Minister on DTI Annual Report 2011/12 & Trade Current Affairs: Tripartite FTA, EPA, PTA, Bulk Wine; Product Labelling)

Meeting report

Introduction by Minister of Trade and industry
Dr Rob Davies, Minister of Trade and Industry, said the overarching objective of the Department of Trade and Industry (dti) was to contribute to the New Growth Path, bringing about structural change in the economy in favour of the productive sector with an emphasis on manufacturing and value added production. The dti had argued long enough on the importance of that in moving South Africa from an undeveloped to a developed economy. Where there were active programmes and strong interventions, the results had led to good results. A number of designations had been made to acquire from local sources. Organs of state had been directed to purchase from local sources. There had been an accord on localisation. This had to be strengthened.

Minister Davies said that those companies that had real prospects despite the difficult current circumstances would advance while those who were content to “sit out” the crisis would not survive. Manufacturers would be encouraged. Where they had assets which could be invested, the dti would partner with them and give them some support. In his budget speech he had quoted Karl Marx on making one's own history. Circumstances had changed. There was now a global slowdown. This was particularly so in the developed world, but there were lower levels of growth across the world. Brazil had reported this problem of reduced growth rate. There were some conclusions one could draw and the next decade would be very different to the previous one.

Minister Davies said that exporting goods to the developed world was becoming a less attractive proposition. China had realised this and had adapted its policies accordingly. The next decade would not be characterised by commodity super cycles. Growth was likely to be more moderate. Strategic thinking was needed. In the immediate term, industrialisation should be based on the infrastructure programme and the localisation concept. The orgy of imports had to end. Localisation had to be a change of mind set by business and consumers. People had to buy local and support the Proudly South African campaign.

Minister Davies said that there was an important change in perceptions about Africa. There were a number of dynamic economies and firms who were saying they were going to have to increase their presence on the African continent. And South Africa continued to be seen as playing an important role in Africa. In the previous year, there had been a sizeable increase in foreign direct investment (FDI) – not just portfolio investment but bricks and mortar investment. Two of the world's leading agro-processing industries had set up new plants and expanded operations in South Africa. Big automotive companies were intent on deepening their manufacturing presence in South Africa. This illustrated that Africa represented the next growth frontier and South Africa continued to occupy the strategic base here. Thus in the immediate term these were the issues dti was trying to attend to: identify dynamic opportunities; promote and support the infrastructure programme, and encourage localisation. In the medium term, SA had the great importance of the delivery and the promise of the regional integration programme in Africa,   particularly the tripartite programme which seeks to broaden integration across existing across regional communities, making big swathes of Africa as free trade areas. This was important as these could create the market size that could support industrialisation not just in SA but in other parts of the African continent. But of course one had to address that in a developmental way by complementing it with infrastructure programmes and by complementing it with actual on the ground work to support cooperation around industrial development. The other thing was beneficiation of mineral products which was absolutely fundamental. Beneficiation meant two things. The one was when we exported products to be used in somebody else’s industrial processes, we needed to do that in ways in which there was more value added in our own economy before it was exported. The other was we were going to have to create a new competitive advantage around availability of mineral products to support industrial development right here in SA – which was a critical medium term project.

The Minister announced that the Deputy Director-General: Industrial Development, Mr Nimrod Zalk, who would soon be leaving to study overseas and would return to the dti later in a different capacity. He noted the important contribution he had made to industrial policy. Dti had succeeded in institutionalising industrial policy action plans. Every year concrete action plans would be presented – not just policy. This was followed by regular internal monitoring within the dti. Mr Zalk had been an exemplary public servant. He had made a significant intellectual contribution, and would hopefully come back with greater insights and skills. An acting DDG would be appointed in the interim. Members should be aware of the International Small Business Conference being held on the forthcoming weekend. Not enough black industrialists were being produced.

Mr Lionel October, Director General, the dti, said that industrial policy had moved from strategy and planning into the real economy. This was particularly in the automotive, clothing, business process and outsourcing and the film sectors. The company landscape had been transformed. Companies in trouble had been rescued. There were new initiatives in cooperatives and small business. Another direction bearing fruit was the need to diversify trade from traditional to high-growth markets.

Mr October said that the global recession was now a fact. Global growth had slowed in 2011 to 3.8%. South Africa was very exposed to international trade. Over 45% of the GDP came from imports and exports. There had been a bloodbath in 2007/2008. This had picked up in the latter part of 2011. Additional jobs had been created, but the manufacturing capacity was still less that what it had been in 2008.

Mr October said that the BRICS countries (Brazil, Russia, India, China and South Africa) had managed to keep growing. Much of the new growth (21%) came from China. The trade deficit was still growing, moving towards 7%. This was dangerous territory.

Mr October said that there had been an increase in investment performance. State owned enterprise spending had increased, driving the increase in capital spending. Amendments to the Companies Act had also contributed to an increase in investment. There had been a big increase in FDI. In general, the overall investment climate had improved. South Africa continued to be an attractive avenue for investment. Audit systems were good. The country had advanced by thirty places to 44th in the World Bank ranking for the ease of doing business.

Mr October said that the bulk of new jobs had been in consumption sectors and less so in manufacturing. Even so, 52 000 jobs had been created in the manufacturing sector in the final quarter of 2011.

Mr October said that the implementation of the Automotive Production and Development Programme had helped to renew confidence. Some R15 billion had been invested. China's First Auto Works had invested $100 million in an assembly plant in Coega.

Mr October said that there had been meetings with major companies in the transport sector. Contracts had been awarded for new locomotives and rolling stock for Transnet. More than 70% had gone to local manufacturers. R2 to R3 billion would be spent on pharmaceutical tenders. The business process outsourcing sector had also picked up, with some global players being attracted to the country. The Monyetla II Programme was training 3 400 young people. The clothing sector was recovering after a period of massive retrenchments. Major retailers were now re-investing in South African manufacturers.

Mr October presented some major call centre enterprises. It was a mixture of local and foreign companies. There had been 23 approvals in this sector. There was also a good mix in the 12i Tax Allowance Incentive division. A number of major films had been shot in South Africa. There was an increasing local content.

Mr October said that just under 3 000 companies had been assisted. More than 48 000 jobs had been created. There was a positive effect on turnaround times, at four weeks for most programmes and six weeks for others. There was a move towards electronic processing.

Mr October said that the Industrial Development Zone (IDZ) programme was being revitalised. There had now been some significant investments, particularly in Coega and East London. There had been major infrastructure construction in Richards Bay. Work at Saldanha Bay was at an advanced stage. All feasibility studies and land issues had been sorted out. Within the next few months the application to declare an IDZ should be lodged.

Mr October told Members that R40.9 billion in investments had been facilitated. A major investment had been secured by the Airports Company of South Africa in Brazil.

Mr October said that in Africa, trade talks had been launched. Eight sectors had been identified for cross-border complementarities. At a bilateral level, there had been facilitation with fast-growing economies such as Angola and South Sudan. At a multilateral level, there had been successful co-ordination of work within BRICS. There had been work on two key projects. One was the undersea cable linking South Africa to Brazil, being done by a local company. A re-insurance tool had been proposed by Hollard and others. The BRICS-led development bank would be launched in the near future. Value added exports to China had to be increased.

Mr October said that ten projects had been proposed to China. A mission of seventy companies had resulted in over R400 million in trade. Trade with China was moving in the right direction. The trade deficit had been reduced to R18 billion. This was partly due to China accepting an import policy. Chinese importers would be visiting local plants.

Mr October said that there had been significant work towards boosting women-owned enterprises. There was a two-pronged approach to providing incubators for women. To date, 34 incubators had been set up but the private sector had made 44 proposals for additional incubators. Small business struggled with red tape. A forum had been set up to assist in this regard. The workplace challenge programme would help small business improve in competitiveness.

Mr October revealed that three industrial support clusters had been set up. The 30 day payment was a big problem in both the private sector and government. A hotline had been set up which would expedite late payments.

Mr October said that a code of good practice had been put in place for broad-based black economic empowerment (BBBEE) enterprises. A group of 74 students had graduated from a diploma programme at the University of Witwatersrand in management development.

In terms of regulation, Mr October said that the Gambling Review Report, Copyright Review Bill and Intellectual Property Bill had been tabled in Parliament. The Companies Tribunal had been established. The Estate Agency Affairs Board (EAAB) had been handed over to the Department of Human Settlements.

Mr October said that the number of failing companies had been reduced by 10.8%. The dti had managed to reduce its vacancy rate from 18% to 8.45% at year-end and by the end of June 2012, it was down to 7.4%. The Department had paid 95% of its bills within 21 days. The number of women was 43% of the staff, with appointments at DDG level at 50% female. The number of persons with disabilities was at 2.6%, above the target of 2%. Several engagements had been held with the public.

Mr October said that there had been a number of interventions. A critical one had been with the EAAB.

Mr October turned to the financial reports. The final appropriation for the 2011/12 financial year (FY) was R6.876 billion, of which R6 800 billion had been spent. The underspending amount was 1.1%. This was the lowest level in the previous five years. This underspending was mainly due to staff vacancies.

Mr October said that the Auditor-General's Report was unqualified, but some concerns had been expressed. Performance information and asset management were some of these but they had been addressed. One real issue was that of contingent liabilities. Conditions were put in place for the payment of incentives. This matter was being considered. There was an issue over irregular expenditure, which had been a significant finding. This was not due to corruption or fruitless expenditure, but was of a technical nature. The three quotation policy was being enforced, and an explanation offered if this policy was not enforced. Small and medium enterprises were often targeted for services such as conference gifts, and it was often not possible to follow the three quotation policy in this regard.

Mr October said the double dip recession was still a challenge. The country would have to grow under its own steam. The over-exposure to the global market could be a hindrance. The management and governance of entities was also a challenge, with four receiving special attention at present. In some sectors, licences were granted by other Departments. An example was in the energy sector. The dti wanted to engage on a programme to upgrade small and black business. They had to be brought into the mainstream. While the industrial policy programme was being implemented, these things could take up to five years while the demand for employment was immediate. Public Works schemes and partnerships with the private sector would be investigated.

Discussion
The Chairperson said that there was an annual report due on IPAP. This would be detailed. Some of this information might be incorporated into the Committee's report.

Mr G Hill-Lewis (DA) congratulated the dti on an excellent report. This was one of the best performing Departments and their efforts were laudable. He did not quite understand the R112 million approved for disbursement in the clothing industry, but only R14 million had been disbursed to date. He asked what progress had been made on gambling legislation. On policy, he asked about the location of the International Trade Administration Commission of South Africa (ITAC). Their work was integral to that of the dti.

Ms S van der Merwe (ANC) agreed that the presentation was excellent. The slogan of 'continuous improvement' was being put into practice. She acknowledged the tough global conditions, but at some point growth must fuel the economy and job creation. A solid platform was in place, but she wanted an indication of how this could be made to take off. The current scenario had been termed 'a lame duck' by a study group she had been involved in, while the take-off scenario was dubbed 'the flight of the flamingo'. The FDI figures were encouraging, but she asked how this could be translated into jobs.

Mr X Mabasa (ANC) also congratulated the dti on a job well done. In initiatives to create jobs, it was not easy for government to lead the process. There was a disparity between provinces. He asked if this was being left to the market or if dti was intervening. The incubators would have a spin-off into local production. Even if it was a difficult area, the dti should persist in investing time and resources. The unqualified audit report and dti employment figures for those with disabilities were commendable. There were industrial parks in various parts of the country and he asked if there was any concerted effort to work with these developments. The bigger players would bring a broad-based aspect. Government should rather go to these people. He was no longer hearing anything about a South African car. He asked what movement there was with universities and technikons. Syllabi had to be in harmony with what the dti was trying to achieve. The infrastructure of Africa could not only be supported by South Africa, and he asked what was being done by other African countries.

Mr G McIntosh (COPE) was astonished that the Technology and Human Resources for Industry Programme (THRIP) initiative had not been quoted in what was otherwise an excellent report. The dti was a midwife to entrepreneurs and capitalists of South Africa. It could not itself create jobs, but was a midwife and an empowering institution. It would be sad to lose Mr Zalk. For those who read more history than Marx, Nimrod was a famous warrior. Swiss companies had not joined the boycott of apartheid South Africa. Nestle had one of its biggest factories in the world near his home town of Escourt. There was gossip that electricity charges were being increased so drastically that Nestle was reconsidering its R2 billion investment. Another enterprise in his area dealt with compost. Of the eight workers, seven were from Malawi. A factory in Molteno, owned by Foodcorp, was facing relocation to the West Rand. Foodcorp had decided to retain the factory. Problems with electrical supply had been addressed by direct negotiation with Eskom. This decision was about more than business. These country towns needed help, and he named a few more examples in the former bantustans. Some were successful but others were disasters. In Johannesburg, a service centre for Africa could be established in the way London was the financial hub of Britain. More financial and other services for Africa could be brought in. Other cities such as Durban and Cape Town should not be left behind. On the EAAB, an excellent intervention had been made, and the Small Enterprise Development Agency (Seda) was a similar example. There were fantastic statistics in the report. More than 50% of university students were black, and more than 50% were female. He asked how many graduates were in the dti's employ, and how many could speak languages such as Mandarin. Skills and abilities were needed.

Mr M Oriani-Ambrosini (IFP) said that Mr McIntosh was the one politician he could listen to forever. He urged the Minister to appoint him as a roving ambassador. The capacity of the Minister and the dti to adjust to rapidly changing circumstances was praiseworthy. In many other departments the annual report was the same every year. There had been a dialogue for some time. The Minister had not anticipated the double dip. He reminded Min Davies of what he had told the Minister some time previously, and now his prediction was coming true. He asked how South Africa would survive the recession. Large manufacturing facilities might move to the East and high technology to the West, with South Africa somewhere between the extremes of rich and poor. He questioned the relationship with China. The most fundamental transformation would be to develop South Africa into a knowledge-based economy. He had often put forward the option of making substantial investment in nano-technology, which was the technology of the future. An African electric car might be a suitable project. The most challenging form of beneficiation was gathering materials to develop the battery of the future. He appreciated the capacity of the dti to move with the times enormously, but it was time to leapfrog the times and make history.

The Chairperson had looked at the two pages on mega investments. Moving from R150 million with 226 jobs to R2 billion with 1 300 jobs, she asked how much it cost to make a job. Manual labour was less cost intensive. She had calculated rand values for some of the projects. She asked what the most urgent thing was, as she was convinced that unemployment was unacceptably high. Jobs were needed. The dti was creating an enabling environment. Education was another important aspect. An enormous amount was spent on ever-changing textbooks. She had experience as a teacher. She asked if it would not make sense to promote the manufacture of devices such as iPads. There would always be a place for books, but this technology could be used. Some components might still need to be imported. The film industry had also achieved commendable results. She also noted the rapid progress on the critical aspect of designations. She supported local components, but it seemed that some quarters hesitated to make use of local products. She asked if there was any way to incentivise the support of local products.

Min Davies thanked Members for their compliments. On the gambling report, the Review was at the National Council of Provinces. There was a lotto policy document which he had signed off, and was before Cabinet. The location of ITAC within the Economic Development Department was not problematic. The dti continued to work with them and sign off reports. The term 'continuous improvement' came from Asian industry. It was not very often that things improved as the result of one bright idea. Sometimes such ideas made things worse. The Asian experience was that small improvements, which might seem insignificant in isolation, made a huge positive difference over time.

Min Davies had a real question over the New Growth Path. It had been a slow growth path, but the flight of the flamingo concept was now showing rather than the disastrous example of Icarus. The first year had been extremely modest. The question was on how to accelerate the pace of change, and what short term interventions were possible. The dti steered rather than ran such initiatives. They worked largely with the private sector, and could only encourage them or provide incentives rather than give orders.

Min Davies did not recall being bullish on the possibility of recession, and was by nature pessimistic. There was a significant set of problems lying ahead in the next few years. The prognosis for Europe was a decade of contracting economic activity. He had seen a brief report on what the impact would be on South African jobs. If Europe slowed down on imports it would affect South Africans. It was not just China or BRICS. South Africa was opening doors to value added production. Dynamic opportunities were being sought across the world. He had been invited to a major organisation in Switzerland, which thought that South Africa was a considerable emerging market. Many companies not previously involved in Africa were now showing interest.

Min Davies agreed that a knowledge economy was part of the growth path. What could not be done was try to play for footloose basic processing activities run by multinational companies with no fixed base. Many of these were looking for cheap labour. South Africa needed to build manufacturing facilities with a high level of knowledge. The iPad suggestion would be a prime example. Dormant capacity could be rebuilt. Green industries were being encouraged. South Africa could be important players. Automotive companies and fuel cell technology should be pursued. This path should be followed doggedly.

Min Davies said the Special Economic Zone (SEZ) Bill would look to decentralise industry. Regarding the tertiary institutions, any investing company was expected to get involved in skills development. This was why the dti had developed its own course together with the University of the Witwatersrand. Regarding Nestle and the electricity charges, a cereal plant had been opened in Gauteng. They were locating in one of the former homeland areas. The dti was well aware of, and participated in the debate on electricity prices. Municipalities had a mark-up on electricity supplies, and this would increase prices and might discourage industry. The dti must tell all South Africans to save energy and use energy efficiently. Complying companies should perhaps be given a discount. Environmental consciousness was an element in competitiveness.

Min Davies found a case for both labour and capital intensive manufacture. In the film industry, the dti was looking for deeper local involvement. He had been impressed when visiting a local film studio where the set was a realistic representation of Robben Island. The only direction the dti took was the decisions over government purchases. An accord had been reached on localisation. The attitude of preference still had to be developed. The balance of payments matter had to be addressed.

Mr October said that FDI was linked to 42 000 jobs. There was a bias towards labour-intensive projects, and incentives were adapted accordingly. He was happy that technology resource information policy had been raised. This was a programme that could be upscaled. It had been running for some time. On renewable energy projects, financial closure had been reached and wind and solar plants would soon be under construction. Biofuels were another issue. Blending regulations had been finalised in the previous few weeks, and now incentives were being tied up with Treasury. This would generate jobs in the sector and downstream in the agriculture sector. Some 70 000 jobs might be the result. The capital-labour ratios were high. The cost per job was high. This was why dti targeted labour intensive industries such as furniture making and food production. The dti had met with all provinces, and had agreed on SEZs. At least one would be created in each province.

Mr Nimrod Zalk, DDG: Industrial Development Division, dti, said that the disbursement in the clothing industry should read R112 million. On the Jewel project, there had been agreement on the assembly proposals. The challenges were in establishing a credible marketing strategy. This was not unique to South Africa. A number of companies were putting electric vehicles on the market. Just about every major brand now had an electric or hybrid model on the market. However, the projects were struggling even in more favourable markets.

Mr October added that projects were sometimes approved, but companies claimed only over a number of years. Allocations could be made in one FY but payments only made in subsequent years.

Mr Mabasa asked what the strategy was for assisting in the development of previously disadvantaged individuals in entering trade. The industrial parks in Soweto, if well taken care of, could provide an opportunity for black people to enter the manufacturing sector. His observation was that these schemes were not receiving government attention.

Mr G Selau (ANC) had a friend working for BMW. This company had recently taken on 600 new workers. He had heard other companies doing so as well. He did not know if this was a result of incentives. He asked for clarity on South Africa's position on a customs union for the Southern African Development Community (SADC).

The Chairperson said that the dti would present later on trade issues.

Mr Selau said that there was a perception of China and Japan that they were experts at copying technology. Exports were now being made to these countries, but he was concerned that China might duplicate these items and start manufacturing and exporting these items themselves. There had been low spending on some items. It was not a crisis situation, but there was room for improvement. On the Auditor-General's (AG) report some irregular expenditure had been reported. One of these was the use of single source service providers without the required approval. He wanted to understand if this was the result of an omission or by juniors undermining the superior's authority. He asked if cooperatives would have their own type of incubator agreements. Companies might see cooperatives as competitors and not give them their best advice.

Mr McIntosh returned to the THRIP project. It was an exciting concept. He asked if there was any co-operation with the dti. There was an SMS reminder to take one's medication and a demonstration on how nougat should be cut in the brochure.

Adv A Alberts (FF+) noted that the space sector had grown lately. The company started at the University of Stellenbosch had had an agreement with the government, but the promised funds had not been forthcoming. This might force the company to close down.

Mr Oriani-Ambrosini said that Icarus's only problem was the wrong choice of glue. He had written a paper on a new generation of Kindle devices. This would solve problems with the distribution of books and would be a game-changer in both the education of children and their parents. Along the same lines, the Department of Home Affairs had leveraged the production of smart identity cards. An export market was available. There was a rumour that the President had sent the Intellectual Property Laws Amendment Bill back to Parliament. He asked if this could be confirmed.

The Chairperson said that some investors had indicated that they wished to send South Africans to their base facilities for training. This was discounted. All training opportunities should be pursued.

Min Davies said that the capacity to assist industrial parks was lacking. A new scheme was being developed. He could not confirm the figures from BMW. All of these automotive sectors were because of interaction with dti programmes. BMW was one of those which had made good use of the training lay-off scheme after the 2009 downturn. In most other cases, companies in the FDI pipeline wanted to draw on one or other dti programme.

Regarding China, Min Davies did not think that many South African products would be reverse engineered. He agreed that it was an issue. Improving an existing product was an example of continuous improvement. The British company BSA had dominated the motorcycle market after the Second World War, but was completely overtaken by Japanese companies. The importance of the initiative was that South Africa received 25% of China's exports into Africa. Nine of South Africa's exports to China was mineral. China had now agreed to import value added products from South Africa. Ten products had been identified. Ten investment projects had also been identified. R400 million in orders had been placed from this exhibition. Another exhibition would be held in 2012. Targets needed to be set. Wine should be one of these.

Min Davies said that the THRIP programme had been in the dti for some time. The Department presented awards for innovation annually. This was a key aspect. The Department of Science and Technology (DST) ran the science councils while dti was responsible for the commercialisation of these schemes. Solar panels were the best known, where South African technology had gone to Germany and the country was now importing panels from Germany. There were two bodies in South Africa. There was a Space Council under the dti, responsible for regulatory aspects such as the registration of South African vehicles in orbit, and there was a body within DST which played a similar role to the National Aeronautical and Space Agency in America. Min Pandor had gone to Kazakhstan to witness the launch of the South African satellite. He had heard the same rumours as Mr Oriani-Ambrosini about the Intellectual Property Laws Amendment Bill, but would not comment on it. He agreed that a high number of South Africans were undergoing overseas training.

Mr October said that the industrial parks would be the focus of the dti's work for the near future. A Director had been appointed to oversee this programme. Many of the industrial parks did not have access to markets. A partnership had been started with Pick'n'Pay to purchase from cooperatives. The emerging exporter development programme was stimulating business. The AG had raised a question over delegations. The authority to approve purchases under R500 000 was held by DDGs. Anything between R500 000 and R4 million was dealt with by a bid adjudication committee. The problems were in the lower tier of purchase. There had not been a specific instruction on what to do when deviating from the three quotation system. The delegations of authority to the DDGs had been amended. Deviations could be allowed where necessary. The viability of iPad and Kindle type devices would be investigated.

Mr Kumaran Naidoo, Chief Financial Officer, the dti, said that under-expenditure was mainly due to vacancies. On goods and services, a large number of invoices had been received after the end of the FY and thus could not be settled within the FY. Commitments had been made before the time.

The Chairperson said that time was running short. Any outstanding questions would have to be answered in writing.

Trade Current Affairs presentation
Minister Davies said that the presentation had been titled 'Current Affairs' as it covered a number of matters. He spoke about the Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC) and Southern African Development Community (SADC) Tripartite Free Trade Agreement; the Southern African-India Preferential Trade Agreement