Economic Development Department 2014 Annual Report briefing, with Deputy Minister present

Meeting report

Opening remarks

The Chairperson gave a special word of welcome to the Deputy Minister, and said the Committee appreciated his attendance at all meetings. He noted that the meeting would end earlier than scheduled because some Members had other commitments.

Mr E Makue (ANC, Gauteng) informed Members that the Chairperson of the NCOP had requested their presence for a briefing with the Auditor-General and also requested that the meeting for the next day be postponed.

Economic Development Department 2013/2014 Annual Report: Deputy Minister's briefing

Mr Madala Masuku, Deputy Minister of Economic Development tabled the presentation on the 2013/2014 Annual Report of the Department of Economic Development (EDD or the Department). He tendered the apologies of the Minister, who had wanted to attend but was requested by the President to attend other engagements of the Department.

He summarised the core functions of the Department, which included developing strategies and measures to make economic growth more inclusive. This would involve, in particular, supporting and encouraging job creation, encouraging and helping all state agencies to work together for inclusive growth and job creation, providing a secretariat for the South African infrastructure programme, which was led by the President through the Presidential Infrastructure Coordinating Committee (PICC) and where the role of EDD was to ensure that anyone who was assigned a task performed, and referred any challenges to the technical team. He added that EDD, besides being a secretariat, also worked with the infrastructure state coordinators, who were state agencies like the Industrial Development Corporation (IDC), Development Bank of South Africa (DBSA) and similar agencies. EDD facilitated social dialogue because it had to interact with all people involved and who were supposed to be involved in the economy. This could include NGOs, trade unions, the private sector businesses and others. EDD oversaw the work of the IDC and its small subsidiary agencies. EDD also looked at the work of its regulatory bodies such as the Competition Commission (CC) , the Competition Tribunal (CT) and the International Trade Administration Commission (TRALAC).

The Deputy Minister noted that in the period 2009 to2014 there was serious growth in spending on infrastructure, in order to stimulate the economy, explaining that the the economy could not be left on its own to develop, and it was recognised that the growth of the economy would be stimulated by the availability of both social and economic infrastructure, hence the increase in expenditure on infrastructure which was considered appropriate to stimulate investment. He pointed out that this must be a social infrastructure that could ensure that the work force was actually healthy. There was a need for education infrastructure to ensure that capacity would be built within the economic system.

He outlined the work of the PICC during this year, and noted that EDD had been actively involved in 18 strategic integrated projects. The EDD had 70 teams in the public sector that were coordinating the work of the PICC and were tracking projects worth R1 trillion. Whilst working in these areas, areas of weaknesses were identified. In order for the EDD to implement a successful infrastructure plan in South Africa, it needed skills, and had to interact with the Human Resource Development Council South Africa (HRDCSA) to try to resolve this problem. This Council constituted of government, academics, NGOs and business, and identified all the skills development institutions and whether their activities were linked into the industry they were directed to, so it was very much involved in the adequacy of skills affecting the Department. He repeated that the EDD was handling 18 Strategic Integrated Projects (SIPs), which were targeted respectively to specific geographical areas.  For example there was a SIP that was situated in Limpopo that was meant to look at the minerals in the Waterberg area, with the aim of meeting the need to revitalise some of South Africa’s traditional sectors like mining, agriculture, tourism and manufacturing. In Waterberg area, the SIP was actually increasing the production in mining that had never been exploited as well as speaking to infrastructure, an issue that had been discussed for many years. He said that the SIPs were looking into activities that facilitated mining, agriculture, manufacturing and economic growth and addressing social infrastructure.

The Deputy Minister reminded Members that the EDD had, having noted that legislation was needed, managed to bring draft legislation to Parliament to guide the implementation of infrastructure build. The EDD was looking into beneficial activities for the economy as a whole, identifying activities that would give people the opportunity for localised employment. He said that it was well known that the Industrial Policy Action Plan emphasized the issue of localisation and the IDC had been asked to assist in this localisation. This involved communicating to the industries on the areas that had been designated; for instance, the policy requiring 75% of the products in the specific markets to be locally manufactured. This indicated both opportunities for both the local business investors and the foreign investors, and EDD had a centre where it exchanged information in relation to these practices and policies. Both the NCOP and the NA committees had questioned the work that the EDD was doing on the Presidential Infrastructure Coordinating Committee, and the EDD had managed to do work on popularising and promoting the work and knowledge of the PICC to the public.

EDD also exercised oversight over the IDC, and between 2009 to 2013, EDD noted a doubling of the approvals of credit and disbursements. There was an increase in approvals for companies that had an industrialisation initiative. Some of the projects with IDC funding included renewable energy, where over R6 billion was invested for renewable independent power producers. The IDC also funded solar projects in the Northern and Eastern Cape and these, amongst other benefits, often assisted locals to acquire employment. The Deputy Minister noted that questions had been raised on the budget of the IDC, and he explained that Gauteng took the largest share of the of the IDC budget, because of its high levels of industrialisation and the Free State and Mpumalanga took the lowest share of the budget, but the funding depended on the industrialisation opportunities in the provinces. With regard to the disbursements, manufacturing was ranking high, followed by electricity, gas, mining, and service industries. The reason for this was that the National Development Plan (NDP) spoke to prioritising the first areas, as well as lifting the new opportunities and growing areas that the local population needed. This was an indicator that the IDC was now well aligned to a specific sector.

He added that there was substantial improvement with regard to Small Enterprise Finance Agency (SEFA) in terms of budget allocation from the finances from the EDD; again, the biggest allocation went to Gauteng province. Some of the projects that SEFA was financing included a women-owned company in George employing 21 people and manufacturing coal replacements from wood pellets, with carbon-neutral emissions. SEFA was also financing Zakhe Engineering, a small engineering project in Khayelitsha, and was also looking at interventions in other areas in Mossel Bay.

The Deputy Minister moved on to report that the competition authority (CC) also recorded significant growth in achievements between 2004 and 2014, with the highest levels in 2012 to 2014. It was assisting the EDD with disclosure, unblocking the barriers of entry into investment and addressing anti-competitive activities which had the potential to bar others from engaging in certain activities and also affected pricing for the public. Over a five year period the Competition Commission had recorded over R5.8 billion imposed as fines on cartels, for offences including abuse of dominance. One example was a fine imposed on Telkom when it over charged people, and the Commission had also imposed fines after settlement procedures, totalling R1.5 billion imposed on 15 companies in the construction industry. Companies had reached out to the Commission requesting that such matters be resolved out of court in a bid to lessen the even more serious fines that could be imposed for non-compliance with the regulations of the Commission.

He noted that there were concerns about a merger in the agri-sector, expressed by consumers and farmers who were worried about the effect. The intervention of the EDD in this matter was very important because the merge process was not covered by the law of competition, meaning that affected parties were even more vulnerable. However, the merger was currently complying with the CC's regulations and rulings in every aspect around both competition and trading. Research was being done on areas in which it might be necessary or desirable to amend the Competition Act, which should take a period of around 18 to 24 months and would allow the Competition Commission to identify problematic areas and come up with solutions.

The area of trade administration was being aligned with the country's priorities, and a number of initiatives were taken. For instance, the EDD and the Department of Agriculture, Forestry and Fisheries (DAFF)  had developed a number of strategies to support long term development in the agricultural industry. The work of TRALAC also allowed EDD to identify, in relation to the scrap metal industry, where South Africa had been exporting scrap metal, and the EDD had realised that the increasing exports of scrap metal were benefiting the job situation in other countries, but not in South Africa. The ministers responsible for economic development and trade and industry had met to discuss the matter and implemented a policy that gave first preference on the sale of scrap metal to the local industries before that metal could be considered for export to foreign buyers.

Mr Masuku repeated that one of the core functions of the EDD was to unblock investment opportunities, which could be hindered by trivial matters in specific areas and red tape that required to be addressed. EDD had, through its efforts to deal with red tape, managed to assist a number of enterprises to obtain land from the government and the municipalities to facilitate investment, which then ensured that industries could set up and operate in those areas  where it was needed.

With support of the International Labour Organisation (ILO), the EDD had developed a model that enabled it to simulate the impact of some state policies on employment, as well as economic developments. For the future, EDD noted that infrastructure would still be the major area of focus, but the Department would also be turning its attention to other sectors of the economy and tightening them, particularly looking at mining, and assessing the extent to which it was really benefiting the economy, as well as giving similar attention to agro-processing and other manufacturing areas. EDD would be working with the different spheres, with provinces and municipalities, to check if there were more opportunities that would take the country forward. EDD had prioritised conflict management with the Department of Labour and the Presidency, to try to achieve peace in the workplace.

He concluded that in the last financial year, EDD had 206 targets for its front-line work and had achieved 253 deliverables. Of its 38 Key Performance Areas, it had met 26, and achieved over target in eleven. One administrative target was not met, to do with the completion of the employment organogram by the human resources division.

Economic Development Department on their 2013/2014 Financial Report

Mr Mahomed Vawda, Acting Director General, EDD, re-emphasised that the EDD had delivered effectively on its core business key performance indicators. The Department had been able to resource the Annual Performance Plan's (APP) core business delivery, although there was some room for improvement in demand planning and recruitment of staff. The management systems of the Department were settling in, and this would be enhanced as staff stability improved. Governance was improving through risk management, internal audit, ICT governance, security management and oversight support from the audit committee. In the 2013/14 financial year under review, the Department had spent 99.9% of its allocated budget.

Ms Semphete Oosterwyk, Chief Financial Officer, EDD, summarised the 2013/2014 financial report for the EDD (see attached document for full details). She said that the EDD needed sufficient financial resources to perform its work. For the 2013/2014 financial year, the Department was allocated R771 million, and the bulk of this money was transferred to its entities, dealing with administration, economic policy development, economic planning and coordination, economic development and dialogue. EDD had managed to improve its spending patterns in each successive year. She pointed out that when planning, the EDD was basing its plans on compensation of employees in the funded posts. In the 2013/14 financial year, it had 166 funded posts and the APP planned to fill 146 posts. During their adjusted estimate process, EDD looked at the budget spent in the first five months of the financial year, and used the same projection for the remaining seven months, in order to get almost accurate projections on spending. The EDD had realised some savings during the adjusted estimates, and had to accept an 8% limitation. Savings realized in the area of employee compensation were utilised to absorb; the increased rental for the additional space that EDD had acquired within the Department of Trade and Industry (dti) campus. Legal fees were incurred when the Department had to respond to claims in relation to competition matters or economic regulatory bodies that EDD oversaw. The Department had prioritized the PICC publicity campaign with its savings of R19.1million. The Department also dedicated some of the savings towards purchasing video conference facilities.

Ms Oosterwyk said that when the Department was finalising its Estimates of National Expenditure (ENE) for 2014/2015 the National Treasury had advised that the SEFA allocation would be cut by R50 million for the 2014/2015 financial year. The Department deemed it fit to re-prioritize within the Department and try to amend the budget allocated. She reminded Members that SEFA basically provided finances for small businesses, at a lower interest rate than was charged by other financial institutions. The Minister and the Director General felt that SEFA needed to be prioritised, despite the budget cuts, and thus transferred R15 million from the remainder of the budget to support SEFA's activities, although this still left a R35 million deficit that needed to be financed. There were 166 funded posts but the EDD had only managed to fill 139 posts. The balance of funding budgeted for posts was used to finance areas of the Department showing a deficit.

She explained that, in general, the EDD did not generate revenue as such; the money it received represented fines and penalties that were collected through the Competition Commission, following rulings by the Competition Tribunal. The money collected had to be transferred, in terms of the Competition Act, to the National Revenue Fund. The interest and dividends listed represented income relating to shares that the EDD held in the Industrial Development Corporation. The Department’s 1.6 million shares in the IDC yielded R50 million annually and R229 000 was interest earned from its commercial bank account.

The irregular expenditure incurred by the Department had increased, from R61 000 in the previous year to R592 000 in 2013/14. The reasons related to,amongst others, one appointment of a tax consultant without a tax clearance certificate and another instance where although the tax consultant had submitted a certified copy of the tax certificate,the Auditor-General required the original and deemed the expenditure irregular in the absence of this document. EDD had engaged other service providers whose tax clearance certificates lapsed during the period of their engagement, resulting in this expense being regarded as irregular. In another instance, service providers were engaged without the necessary quotations having been obtained. In some instances, the EDD had paid overtime, and approved it after the fact, which was also deemed irregular. Since then, EDD had put controls in place to investigate and mitigate the irregular practices and address the weaknesses in the system. In future, the Department would only process payments when an original tax clearance certificate was available, would not solicit quotations from suppliers without making sure that the service providers on the database had provided a valid original tax clearance certificate, and was going one step further to ensure that, before processing payments, the tax clearance would have been verified. She noted that most instances relating to non-compliance with supply chain management (SCM) processes arose when the SCM unit was not involved in procurement, but this too had now been corrected, by initiating the whole process within that unit. Suppliers had been warned that in future no procurement would be permitted to happen outside those processes.

Ms Hayley Rodkin, Acting Chief Director, EDD, repeated that there were 166 approved posts in this financial year, but only 136 were filled. Three additional posts were created and added to the structure, as reported in the Annual Report. Overall, the Department had a vacancy rate of 18%.

Ms Oosterwyk reported that the EDD had received an unqualified audit report from the Auditor-General but there was an emphasis of matter that related to the disclosure of revenue. EDD had received approval to depart from what the standards required, from the office of the Accountant-General. The AG held the view that EDD should not reflect the revenue it collected and paid over to the National Revenue Fund because it did not generate this revenue itself, because the revenue resulted from fines that CC neither budgeted for nor actively generated as part of its mandate. However, an agreement had been reached now between the offices of the AG and Accountant-General that the EDD, for the sake of transparency, should indicate this kind of revenue collected in its books.

The EDD had needed, on several occasions, to correct its financial statements during the audit process and there were three areas that had to be re-submitted for audit, relating to disclosure notes, receivables and accruals and the assets disclosure notes. EDD had been compiling its monthly disclosure notes which were submitted on the tenth day of each month. Ms Oosterwyk conceded that in relation to the receivables, it was "inexcusable", but there was a challenge with EDD compiling two sets of financial statements; one in Excel, which had controls showing when additions were being made that did not add up, and a published version where a Word document was created for the numbers. There was a mistake in the Word document, where one line had been missed. The AG highlighted this mistake, and regarded it as a material error that required to be noted, although the Excel chart was correct. With regard to approvals, the discrepancy related to a claim that the EDD received from the Department of Justice and Constitutional Development, in relation to defending a scrap metal issue claim, where EDD did not record it as it was under the impression that the service was being rendered by the other department on its behalf. It had received the claim in April 2014, and did not agree that it should have been classified as an accrual, but the AG took an opposite view. Eventually there was agreement that it must be disclosed as an accrual, but the failure to do so initially was regarded as a material misstatement, as it involved a R1.6 million claim. With regard to the disclosure note, there was a new requirement for the EDD to include finance leases, add them on to the disclosure note, and subtract them again. This was done for the financial year under review, but the previous 2012/2013 financial year had one column missing, making the disclosure inconsistent with the specified practice and rendering it impossible to compare the financial statement figures with the additions in the disclosure note. She commented that the EDD was uncertain that it should be working on the basis of implications, but since that had been expected and had to be corrected lest the EDD received a qualified audit result, the EDD had done as instructed, although it did not agree with the ruling. EDD had not engaged with the Office of the Accountant-General, merely complied, and she stated that this was a lesson for the EDD to do as it was told, rather than what it believed made sense.

Discussion

Mr Makue commended the Deputy Minister and his team on the clear presentation. He said that he thought that EDD helped young people to acquire skills and would in all probability be cooperating with other departments, particularly with the Department of Higher Education and Training. He wanted more information on the imparting of skills, pointing out that shortage of skills was one of South Africa’s biggest challenges, and it would be beneficial to development if the EDD could address it.

Mr Makue asked why the vacant positions had not been filled, although he acknowledged that the presentation's concluding remarks had pointed out that this issue would be addressed, but needed to know when it would be addressed, and when the posts were likely to be filled.

The Chairperson also requested more clarity on the critical vacant posts that needed to be filled in order to streamline, stressing the distinction between the vacancy rate and the filling of the critical vacancy posts.

Mr Makue had the sense that there was a lot of cooperation between the EDD and Department of Small Business Development, and the EDD was funding several small business development projects, activities and initiatives. He wondered when this dependency would cease so that the small business projects financed their own activities.

Mr W Faber (DA, Northern Cape) commended the Deputy Minister also on the presentation, and commented that it was unfortunate that only one day was allowed for questions, because the substantial subject matter needed a week. Members in this Committee represented provinces and he had been particularly alert to mentions of the Northern Cape, his province. Whilst the presentation had shown that there was a lot of work being done there, he requested detailed information on the specific projects in the Northern Cape, asking where and what the 13 projects were, how much money had been allocated for each project and, most importantly, how many jobs had been created by these projects, because no statistics on job creation in Northern Cape seemed to be available, which created a huge problem for him when carrying out oversight. He had often queried job creation figures from the investment projects like the Italian solar firm, in the area. He noted that he also received complaints that the employees had been exploited by some of their employers in the investment firms and stressed that, no matter the importance of the investments, the companies could not be allowed to exploit the local people and, for instance, pay them less than minimum wage. He also wanted more information on the training works that were supposed to be set-up in the Northern Cape, which had frequently been asked about by local populations, yet he could not get an appropriate response. Furthermore, he wondered why the works, which were to be performed in the Northern Cape, would apparently be staffed by people from Johannesburg, taking away employment opportunities for the people in the Northern Cape.

Ms E van Lingen (DA, Eastern Cape) said that it was important for the Committee to know about SIPs because they were part of the Committee's mandate, which covered nine different portfolios, including transport, economic development, trade and industry, tourism, and small businesses. She noted that complaints were voiced that not enough had been done to promote the activities of the PICC, but the EDD indicated that it had spent R19.1 million on billboards and advertising. She wondered why she often received a half-baked answer whenever she asked about the projects that the Department had in the provinces. She wanted to know the status of the current projects, as well as the future projects that were going to be implemented, and the budget allocations for their implementation. Unless the EDD gave a clear picture of all the projects, it would not be moving anywhere. For instance, clarity was needed on transport systems across the provinces in order to develop them. She also requested more information on the SIP project from Gauteng to Northern Cape, saying that insufficient information had been given. The Committee needed to know where e-tolling was going, particularly in view of the institution of court proceedings.

Ms van Lingen agreed with Mr Faber that the Committee needed to know what was happening in each province individually, and Members needed full information on projects in order to be able to properly assess the Annual Report.

Ms van Lingen noted that page 12 spoke to R6 billion spent on renewable energy and independent power producers, a great achievement although she personally would agree with even more spending on similar projects that brought economic development and job creation in rural areas. She requested clarity on the IDC project and whether it had created the much anticipated job opportunities. She requested information on the investment made by the investor on the IDC project, saying that she believed that investors should contribute two-thirds of investment to projects, and the amount was related to the number of jobs created.
Ms van Lingen asked the Chairperson if the solar firm in Upington had submitted its trust deed to the Committee, for it to assess whether it was worth encouraging the local population to acquire shares in the firm, since that firm had indicated that it intended to execute its mandate differently if there were attempts to compare to other investors.

The Chairperson responded that the trust deed had been submitted, and it would be circulated and discussed by the Members at a future date.

Ms van Lingen continued that she was very concerned about the Department’s audit outcome and wondered whether EDD had put all the checks in place in order to ensure that the same mistakes were not repeated in the current year. She was aware that it was often not possible for an entity to fix the problems giving rise to an unfavourable audit result within one year, and wondered if this applied to EDD, or whether it could guarantee that it would receive a clean audit in the next year.

Ms van Lingen requested more information on the green project funded by the IDC, including what specific projects had been funded, where the projects were, how much money had been spent on the projects and what was their progress

Ms M Dikgale (ANC, Limpopo) inquired why there was no allocation for Limpopo shown on slide 28 of the document presentation. She requested clarity on how allocations were made to the different provinces, and on what basis money was distributed. She was pleased that the EDD was not attempting to hide anything from the Committee, and was open about exactly what was happening in the execution of its mandate. She wander clarity on the budget spending; although the presentation indicated that spending was at 99.9%, other statistics and figures in relation to the non-filled posts seemed to indicate to the contrary. She had thought that the variation of budget unspent would probably be closer to 1%.She further noted that the EDD had not used all money, but stressed that when it did receive money, it should be striving to spend in full on development as the EDD was supposed to be the "foot-soldiers" for the rural poor on the ground. Furthermore, she cautioned that when a department failed to spend, this could negatively affect its future budget allocations.

The Chairperson thanked the Committee members for their questions and apologised to those who were unable to ask questions because time was short. He requested that the EDD send a written response to all questions raised, and expressed the hope that future meetings would allow more time for interaction.

The meeting was adjourned.