The Enterprise Organisation (TEO) Incentive programmes, Climate change impacts on future trade relations: Department's briefings

Meeting report

An overview of performance of The Enterprise Organisation's (TEO) incentive programme: Department of Trade and Industry briefing
Ms Francisca Strauss, Chief Director: Incentive Administration, Department of Trade and Industry, outlined what this Department (dti or the Department) was doing in relation to incentive programmes. She presented the number of programmes that were created to the Committee and said that the critical infrastructure programme had created 31 778 direct permanent jobs, the enterprise investment programme had created 3 134 direct full time equivalent jobs, the automotive investment scheme (AIS) created 15 014 direct full time equivalent jobs, and business processing services created 3 944 direct full time equivalent jobs. However there were no estimates available for the jobs that had been created in the film industry because they were all temporary jobs. In addition, there were 1 426 and 10 545 direct permanent jobs created under the co-operative incentive scheme and the export marketing and investment scheme respectively.

The dti incentives were focused on investment, job creation, and competitiveness and broadening participation. The five programmes that accounted for most of the reported job creation were automotive support under AIS, enterprise support under EIP, infrastructure support under CIP and Industrial Development Zone (IDZs) as well as export promotion under EMIA.

Discussion
Mr J Smalle (DA) said that the most successful programme was the automotive investment scheme and the Department had put much effort into expanding the sector. One of the biggest problems was the repayment of the investment back to the consumer or the industry. He asked what caused the delay of the payments, whether the problems were addressed, what turnaround time had been set in order to deal with the issues and whether there were any new ventures in the industry that the dti was looking at, that could ensure that there was efficient management of funding of new investors.

Mr Smalle questioned whether, in the evaluation of the industrial development zones (IDZ), there was a contingency plan or research done in order to determine whether the programmes were cost effective.

Mr Smalle asked whether the dti was looking at private partnerships and whether the private partnerships would be run by the dti or by the private sector.

Mr T Harris (DA) said that the presentation had only answered one question. He suggested that the presentation should have been far more elaborate and it should have set out the amount of money that the dti had spent on the programmes.

Mr N Gcwabaza (ANC) asked whether the jobs that had been created were created during the 2010/11 financial year, or related to 2011/12. He asked for a breakdown of the jobs that had been created by the IDZ.

Mr Gcwabaza asked how much money had been spent in the film industry and what challenges had been faced that prevented an estimate being done of the number of the jobs.

The Chairperson said that the Committee expected written responses from the dti to questions that they could not answer.

Ms Tumelo Marivate, Chief Director: Incentive Administration, dti, responded to the question on delays in payment to the AIS by saying that what the dti had presented were the number of support programmes for the automotive sector, in particular the automotive investment scheme. There were no delays in payments under the automotive investment scheme and the average turnaround time to make payments to companies was between five and six weeks. The dti had enough budget to support the programme, as there was R947 million that was available for the programme.

Ms Strauss responded there was continuous planning, research and meetings with National Treasury in order to determine where to put funds. She explained that the figures for jobs did not necessarily represent those created in one particular year, but was an estimate of the number of jobs that companies were expected to created. The jobs were counted by the dti at the time that it made the payments under the schemes. There were different ways in which the dti compiled figures on the number of jobs that had been created for each and every programme. The dti did not have the number of jobs that had been created in the film industry, because a person could be employed in four movies in a year, and the dti wanted to avoid a “double-count” of the jobs. The best way to determine the jobs in the film industry was to have a full time equivalent. The dti had started that process, which involved questions being asked of an applicant about how many people that applicant employed, and how many hours they worked. Based on the hours, the dti would then work out a full time equivalent figure. The dti would try and report on such figures in 2012.The information on the jobs in the film industry was available, but it was not yet information for the full year.

Mr Smalle noted that there had been a R230 million investment to Limpopo under the manufacturing investment cluster, in particular the strategic industrial projects. However, there were no direct jobs that had been created. He asked how that was possible.

Mr Smalle also asked how the The Enterprise Organisation (TEO) planned to improve the level of expenditure on incentive schemes, in light of the fact that there had been underspending to the amount of R253 million in 2010/11.

Mr Harris stressed that the document presented was not good enough. The Committee and the Department had met in July and the report was also not good enough then. The information was spread across the whole presentation. He suggested that the dti go back and draft a summary, in tabular form, that included each of the clusters, the jobs that had been created in the clusters, and how much money had been spent. It was extremely frustrating to try and read the document. The Committee could not conduct a proper oversight with the information that had been submitted by the dti. He was, however, satisfied about the number of jobs that had been created.

Mr B Radebe, who was acting as Chairperson at this point, agreed with what Mr Harris had said. He urged the dti to submit the summary by Tuesday 15 November 2011.

Ms Strauss noted these comments.

Mr Gcwabaza argued that it was possible to determine the number of jobs in the film industry because the film industry was based on contracts. There was a need to determine the number of jobs, based on these long and short term contracts, in order to see whether the money that had been allocated was being spent properly. He requested that a written submission be given to the Committee that addressed the movement of jobs in the films industry. He pointed out that the Government was working towards creating five million jobs and if the dti could not account for the jobs created in each financial year, then the Committee would not be able to answer questions on how the dti incentives were contributing to that job creation target. He asked how the dti monitored and followed up to ensure that the funds that had been disbursed had achieved the number of jobs that had been projected.

Ms Strauss commented that a written submission of jobs in the film industry would be submitted to the Committee.

The Acting Chairperson asked why no funds had been allocated for the Northern Cape province, in light of the fact that the province was economically challenged despite having so many resources. The Chairperson also asked what had been done, in terms of the black business supply development programme, to ensure that the provinces that were lagging behind were taken on board.

Ms Strauss responded, in relation to the questions on the Northern Cape, that the dti had not received any applications from the Northern Cape said that the dti had not received any applications from the Northern Cape, so there were no figures.

Ms Strauss also pointed out that the slide that showed that there were no jobs created in Limpopo was not a misprint. The jobs that were on the slide were the jobs that had scored points under the Strategic Industrial Project. The jobs in Limpopo province had failed to score points, hence they were not reported. The Strategic Industrial Programme (SIP) was under tax allowances. The dti evaluated the jobs, based on the mandatory requirements, and if they passed the mandatory requirements then a point scoring system was applied. Entities would receive points if they created jobs, or if the jobs were energy efficient, or if there was linkage of business, and innovative processes. If the entities failed to score points on jobs creation, they could still score points on skills and training. If they scored five or more points, they were approved.

Mr Smalle asked whether the figures presented to the Committee were then less than the number of jobs that had been created, if some jobs had failed to pass the points system. He requested that a document that explained the point system should be submitted to the Committee, together with information on the jobs that had been created but not recognised on the point system. He also pointed out that the way that the dti scored its jobs disadvantaged people in the rural areas.

The Acting Chairperson highlighted that it seemed that the dti was creating more jobs, but there was an undercounting of those jobs. He agreed with the request of Mr Smalle.

Ms Marivate responded that the strategic industrial jobs were jobs that were capital-intensive. The number of direct jobs linked to the applicant may be very low, despite the fact that the projects could create a large number of indirect jobs.

Ms Strauss also addressed the questions on how the dti monitored and evaluated job creation, saying that whenever the dti received an application it should be based on a projection. When the dti paid the applicant, a more thorough check would be conducted. Monitoring was done on an annual basis. The dti would ask the applicant if the applicant was still in line to create the number of jobs that it had projected. The dti would then go out and check the number of jobs that had been created. If the applicants failed to achieve the number of the jobs that they had projected, they would either be disqualified on certain points, or they might even have a disqualification of the whole project. In addition the dti also relied on the audit reports to assist with its monitoring.

Ms Strauss commented on the remarks about the provincial spread. The Black Business Supplier Development Programme (BBSDP) represented a new programme that was still in its initial phases. The dti had trained network facilitators, since there were few network facilitators in some provinces. Provinces like Limpopo had done well.

The Chairperson asked what qualifications were needed to become a network facilitator, and how they were recruited.

Ms Tsepiso Makgothi, Chief Operations Officer: TEO, dti, responded that the dti targeted graduates with commercial background, but did not rule out people who had the necessary experience. The dti had trained network facilitators throughout the country.

Ms Strauss responded that the dti sent out an advertisement asking people to apply to become network facilitators. There was strict screening and the applicants had to undergo proper training because they had to provide adequate advice to companies. In addition there would be a dedicated Chief Director taking care of Black Business Supply Development Programme (BBSDP).

Mr Smalle highlighted the sustainability of the various schemes incentive programmes, saying that this was a very important point. He asked whether any information on the failures of any of the incentive schemes was available.

Mr Gcwabaza said that one of the critical targets of the five priorities was rural development. There was need to see an analysis of the jobs that had been created in the rural areas, and a comparison between urban and rural areas. He too stressed the need for a much more focused approach to rural development.

Ms Nonceba Mashalaba, Chief Director: Products and Systems Development-TEO, DTI, added that with regards to the summary of the whole report, a spreadsheet had been prepared but it was overshadowed by the real presentation. However the dti could provide the Committee with a summary spreadsheet as requested by Mr Harris. In terms of reporting about the successes and failures of their incentive schemes, the dti had taken note of the points, and had recognised this as a weakness. The dti had established a monitoring and evaluation unit. Before the end of the financial year the Minister was going to launch a comprehensive report on incentives that showed the trends in jobs.

Ms Marivate added that there was information on work that the Department had done on some of the incentives programmes, such as impact studies and the outcomes of the studies. The impact studies had informed the structure of the incentives. On the issue of jobs, the dti had made a distinction between projected jobs and supported jobs. Supported jobs were the jobs that the dti was able to verify. Payments were made on the basis of applicants reaching certain milestones in order to ensure that the project achieved the key economic impacts, including creating jobs. One of the problems was that applicants were failing to create jobs at the rate that they had originally expected, because of the economic slowdown. The dti was looking at relaxing requirements without jeopardizing the objectives of the programme and the government.

Mr McIntosh asked whether there were any figures on jobs that had been created by the IDZ, whether the dti considered the creation of potential jobs at the Dube trade port in KwaZulu Natal, and whether there were any ideas to put an IDZ in Durban.

Ms Mashalaba said that the dti had seen some weaknesses in the way that the IDZs were operating. The Dube port was not part of the IDZ but the dti was working with other stakeholders in order to review the policy on the economic zones programme. There was reason to believe that economic zones could be moved elsewhere from the coastal areas. There were challenges in the government model on IDZ, including the aspect of stakeholder coordination, and the new funding model would address this. There was a need to rework the strategies, based on the challenges identified, if the dti was to move from the concept of IDZs to economic zones. In 2008 the dti conducted a macro-economic study on IDZ, but this did not look at specific programmes.

The Chairperson asked whether there were any challenges that related to fraud, how the dti had addressed this and what preventative measures were put in place.

Ms Makgothi said that a number of internal processes had been put in place to try and mitigate fraud, including training that was provided to employees, including those who worked at the regional offices, who worked directly incentives. The dti had a database of registered accountants and chief accountants who verified some of the information that was provided by various companies. The accountants would not risk their professional integrity, and had properly verified the companies. However, dti was aware that some people tried to inflate their figures, and therefore had people with various skills serving on the adjudication committee, to try to prevent fraud.

Ms Strauss added that there was a regular risk assessment where the dti identified areas that might pose some risk. More emphasis would be put on the claims stage, and where dti doubted a claim, it would be able to call for a forensic investigation.

The Chairperson highlighted that half of the Committees budget went to the dti. He asked whether the dti was happy with the work done and what challenges it faced.

Ms Strauss replied that the dti would never be fully satisfied, as there were areas where improvements were needed.

Mr C Weber, Director: Accounting, dti, said that there was under spending on incentives, and the dti was taking this seriously. All incentives were monitored every two weeks. The number of claims was not in the hands of the dti but in the hands of the claimants. The dti had asked the National Treasury to relax some of the virements that the dti wanted to do under incentives in order to ensure that it was able to target each new incentive. From the adjusted table that was going to be presented, the Minister was going to lower or adjust some of the incentives. The dti had spent 51% by the end of the second quarter.

Impact of Climate change on South Africa's Future Trade Relations Presentation
Dr Brendan Vickers, Chief Director: Research and Policy, ITED Division, dti, gave a brief presentation on the linkage between trade and climate. He said that climate change physically affected trade, and trade affected climate change both directly and indirectly, and that whilst climate change policies affected trade, trade policies could also be used as mechanisms to address climate change. He outlined the context of the United Nations Framework Convention on Climate Change (UNFCCC) was given. Trade was not formally part of the UNFCCC. However trade was the “elephant in the room that no one was talking about”. Trade was indirectly mentioned in the UNFCCC and the Kyoto Protocol. Response measures were measures that addressed climate change that implied changes in the conditions for trade. The issue of response measures in the UNFCCC was introduced by the oil exporting countries, who were concerned about the potential of lost revenue that would result from fewer consumers of oil. All developing countries were vulnerable to the response measures. There was need to shift global competitiveness from north to south, and from west to east. Developed countries were using response measures to reclaim their positions in the global economy.

There were a number of climate change policies or response measures that affected trade. Border Carbon Adjustments (BCAs) or tax had been placed in order to prevent "leakage" of trade to more carbon-intensive economies. Subsidies had been made, that affected production costs of climate-friendly technologies, as well as competition globally. Non-Tariff Barriers (NTBs) included technical regulations or government regulations and private standards, such as product carbon footprint (PCF). One good example of this was that consumers in developing countries were discouraged from buying flowers from Kenya, being told that the carbon costs were high, because these flowers had to be flown in. However, this ignored the fact that the competitors in Netherlands, whilst not having to airlift their flowers, in fact produced triple to five times the carbon emissions in growing their flowers because, unlike Kenya, the flowers were not grown organically. The dti was working together with its partners in the developing nations to try and unmask this hypocrisy. Lastly there were bunker fuels that affected the aviation and maritime industry. The regulation of this industry could raise the cost for exporters.

There were two challenges for South Africa. Firstly, its exports were carbon intensive. Consequently South Africa was very vulnerable to the response measures. South Africa mainly exported basic non-ferrous metals such as aluminum, brass and cooper, basic iron and steel, motor vehicles, parts and accessories, machinery and equipment, basic chemicals, food, and paper and paper products. Secondly, South Africa was very isolated from all of its trading partners. From 2012 Europeans would be introducing an emissions trading scheme, which was being opposed by both developed and developing countries. The European Union (EU) would be imposing an additional international tax on airlines that were flying in the EU, and this would add to costs.

Two case studies were given to highlight the potential impact on South Africa. The first one related to the border carbon taxes and the other one to  the growth of private standards. Border tariffs were used to deal with competitive concerns particularly in Organisation of Economic Cooperation and Development (OECD) countries. None of the tariffs had been levied as such but there was a range of proposals in wealthy countries to introduce border carbon taxes on the carbon intensive programmes from developing countries. The United States of America (USA) was leading this. In 2009 USA had passed a Bill the America Clean Energy and Security Act (ACESA). No climate change legislation would be passed without any reference to border carbon tax in Washington. 164 sectors were identified in the European Union (EU) that were vulnerable to leakages, and those covered 80% of its imports. There was a growing pressure on other developed countries such as Canada and Japan to adopt similar measures. The least developed countries would be exempted from the ACESA, as well as those countries who had entered into bilateral and multi-lateral sector agreements with the USA, as well as countries that had a lower greenhouse gas (GHG) that the USA.

There were two trade agreements between South Africa and the EU, which were the Trade Development and Cooperation Agreement (TDCA) and the Generalized System of Preferences. South Africa had free market access to the EU with the exception of aluminum and agriculture products. Any border tax that the EU might levy would raise the current trade. There were further challenges when it came to trade negotiations. South Africa wanted more access for aluminum in Economic Partnership Agreements (EPAs), but to get more access for aluminum South Africa would have to pay and reciprocate the favour with something else. South Africa could open up a sector in order to have more access for aluminum, but this could be rendered useless if a carbon tax was imposed on the aluminum products. The dti was aware of this and they would approach the discussion more sensitively.

According to a study by the International Centre for Trade and Sustainable Development (ICSTD), 28% of South African products to the EU were going to attract taxes if there was a regime change. This was particularly significant compared to other countries, since 30% of South African exports were destined for the EU. The potential cost would be over US$720 million per annum. The most affected products would be gold, platinum, iron and steel.

The second case study looked at the importance of product carbon footprints (PCF). Unlike BCAs, PCFs covered consumer goods, and not commodities. These goods were predominantly food items and textiles. The consumer was given a choice on which products to buy. The South African Renewable Initiative estimated a global loss of US $63.3 billion, largely in food products to the EU, as a result of private carbon labels or private standards. In the United Kingdom (UK) there was pressure on supermarkets to buy South African wine in bulk, and increasing pressure on South African exporters to sell their wine in bulk. This would then be re-bottled in the UK in standard green bottles. This was because of concern about the emissions in transporting the wine and inefficiencies in the bottling and shipping processes. The dti suspected some protectionism in this area. If this was followed through, it would impact on the South African packaging industry and the upstream industry, particularly in the Western Cape. Figures from one of the industries revealed that they could lose up to R400 million in revenue by 2012, and that there could be significant job losses.

Industries were thus encouraged to bring examples that would help South Africa to build its case. It wanted to establish a forum on response measures that would provide a platform for direct discussions with other UNFCCC parties, and share information and experiences. South Africa was a very strong supporter of this forum. There was a lot of pressure on parties in the World Trade Organisation (WTO) to talk about trade and climate change but the WTO was resistant, and was waiting for a signal from the UNFCCC. The WTO had some exceptions, contained in Article XX(b) and (g), that enabled countries to deal with issues of the environment, but these exceptions were abused.

Discussion
Mr G Radebe (ANC) was uncomfortable with what the presentation had revealed. The West had grown to its current levels because if had used “dirty” and non-green energy, yet those very same countries who had benefited from doing so, and produced so many emissions, were now seeking to place barriers before countries who had not contributed so much to the degradation of the environment. He asked why the issues of trade were sidelined in the COP17 agenda and why they were allowed to be a “silent elephant”. In order for any country to grow it must export. Barriers were in essence denying the growth of least developed countries. The dti should be doing more. He noted that now that Britain and America had had their heyday in the past two centuries, the 21^st century should be the century for Africa.

Mr Smalle asked whether there had been negotiations by other firms to relocate within South African borders, and whether the South African nuclear energy was going to be paid for by various sectors now or later on after the project.

Mr Gcwabaza agreed that a depressing state of affairs had been presented. The attitude of the developed nations on this matter was an attempt at final subjugation and destruction of developing countries. He asked to what extent the focus on the value added goods, as identified, would minimise the negative effect on the envisaged border tax on carbon intensive goods.

Mr McIntosh said that the presentation was mind stretching and challenging. He was concerned about the forum that was supposed to be established. He asked whether that forum would include all the parties, or it would include major trading countries. He also asked what the impact would be on export, if a border tax on carbon intensive products was placed on aluminum products.

The Chairperson asked for more information on the impact of PCF standards.

Mr Vickers said that there were differences by the parties on how important trade was and about the appropriate forum. Some parties were of the opinion that trade and climate issues should be discussed in the WTO, which was a rule setting body backed up by enforced adjudication. Others, including South Africa, were pushing for a stronger focus on trade. Other countries were of the opinion that the UNFCCC was adequate enough, because they were looking for a cover for their protectionist policies. South Africa and partners in China were pushing strongly for discussion of trade on the COP agenda. There was a need for stronger langue in the UNFCCC, but those who were proposing this were facing opposition from developed countries, and even some of the developing countries. In terms of border carbon taxes and denying growth, he said that the dti was trying to uphold the principles, such as common but differentiated responsibilities, and historic responsibility for developed countries. He assured the Committee that the dti was attacking the issues head on.

Mr Vickers told Members that none of the South African companies had shown any intention to leave the country because the border tax issue was a debate that was still theoretical. However no industry would suffer 100% carbon leakages.

Mr Vickers said that although he did not have an answer on nuclear technology, dti had processes around developing wind and solar strategy. Renewable energy was within the dti agenda. The IPAP focus sectors would have  to become as green as possible in order to reduce the carbon footprint and the carbon intensity.

Mr Vickers said that the forum would be inclusive of all parties to the convention. It was also open to international non-governmental organisations and think tanks.

Finally, he noted that Aluminum and cement products were the prime targets for border taxes. He said that the dti could do a simulation exercise to determine the potential job losses.

Mr Macintosh made a comment that the simulation exercise on the aluminum industry would be a good exercise because the industry was capital intensive. It would be a pity if the industry failed to expand and if border taxes were imposed.

The Chairperson asked for figures of job losses as a result of the PCFs and for more clarity on the amount of carbon GHGs emitted in the life cycle of a product.

Mr Vickers again cited the example of cut flowers from Kenya. At present, countries were focusing only on the emissions from transporting the flowers, and were not looking at the prior processes from planting of the seed, through cultivation, to harvesting and packaging. Consumers in developing countries were given the choice whether they wished to buy a product that was flown in (indicated by an aeroplane on the packaging), or to buy a product that was locally produced, but they were not informed of all the other processes, and this was hypocrisy. The International Standards Organisation was developing a standard for the methodology of calculating embodied carbon in all goods, but South Africa and other countries, including Argentina, were resisting this standard.

The Chairperson asked what risk there was to some of the measures that were being developed. She noted that there were articles that were broadly interpreted to justify the measures, and she asked how the developed countries could address the development of measures, and what instruments could be used by dti to address the problems.

Mr Harris asked to what extent the dti and other companies understood the implications of the trade realities and the potentially protectionist measures, whether other emerging economies were going to use protectionist measures, and what the best and worst outcomes for South Africa could be, in terms of the PCFs and BCAs.

Mr Vickers said that parties were forum shopping on how to deal with climate and trade issues. If the issues of climate were canvassed by the WTO, then they would be binding on countries. Singapore had made a request to the WTO Committee on Trade and Environment to start discussing border carbon adjustments (BCAs). Developed countries intended to urge the Ministerial conference in Geneva to look at a new mandate for the Committee on Trade and Environment, to address issues more strongly, but this had not been confirmed as yet. Others were of the opinion that the UNFCCC should be strengthened. He stressed that there was need to distinguish production process methods, especially when it came to products such as aluminum. There was a slow but steady recognition of the importance of greening the economy. There was a possibility of carbon tax from emerging economies such as China, to prevent them from vulnerability to the emissions trading scheme from the developed countries. This could be a challenge to South Africa, but it could deal with the issue by producing an equivalent tax.

He noted that the dti was looking at was the establishment of a public forum, to be inclusive of all parties and to include external experts who could provide evidence. The dti wanted to see the forum being established permanently and being held on a regular basis. The dti also wanted Article 3.5 of the UNFCCC to be strengthened. The worst outcome for the dti would be that such a forum could not be established.

The Chairperson said that the issues that had been raised were very important. She asked for answers on the outstanding issues to be submitted in writing by 15 November. It would appear, from what had been presented, that all of IPAP 2 was under threat. There was a need for economic development to include job creation and growth.

The meeting was adjourned.