statements and asset register.

8.3 Auditor-General’s findings on non-compliance

The Auditor-General raised a number of areas where he found the NRCS to be non-compliant. The key areas were:

8.3.1 Procurement:

· Goods and services above R500 000 : In 2010/11, the Auditor-General found that the NRCS had contravened Treasury Regulations regarding multi-year contracts above R500 000 entered into in prior years. The correct process would have been to engage in a competitive bid to source the suppliers. A similar finding was made in 2011/12.

· Goods and services below R500 000 : The required price quotations (three) were not obtained.

· Preference point system : The system was not consistently applied to goods and services above R30 000. Quotations were awarded to bidders without correctly applying the points.

· Awarding of quotations : The NRCS had not complied with Treasury Regulations by not verifying suppliers’ tax clearance certificates and not waiting for the suppliers’ declaration of past supply chain practices (regarding fraud, abuse of supply chain management system and non-performance) before awarding quotations. The NRCS had also awarded quotations to bidders without receiving their declaration on whether they are government officials or connected to such a person.

· Insufficient audit evidence that all contracts were awarded according to legislative requirements.

8.3.2 Irregular expenditure:

In 2010/11, the accounting authority was found not to have taken effective and appropriate steps to prevent irregular expenditure of R2.4 million. However, in 2011/12, this finding remains for irregular expenditure (R22.9 million) but a similar finding was made in terms of fruitless and wasteful expenditure of R0.4 million.

8.4 Auditor-General’s findings on non-financial performance

There was material findings regarding the usefulness and reliability of the non-financial performance information reported.

In terms of the usefulness of information, 33 per cent of the performance indicators related to the goal of maximising compliance with specifications and technical regulations were not clearly defined. In addition, 33 per cent of these performance targets were not specific.

In terms of the reliability of information, reported performance was not valid, accurate and complete. This was due to lack of monitoring and review of the actual recording of the underlying data by senior management, especially for the abovementioned goal.

8.6 Key issues

The Committee welcomed the frank and honest account by the NRCS with respect to its current position. The following issues emerged during the Committee’s deliberations:

· Procedures in place and action taken against suspended staff : The Acting CEO informed the Committee that a number of investigations were currently underway which were commissioned by the Ministry of Trade and Industry or referred to the Public Protector. A number of these investigations have been completed. These reports have been submitted to the NRCS legal representatives to advice on the appropriate corrective actions. The Board of the NRCS initiated disciplinary proceedings against the incumbent CEO. The NRCS informed the Committee that one matter relating to theft had been reported to the police and was currently being investigated.

· Relationship between the NRCS and the NCC: The Acting CEO informed the Committee that the two organisations were working together and were in the process of finalising a MOU that would govern such a relationship. Although consumer redress fell outside the NRCS’ mandate, the organisations worked together to ensure that their legislative responsibilities of enforcement was achieved.

· Ensuring compliance of manufactured goods: The NRCS informed the Committee that it was responsible for ensuring compliance of products within the manufacturing sector.

· Reasons for the high turnover: The NCRS acknowledged that its approach to restructuring and the actions that led to the transformation of the organisation caused a lot of uncertainty among staff. This led to staff resignations as well as industrial action.

· Concerns with respect to the perceived delay in addressing the matters which led to the NRCS receiving a qualified report: The Group Chief Financial Officer informed the Committee that normally the DTI would intervene if it became apparent that entities were experiencing problems. In the case of the NRCS, all the major role-players, namely the CEO, CFO, procurement manager and the acting chairperson of the Board, had either resigned or had been suspended, which contributed to the crisis. When the DTI became aware of the situation, it implemented the necessary controls. This crisis has led to the Minister appointing DTI officials to the audit committees of its entities to avert similar crises from occurring in other entities. A detailed rectification plan has been developed to address the Auditor-General’s findings with specific milestones and responsible individuals. This is being implemented and quarterly progress reports are being submitted to the Audit Committee as well as the Minister. The NRCS was also in the process of aligning its performance agreements of executives with the performance targets of the organisations and its strategic plans.

The Committee expressed its concern that good governance had broken down, in some cases irretrievably, with senior managers having to be replaced in particular the CEO, the CFO and the suspension of the acting chairperson. However, the Committee welcomes the appointment of another acting chairperson as well as the measures taken by the DTI to address the good governance issues. This was to immediately arrest the deterioration in the supply chain management process that had compromised tenders, which impacted negatively on resources available for the NRCS work.

9. Other entities

9.1 Companies and Intellectual Property Commission (CIPC)

CIPC was established in May 2011 in terms of the Companies Act of 2008 which merged the Office of Companies and Intellectual Property Enforcement (OCIPE) and the Companies and Intellectual Property Registration Office (CIPRO). In the year under review, the CIPC was faced with the challenge of strategically, structurally and culturally invigorating the image and reputation of its predecessor. This included building a capable organisation that is customer centric and highly motivated.

A new strategic framework had to be developed and was aimed at further designing effective and efficient business processes, a customer focussed service delivery model, strategically aligned structure, and Information Technology (IT) enabled systems, appropriate facilities and ‘fit for purpose’ common organisational culture

As one of the new entities, the Committee took a decision to closely monitor the establishment of the organisation. During its numerous engagements with the Committee, it appeared that the CIPC was moving in the right direction in implementing the necessary financial and performance management and internal controls systems.

Therefore, the Committee noted with concern that the CIPC received a qualified audit [25] with emphasis of matters. The key areas of concern highlighted by the Auditor-General’s office were [26] :

· The non-compliance with the National Treasury Framework for managing programme performance information in terms of the usefulness and reliability of performance information submitted for auditing purposes. The Auditor-General was of the opinion that 66 per cent of the indicators used by the CIPC were not verifiable. No mechanisms were in place to review planned targets for compliance against prescribed criteria before being approved. A performance system that could assist management with valid, accurate and complete reporting was also absent.

· With regard to Human Resources, the vacancy rate increased from 10.3 per cent in 2010/11 to ? in 2011/12. This was due to all posts being frozen until a new approved organisational structure was in place.

· With regard to information technology (IT) controls, the Auditor-General’s report highlighted the following findings:

o Inadequate controls with regard to the IT security policy.

o The absence of user access, designed change management, IT services continuity and IT governance controls.

· The financial statements submitted for auditing was not prepared in accordance with the prescribed financial reporting framework as required by section 40(1)(b) of the Public Finance Management Act, leading to misstatements. Corrections required, with regard to the financial statements, were not effectively implemented which resulted in a qualified audit opinion.

During its engagement with the CIPC during the 2011/12 – 2012/13 financial years, the Committee highlighted the importance of a fully functioning call centre. The CIPC highlighted the challenges with regard to the call centre and informed the Committee that it had decided to outsource part of the call centre function by creating handling support in business areas. This was done in order to reduce the level of abandoned calls by the call centre consultants due to heavy volumes of calls. [27] However, in spite of the decision that had been made to outsource some of the functions of the call centre, it proved difficult to implement due to the limitations of the network and ICT legacy applications. [28] As a result, a decision was made to establish focused query teams. The motivation for this deviation was that call centre agents were unable to cope with high volumes of calls, which remained high as queries were not resolved immediately. In this respect, the effectiveness of the decentralised call centre needs to be assessed, particularly the call resolution rate.

The Committee welcomed the stability that the Commissioner had restored and the steady progress in the CIPC achievement of its goals. However, the Commissioner pointed out the challenges in the call centre which impacted negatively on the work of CIPC. The Committee has noted with concern the emphasis placed by the AG’s office on the weaknesses of the IT controls. The DG has assured the Committee that he has instructed the CIPC to address these weaknesses immediately and appoint a permanent Chief Information Officer. He further recommended that the CIPC consider bringing in a competent firm of IT specialists to assist in this regard. Nevertheless the Committee wishes to stress the urgency in the acquisition of an appropriate IT architecture to address this issue.

9.2 National Credit Regulator

The Committee had two engagements with the NCR during the 2012/13 financial year regarding the NCR’s research report on the increase of unsecured personal loans in South Africa ’s credit market. The study found that there had been an increase in the trend of unsecured lending in relation to secured lending such as home loans since 2008. Credit providers have been actively promoting this sector to grow their markets, as the profit margins are more lucrative.

The Committee is concerned that within the current economic environment the increase in unsecured loans to consumers earning less than R15 000 per month is too high. This group of consumers is more likely to be vulnerable to defaulting on their repayment obligations, as they tend to be considered high risk and thus are charged higher interest rates. Furthermore, the percentage of households that are financially unwell [29] (‘anchored unwell’ – 4.8 per cent) appears to be relatively low but the proportion of households that are vulnerable with the risk of becoming debt-impaired (‘drifting unwell’ – 48.5 per cent and ‘drifting well’ – 30.5 per cent).

The Committee’s concern is that credit providers are not fully conveying the full cost of credit and consumers are not always aware of the implications of these loans. It therefore wishes to impress upon credit providers to fully disclose all costs including the hidden costs to consumers before granting loans. Consumers, before being granted loan, are required to signed emoluments attachment orders (EMOs) upfront in case of future defaults on loans. The Committee is concern that credit providers require consumers to sign blank EMOs which is in contravention of the National Credit Act. The Committee is of the opinion that the investigation of specific cases in relation to the EMOs should be included in the current investigation being done by the NCR .

Over-indebtedness of a household will lead to its inability to meet its basic needs and service its debt. Therefore, unscrupulous lending practices and high interest rates charged to low income households are potential catalysts for social unrest and potential destabilisation of the economy. In the Committee’s opinion this can lead to both economic and social instability.

PART IV: CONCLUSIONS AND RECOMMENDATIONS

10. Conclusions

In developing the recommendations for the BRRR, the Portfolio Committee is informed by the macro-economic, fiscal and public expenditure considerations proposed in the Medium-Term Budget Policy Statement as a way forward for the resourcing of service delivery and policy implementation over the next three years.

10.1 The Committee welcomed the Auditor-General’s Report which highlighted the key focus areas in which the DTI and its entities required significant improvement. The areas below were general areas of concern although they were not all applicable:

· The non-compliance with supply chain management procedures as required by Treasury regulations (TR) 16A6.1 which relates to procurement of goods and service below R500 000.

· The non-compliance with the National Treasury Framework for managing programme performance information in terms of the usefulness and reliability of performance information submitted for auditing purposes.

· Vacancies not being filled.

· The lack of IT management controls.

· The financial statements submitted for auditing not being prepared in accordance with the prescribed financial reporting framework as required by section 40 (1)(b) of the Public Finance Act, leading to misstatements.

10.2 The Committee expressed its concern, on other matters of interest, especially the increase in irregular expenditure for DTI, NRCS, the National Lotteries Board and the National Lottery Distribution Trust Fund.

10.3 The Committee was of the view that the terminology used by the Auditor-General’s office to classify an audit outcome, should be reviewed so as to overcome the misperceptions that could blur the robustness of an organisation’s financial management compliance culture. For example two organisations could receive unqualified opinions with the same emphasis of matters, such as financial management controls related to irregular expenditure. However one may be of a purely technical nature while the other could possibly entail fraudulent activities. In the opinion of the Committee there is no clear distinction between the two organisations.

10.4 The Committee considered the Department’s Strategic Plan and Annual Report, as well as its section 32 reports. The Strategic Plan is broadly in line with national priorities and the Department’s strategic priorities. However, the Committee noted that the first six months financial statements could not be verified.

10.5 The Committee welcomed the progress on the designation of products to increase the local content of products procured by government. It emphasised the need for all spheres of government to align planning to enhance local procurement, which is and will continue to strengthen and anchor the country’s development in employment led industrial growth.

10.6 The Committee urged the CIPC to implement the necessary mechanisms to address the challenges within its IT system to enhance the ease of doing business in South Africa .

10.7 The Committee was of the view that the National Credit Act should be reviewed to determine whether the current concerns are addressed and for the NCR to strictly enforce the Act to protect vulnerable consumers against unscrupulous lending practices.

10.8 The committee commends the department on the steady progress it has made towards achieving the key priorities to develop an enabling environment for individual development that drives strategic regional and international trade and investment to create sustainable jobs. The committee wishes to stress the importance of overcoming the weaknesses identified in this report and takes the necessary steps to build on the work already done.

11. Acknowledgements

The Committee would like to thank participants from the Ministry of Trade and Industry, the DTI and its entities at the meeting. The Committee also wishes to thank its Committee support staff in particular the Committee Secretary, Mr A Hermans, the Content Advisor, Ms M Herling, and the Researcher, Mr Z Ngxishe, 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.

12. Recommendations

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

12.1 The Department should address the weaknesses identified in the Auditor- General’s report with respect the DTI and its entities, in particular IT challenges with respect to the CIPC.

12.2 The National Credit Act should be reviewed to ensure compliance of lending institutions with the Act, and to ensure the protection of vulnerable consumers against unscrupulous lending practices.

12.3 The Committee regrets that it has been unable to provide effective oversight over all the entities that fall within its mandate. The Committee recommends that in light of this, the Committee be classified as a Group C Committee (priority committee) in order to ensure it has sufficient committee time to fulfil its mandate.

Report to be considered.

References

Auditor- General (2012) PFMA audit outcome for 2011/12 financial year. Briefing by the Auditor-General’s office on 17 October 2012.

Companies and Intellectual Property Commission (2012a) Presentation to the Portfolio Committee on Trade and Industry dated 24/01/2012.

Companies and Intellectual Property Commission (2012b) Annual Report 2011/12.

Department of Trade and Industry (2011) Annual Report 2010-2011.

Department of Trade and Industry (2012b) Annual Performance Plan 2012-2015.

Department of Trade and Industry (2012b) Annual Report 2011-2012

Department of Trade and Industry (2012c) Financial Performance as at 30 September 2012.

Department of Trade and Industry (2012d) Second Quarter Report for the 2012/13 Financial Year.

National Consumer Commission (2011) Strategic Plan 2011-2014.

National Consumer Commission (2012) Annual Report 2011-2012.

National Credit Regulator (2012a) presentation to the Portfolio Committee on Trade and Industry on 3 August 2012

National Credit Regulator (2012b) Research on the increase of unsecured personal loans in South Africa ’s credit market .

National Empowerment Fund (2011) Strategic Plan for the years 2011/12 - 2014.

National Empowerment Fund (2012) 2012 Annual Report: Growing black industrialists through partnerships.

National Regulator for Compulsory Specifications (2012) Annual Report 2011/2012.

National Treasury (2012a) 2012 Budget Review.

National Treasury (2012b) 2012 Estimates of National Expenditure.

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




[1] The Tripartite Free Trade Area will be between the Southern African Development Community ( SADC), the East African Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA).

[2] The DTI Annual Report that outlined the different Act (2012b)

[3] DTI Annual Report outline the different Acts (DTI 2012b)

[4] DTI (2012a)

[5] The DTI: Annual Performance Plan – 2012-2015

[6] DTI (2011b) Report of the AG for the period ending 31 March 2011

[7] DTI (2012b)

[8] National Treasury (2012a) and own calculations.

[9] Real values are based on an estimated consumer price index (CPI) of 5.9% for 2012/13 (National Treasury 2012b).

[10] The manufacturing development incentives consist of a group of incentives focused on the manufacturing sector. This includes the new Manufacturing Competitiveness Enhancement Programme, the Automotive Production and Development Incentive, the Enterprise Investment Programme and other smaller incentives.

[11] National Treasury (2012a) and own calculations.

[12] Ibid

[13] National Treasury (2012 a )

[14] DTI (2012)

[15] Zuma (2011)

[16] Zuma (2011)

[17] DTI (2011d)

[18] DTI (2011/12) Annual Report

[19] DTI (2011/12) Annual Report

[20] Ibid

[21] DTI (2011/12) Annual Report.

[22] National Treasury (2012)

[23] NCC (2012: 103 – Table 3)

[24] NCC (2011: 21) and NCC (2012: 102)

[25] Reasons for qualified audit captured on pg 55-56 in CIPC Annual report 2010/11

[26] PFMA audit outcome for 2011/12 financial year – Briefing by the AG office on 17 October 2012

[27] CIPC presentation to the Portfolio Committee on Trade and Industry dated 24/01/2012

[28] Ibid

[29] NCR presentation to the Portfolio Committee on Trade and Industry on 3 August 2012 – presentation makes reference to Momentum/Unisa household financial wellness index 2011 (slide 12)

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