ATC121130: Preliminary report of the Portfolio Committee on Trade and Industry on the implementation of the Industrial Policy Action Plan with specific reference to the state of the manufacturing sector, dated 29 November 2012

Preliminary report of the Portfolio Committee on Trade and Industry on the implementation of the Industrial Policy Action Plan with specific reference to the state of the manufacturing sector, dated 29 November 2012

The Portfolio Committee on Trade and Industry having considered the progress report on the implementation of the Industrial Policy Action Plan for 2011/12, and having conducted public hearings that focussed on the challenges, constraints and contribution it is expected to make on employment creation through beneficiation and manufacturing, prepared a preliminary report as follows:

1. Introduction

The Industrial Policy Action Plan is a priority policy instrument of Government over which the Committee has exercised its oversight vigorously since August 2009. This influences a more focussed IPAP2 that was more tightly aligned with the New Economic Growth Path and finally IPAP3 which prioritised core industries and manufacturing enterprises to accelerate the employment creation and economic growth in South Africa and the region. Each year the Committee focussed on different issues beginning with steel as an essential input to industrialisation then infrastructure broadly. This year in 2012 the Committee focussed on the constraints of electricity, ports and administered prices costs impose on IPAP, and the critical need for beneficiation, the measures currently in place but not implemented and measures that may require legislative action.

The revised Industrial Policy Action Plan (IPAP2) was a radical shift to grow a developmental economy by ensuring that investment targets productive sectors of the economy to arrest the decline in manufacturing and accelerate employment creation. Within the context of the New Growth Path, IPAP2 focused on value-added sectors with the potential for high employment creation and growth multipliers. IPAP also correctly identifies that monopolistic pricing of certain minerals and most semi-processed raw materials such as steel and chemicals in the form of import parity pricing has negatively affected the development of industry within South Africa , which is a resource-rich country.

2. Economic Context

The conversion of South Africa ’s mineral endowment to facilitate socio-economic development would be aided by incentives to promote local beneficiation. The primary sector has a lead role to play to enable South Africa ’s comparative advantage. This will assist in industry’s global competitiveness and can lead to increased job creation and retention.

South Africa ’s continued exports of its mineral resources with minimal beneficiation will further undermine the manufacturing sector. Currently, raw ore is exported with no or limited investments down the value-chain. The result of this is that the developmental linkages and broader manufacturing capabilities, such as research and training, are undermined.

The global recession of 2008 had a negative impact on the manufacturing sector which led to massive job losses in the sector. Currently, South Africa ’s growth is driven by credit-fuelled non-tradable sectors with the tradable export sectors languishing. A consequence of this is the expansion of the import market which has created an entrenched external imbalance reflected in the large current account deficit.

The recent Purchasing Managers’ Index registered a three year low indicating declining business confidence and a contraction in the manufacturing sector. Recent data indicates a sharp rise in imports which is at the expense of jobs with exports moving on a flat trajectory.

High administered prices have contributed to South Africa ’s relative lack of competitiveness with some of its trading partners reportedly reducing their industrial electricity rates. South Africa ’s electricity tariff hikes, together with the global economic environment, as well as domestic inefficiencies represent a real threat to the manufacturing sector.

In line with its oversight responsibility, the Committee received regular updates on the implementation of IPAP.

In order to ascertain whether IPAP has been the catalyst for growth in the productive sectors of the economy and/or whether impediments exist within the economy that could undermine the rationale of IPAP, public hearings were scheduled on the state of the manufacturing sector.

3. Economists and Stakeholders

The Committee invited the following economists: Dr Simon Roberts on the state of the economy and the impact of electricity on manufacturing, and Professor Ben Turok (MP) on beneficiation.

Several government departments and an entity, namely the Departments of Trade and Industry and of Public Enterprises and the South African Local Government Association (SALGA), were invited to comment on the impact of administered prices on the manufacturing sector. The National Electricity Regulator of South Africa was also invited to comment on the issues before the Committee. The South African Maritime Safety Authority commented on the potential and opportunities for the maritime industry in relation to industrial development with specific focus on the boat building. State-owned companies (SOC) such as Eskom and the Transnet National Ports Authority were also invited to comment on the issues before the Committee.

Furthermore, other stakeholders and companies that were sensitive to changes in electricity tariffs were invited to the public hearings These included the Manufacturing Circle, the Energy Intensive User Group of Southern Africa (EIUG), Free State Gold Fields Chamber of Commerce (FSCC), the National Foundry Technology Network (NFTN), Silicon Technology, Scaw Metals Group, the Apparel Manufacturers of South Africa (AMSA), the Eastern Cape Socio Economic Consultative Council (ECSECC), National Association of Automobile Manufacturers of South Africa National ( Naamsa ), National Association of Automobile Component and Allied Manufacturers ( Naacam ), Ford Motor Company of South Africa, and Shatterprufe .

4. Emerging Issues

4.1 Electricity Tariffs

a. The perceived negative impact of Eskom’s transition to a cost-reflective pricing regime on the economy despite Eskom’s efforts to increase tariffs at a lower rate than initially indicated.

b. The DPE and Eskom explained that the lack of infrastructure investment in prior years led to aged infrastructure, if not adequately maintained and replaced, could lead to energy supply constraints.

c. Other cost drivers related to the production of electricity included the cost of coal which has been increasing significantly above inflation.

d. Concerns were raised with regard to the widening differential between Eskom and municipal electricity tariffs.

e. Stakeholders were concerned that the current and future municipal tariffs would threaten the viability of the manufacturing sector, particularly energy-intensive industries.

f. There was a need for all energy consumers to shift towards more energy efficient usage.

4.2 Port Tariffs

a. According to the National Port Authority, the lack of infrastructure investment contributed to the deterioration of port facilities. Therefore port infrastructure needs upgrading which would be partially funded through higher port charges.

b. High port charges have increased transport costs for exports and imports which could contribute to decline in the competitiveness of the manufacturing sector.

c. There were general challenges to attract future investment from especially multinationals, as South Africa was facing several administered price hikes as well as skills shortages, low productivity levels and the perceived restrictive labour environment made it relatively uncompetitive compared to other developing countries.

4.3 Status of local procurement

a. Investment by local suppliers was limited due to uncertainty regarding future, particularly long-term, local procurement possibilities.

b. Local investors were reluctant to obtain the necessary international quality assurance certification to qualify to be included in multinationals’ global value chains because of the time and effort required to achieve certification.

c. Where the promotion of black suppliers is imperative, the DPE and other stakeholders had raised the need for on-going direct support as a constraint to ensure the delivery of quality products that are delivered on time.

4.4 Beneficiation

a. If South Africa continues to export its “ unbeneficiated ” mineral resources and import the final, beneficiated products, it could further undermine the manufacturing sector. This trend would result in the loss or decline of other developmental linkages and broader manufacturing capabilities, such as research and training.

b. The promotion of an interface which benefits the national interest is required. This should include pricing arrangements between the mining and manufacturing sectors, limited protectionist arrangements, skills development, positive procurement measures that favour domestic industry and clear taxation policies that would encourage localisation. The Minerals and Petroleum Resources Development Act section 26(3) requires that any person who intends to beneficiate any mineral mined in the Republic (of South Africa ) outside the Republic may only do so after written notice and in consultation with the Minister.

5. Preliminary position of the Committee on IPAP3

The Committee continues to monitor the impact of the steel price on manufacturing and is awaiting a report from an Inter-departmental Committee set up to unpack the impact of the steel price on manufacturing. However, as indicated in the introduction we have begun to dig deeper into other constraints, challenges and impediments while exploring opportunities to overcome these.

The most recent constraint or impediment to the manufacturing sector appears to be relatively high administered prices, particularly electricity and port tariffs. The increase in bulk energy cost by Eskom, as well as the high port charges, has a negative impact on consumers. The high electricity tariff increases implemented by municipalities appear to be cross-subsidising other municipal activities.

The relatively high administered prices contributed to the loss of many small entrepreneurial businesses, especially in the manufacturing sector, which resulted in the retrenchment of thousands of workers .

Currently, the Independent System and Market Operator Bill (ISMO) is before Parliament which seeks to establish an independent structure that is responsible for system operations, the purchase of electricity from electricity generators and selling electricity to distributors and large customers at a wholesale tariff.

6. Conclusion

As a result of the complex nature of the issues and divergent information provided by participants, the Committee wanted to develop a deeper understanding of the issues before submitting a definitive report on the hearings on the state of manufacturing sector and making recommendations for the House to consider.

The Committee will therefore schedule a colloquium from 29 – 31 January 2013 with all stakeholders to determine the way forward.

Report to be considered.