Incentive Programme Review: briefing

Meeting report

Opening remarks
The Chairperson noted that Albertina Sisulu, whose date of birth had been celebrated the previous day, had been a Member of Parliament for many years and had been the MP chosen to nominate Nelson Mandela as President. The Chairperson remembered her for being extremely dedicated to her role of oversight.

Briefing on Incentive Performance Five Year Review 2013/14 – 2017/18
Mr Lionel October, Director-General, Department of Trade and Industry (DTI), stated that the incentive package had doubled in the five years under review.

The DTI presentation of the five-year incentives was highly visual with diagrammatic presentations of specific incentive programmes, funds involved and jobs created.

Manufacturing in South Africa offered 1.7 million jobs directly but indirectly 5.4 million were involved in the industrial sector. Manufacturing was the engine of an economy and ensured equality in a country. Incentives focused on the manufacturing sector, the service sector and the business processing services (BPS), which offered jobs to youths, especially in the call centres, and critical infrastructure, such as industrial parks. DTI had helped over 12 000 companies. The programme had a clean audit for three out of four years and had developed a strong service culture that did not tolerate corruption.

The three types of support offered in the programme were loans at R1.7 bn, tax allowances worth R20 bn and grants totalling R32.1 bn over the five years. It was projected that R311.3 bn in investments would be leveraged by the incentive programme, with R117.2 bn invested in industrial infrastructure and R913 m invested in innovation and technology development. The intention was to retain 280 089 jobs and to create 288 997 jobs. The main beneficiaries supported per group were 102 black industrialists, 106 emerging black film makers, 4 299 emerging exporters, 12 emerging black aquaculture farmers, 370 technology development students and 24 946 jobs in the BPS. The adoption of the Special Economic Zones (SEZ) Act had stimulated the economy in the industries in those zones in the provinces.

The automotive sector was hugely importance and had a push-pull factor that supported many sectors of the economy. It supported 100 000 jobs directly and 500 000 jobs indirectly. The automotive industry had doubled in size in the past five years, expanding from the production of 300 000 vehicles per year to producing 600 000 vehicles per year.

New incentives were in the agricultural sector and in the clothing and textile sector that was growing again after being in decline for over 20 years. The paper and furniture sector was the next sector that would be targeted. The promotion of township economy had been a recent focus.

South Africa was awarded the Global Sourcing Association Award in 2016 for being the Best Outsourcing Destination of the year and in 2018 South Africa won the Award for Global Destination of the year.

Discussion
The Chairperson praised the appearance and the substantive content of the presentation.

Mr A Williams (ANC) asked for the breakdown of the spend between the five clusters. The incentive scheme was there to build the manufacturing sector by creating and maintaining jobs, but where did transformation fit in, as per slide 7, and how much was spent on transformation? Was there a requirement for transformation as a condition of getting an incentive? If so, what was it, and if not, why not? Economic transformation was one of the key policies in government.

Mr D Macpherson (DA) found common cause with the DG on the importance of incentives but it seemed, for the past few years, that DTI’s focus was to support big business and industrialisation. DTI was missing an opportunity to support small and medium-sized businesses. DTI had previously indicated that the Department would be looking at a focus on the small business sector, especially in respect of the 12I tax incentives. What had happened in that regard? That was a sector of the economy that would grow over time.

Something interesting that he had learnt was how the states in the United States competed against each other for investment. He recalled when SASOL had invested in Louisiana, there had been intense competition between states for that investment. How could competition be driven between SEZs because that was what would ultimately get investors to invest their money?

What incentives existed for industrial parks? He did not know what those incentives were. If the agreements had been agreed to, he asked if the DG could take the Committee through those agreements.

Mr Macpherson said there were some problems: on several occasions, people had been awarded various incentives and had bought machines against the awards only to be told after the machines had landed in the country that the award had been withdrawn as a result of a lack of funding. Going forward, there had to be a longer term view of incentives, particularly as those machines were not off-the-shelf machines.  He asked if steps had been taken to view the incentives scheme as a long-term programme.

Mr B Radebe (ANC) asked about the automotive industry and what impact the policies of President Trump, who wanted everything manufactured in America, would have on the South African economy? What impact would competition from the United States and places like Morocco have on the target of 1.2m vehicles in the automotive industry. When the Committee had dealt with the issue of beneficiation, there had been a suggestion that small scale foundries could beneficiate the minerals in the country. He did not see evidence of that, especially not around the areas in the Northern Cape that produced much in the way of minerals. Why were incentives for the Northern Cape so low? Has DTI dumped the idea of supporting small industries that could engage with the minerals industry, and if so, why? 

Ms E Ntlangwini (EFF) stated that the presentation was well-received as, the previous week, she had asked about the the Black Industrialist Programme. One question was vis a vis the money that black industrialists were getting as incentives, what was DTI doing to help them to get work from the private sector and from government?

Mr S Mbuyane (ANC) welcomed the report and the presentation. He had some clarity-seeking questions. In terms of the incentive, was there a transformation plan or strategy? How did SA give an incentive to the United Kingdom (as per slide 17)? How were black people assisted? Why was Mpumalanga not represented at all, not even as an SEZ? Had there been no applications from Mpumalanga? Did people in Mpumalanga receive any capacity-building programmes? How many companies had been assisted with the localisation programme?

Ms L Theko (ANC) noted how the incentives had been allocated to provinces. Mpumalanga needed support in agriculture, tourism and with the Gorge tourism project in Graskop. There was a lot to be covered in Mpumalanga. The grading of roads was needed as one could not afford to ruin one’s tyres on the roads. DTI should integrate with other departments that could assist with roads, etc.  She asked how many of the black industrialists were women. How was the programme supporting unemployed youth, especially the out-of-school youth, the ones who could not pass matric and the ones who were at Further Education and Training colleges?

Mr D Mahlobo (ANC) welcomed the presentation which presented a trend analysis. The previous week, the Committee had taken a decision about incentives and he was pleased that the Committee had taken the correct decision. He noticed that when he looked at approvals, in 2013/14, the figure had stood at R13.5 bn and then in 2014/15 there had been a dip to R7 bn. Was it a question of appetite? How did one ensure that there was an uptake? Were people conscientised about what was available? Was there a mechanism for offering support so that certain sectors of the economy were increased?

DTI had to ensure due diligence or the failure rate would be too high. What was there that the DG could share about those that had failed, in terms of the incentive that they had received, and the lessons learnt? He would like a categorisation of grants to show how much foreign investment was supported versus domestic investment?

Mr Mahlobo had heard the DG speaking of linkages. What remained the main constraints in the economy? Was it skills, labour, energy and environment etc.? He referred to the lack of labour relations regulations in places like China. What was being done about the cost of the environmental assessment that was an added cost that other countries did not impose on industry?

Mr G Cachalia (DA) referred to slide 6. Incentives were intended to have a positive impact on jobs so one had to strengthen competitiveness and sustainability or everything would collapse. In terms of the types of incentives offered, loans were the smallest and grants the largest and he wondered what informed the strategy because he believed that loan support would be the most effective as it would be predicated on due diligence done in terms of repayment and sustainability of the enterprise. The jury was out on the efficacy of tax allowances and the impact of grants in terms of sustainability and efficacy was not good and not nearly as effective as loans. There were many studies on the matter, including one from Stellenbosch. He would like to see discussion around the topic as he worried about the few loans compared with the large amount given in loans.

Ms Ntlangwini had a question about the type of support offered. She referred to the publication handed to Members. There was a list of beneficiaries on pages 75 and 76. She asked the DG for a list of who got the 59% and who got the 37%. She would accept a written response.

The Chairperson stated that the presentation was clear and gave Members a good understanding of the programme. She was trying to synch the approved benefits on slide 12 with the disbursements on slide 14. Were the Members supposed to relate the two slides?   About two years previously, the oversight report given to the Committee had included Naledi Foundry operations. Were they localising and were they securing and fulfilling orders? At the time, it had been communicated to the Committee that there was a problem as Naledi had been given an order but the tender had not followed the order.

The Chairperson reminded Members that, as the Committee was in the National Assembly and not the NCOP; Members should take a more global perspective of the presentation. Looking at the figures per province, she saw that the Northern Cape received by far the smallest amount of support. She was aware that the Northern Cape was the smallest province in terms of number and yet covered a vast area. She wondered if the population was a factor in low support. Did the North-West project get project-by-project approval or was there an understanding that something should be put in each province? What actually informed the approval and allocation of funding?*

DTI Response
The DG stated that it was an exhaustive list of questions and he was going to ask his team to respond to some of the questions before he gave the final responses.

Ms Susan Mangole, Chief Operating Officer: Incentive Development and Administration Division, DTI, stated that DTI required Level 4 BEE compliance, but it was flexible with BPS and Section 12I Tax Allowance Incentive. For BPSs, DTI required Level 6 or compliance, while for 12I, compliance was required. Slide 4 showed the various levels in terms of transformation.

Ms Mangole addressed the question of how much had been allocated. 24% of the allocated budget annually was for manufacturing. Of the R5.3 bn allocated to DTI annually, R4bn went to the manufacturing cluster. The rest followed. In response to Mr Macpherson’s question about the long-term support for manufacturing, she stated that when DTI was allocated the package, it had been a six-year programme but DTI had asked National Treasury for the same support again over the same period. However, there was also the Enterprise Investment Programme, and that and the Automotive Investment Scheme, were the only programmes in the budget to support manufacturing. DTI was engaging National Treasury on the 12I programme and other support for manufacturing in the next Medium Term Expenditure Framework.

Ms Mangole added that the list of beneficiaries in the publication was a list of those who have been given the tax allowance and incentive grants for 2017/18 only. It excluded the loans. Slide 14 showed the annual disbursement per programme. Slide 12 showed the approvals, but that included loans and tax allowances. The allocation was R28 bn and the approved total had been R31 bn.

Ms Reika Jeewan, Chief Director: Manufacturing Investment Cluster, DTI, informed the Committee that, in terms of the breakdown in spend between the five clusters, the automotive incentive scheme had received the largest chunk of the incentive grant. The next biggest spend was the manufacturing sector and then there was the aquaculture programme and agro-processing programme, services and the BPS incentive schemes.

The tax allowance had been re-shaped a few years earlier and targeted medium-sized business starting with an investment of R50 m for green fields and R30 m for brown fields. DTI was reviewing the 12I incentive scheme where it was undertaking an assessment to identify where the gaps existed, or even revamping the scheme.

Ms Jeewan added that localisation was targeted in the agro-processing support scheme. In that scheme, DTI was looking for least 50% of the machinery, equipment and raw materials to be sourced locally, of which 30% had to be from black suppliers. Most of the investment schemes did target foreign investment. R10.7 bn in investments had been received from the United States of America, European and Scandinavian countries.

The DG responded to Mr Williams’ question on the transformation agenda. The black economic cluster was still very small compared to the others and DTI had introduced a qualification criteria of a Level 4 BEE compliance. Regarding constraints, the biggest constraint to small and black business was market access. The problem was not at the supply side where machinery was only running at 50%. The best example of that problem could be seen in the Naledi situation. Naledi, a black industrialist with the most advanced technology, had made investments but Transnet had not given them the order that it had agreed to give Naledi. However, the company had been saved by the automotive industry. Now DTI was using a scorecard and companies had to buy from small companies and from black suppliers. That would ease the market access problem.

The DG noted that Mr Mahlobo had asked about the appetite and why things went up and down over the years. The answer was simple. DTI could only give an incentive to those who applied and who were going to make an investment. No one made an investment if one could not sell the products. Access to the market was tightly controlled. There were only three or four main retailers. If one was not on a shelf at Woolworths, Shoprite or Pick ‘n Pay, one was nowhere in the market. The trouble was that those companies only bought from the big players such as Unilever, etc. To get shelf space was the biggest problem for an industrialist. If one was not in the Big Five, one did not get access to the market because of the concentrated nature of business in South Africa.

He told Mr Macpherson that in any economy the two, big manufacturers and small businesses, had to co-exist. If there were no big businesses, there would be no small businesses. For example, the automotive industry bought from thousands of small component manufacturers, but if one did not have Toyota, there would be no small manufacturers. The component manufacturers could not supply Toyota in Thailand as it would not buy from a small business in South Africa. To have the small, one had to have the big. The problem in South Africa was that the big automotive manufacturers only had a small list of white suppliers and that pattern had to be broken to get more black suppliers into the market. The big original equipment manufacturers (OEMs) had to be located in South Africa in order to provide a market for small industries.  

Regarding the Trump tariffs on steel, aluminium and threatening automobiles, the DG said that there was some very good news. Thanks to the Minister and the team’s efforts, Mr Trump had given SA an exemption on 100 steel products and aluminium products. There would be a press release soon. The agreement had only been made in the past two days. The US had heard South Africa’s pleas and lobbying. DTI was still looking at the exact impact of the concessions. The aluminium foundry KZN made special products for Tesla. The DG stated it was a good first step and he hoped that the US did not target automotive manufacturers from South Africa.

The DG agreed with Mr Cachalia that the mix of incentives was very important. The loan was a new incentive introduced about two years earlier. Previously, DTI had only grants as incentives. The good thing about loans was that the money came back, so DTI wanted to grow the loans incentive. It had been started with
the Manufacturing Competitiveness Enhancement Programme (MCEP) when DTI had more applicants than money and so, working with the Industrial Development Corporation (IDC), had provided low interest loans. The cost of capital and interest rates in South Africa were amongst the highest in the world. It was difficult to raise capital because of the high interest rates.

One could only recoup one’s capital only after five to seven years, but loans had to be re-paid over that period. It was not getting a loan that was the constraint; it was paying back in the first years. Germany had development finance institutions (DFIs) which charged very, very low interest rates, often less than one percent, and drove the banking sector. Grants gave one a break in the first years when one could not DTI needed to look into a mega industrial bank in the next five years.

Responding to the question of how the companies were selected, the DG stated that businesses were selected on application, and the industry had to be prepared to put in capital. He added that the Mpumalanga SEZ was almost ready to be recognised. It was going to Cabinet soon and that would boost growth in Mpumalanga. There were fluctuations in the scheme because the economy was driven by consumer spending. When companies were sure people would buy product, grants could keep the companies alive in the troughs. When the upturn came, the companies would move forward. Without grants, the companies would go under and it was difficult to resurrect a business.

The Chairperson noted that all questions had been addressed. She would take a second round of questions.

Further discussion
Mr Macpherson agreed that there was only so much money to go around when it came to grants and incentives. For him, the key critical incentive to leverage was tax incentives because no cost was involved and the high interest rates were not an issue. Accessing finance was incredibly expensive in the country.  It made sense to drive tax incentives for small and medium-sized businesses, which allowed them to re-invest that capital in growth. He really hoped that DTI would sit down with National Treasury and develop a small to medium-sized business sector-specific tax incentive.

Mr Macpherson turned his attention to the Business Process Outsourcing (BPO) sector. R162 million to Capita had to have been one of the single biggest investments. It seemed an extraordinarily large investment in one business. Was it comparable with anything else?

Ms Ntlangwini wanted the DG to commit to providing information on the type of support received by each one of the beneficiaries listed on pages 75 and 76 of the publication handed out to Members. She wanted the response on Hansard.

Mr Williams noted that the DG had said that a requirement was for companies to be BEE Level 4 compliant. In 2017/18. 41% of the beneficiaries were Level 1, 2 and 3 beneficiaries. Would that 41% not be given incentives again?

Mr Cachalia noted that the DG had said that grants were needed because of the high cost of capital. One needed to understand the risk-reward ratio. The rate was determined by essentially assessing the cost of capital, the risks involved and the opportunity cost of return. Historically, market risk premium was a measure of past performance. That determined the cost of capital. One could not use the argument that because the market risk was high, so grants had to be given. That negated the efficacy of the grant or the loan. One had to be wary of that. It was Economics 101 in his view.

Mr Mbuyane said that there had been no response to his question on the Mpumalanga capacity building. He also wanted a clarification of the UK issue on slide 17.

The Chairperson noted that some years back, the Committee had been worried about value addition in the wood industry. If there had been an improvement, it was worth looking at the broader transformation in terms of the black industrialists in that sector.

The Chairperson stated that she had watched the parliamentary tapes and had noted with alarm how many people were on their cell phones when their questions were responded to. She suggested that it was common courtesy to pay attention when someone was answering a question that one had asked, otherwise the person could just leave the room.

DTI responses
The DG agreed with Mr Macpherson that the tax incentive was the easiest incentive. In the MCEP programme, DTI had more applications than it had had money. The DTI had had lowered the threshold to qualify for the 12I tax incentive. Now the scheme was running at R19.9 bn. DTI had asked National Treasury to increase the 12I incentive to R25 bn over five years. DTI believed that it was necessary to extend all the incentives: tax, loans and grants. He assured Ms Ntlangwini that DTI would supply the details of the beneficiaries and it could be recorded in Hansard as well as the minutes.

The DG told Mr Williams that DTI had gradually introduced Level 4, starting with MCEP but in future the situation would improve because by 2021, part of the Master Plan for the automotive industry was that it had to be at Level 4. He thanked Mr Williams for listening to his response.

He told Mr Cachalia that he was correct about the risks but he was raising the issue that, as a country, the cost of capital was high. Even bonds were repaid at an eight to nine percent interest rate. SA was an importer of capital and one had to a make profit on those loans. In Germany, the interest rate was 1.5% to 2%. The industrial banks lent at just above 0%. The government gave the banks a grant to enable the low interest rates. The issue was that the cost of capital had to be changed as those who received grants were paying 8% on the capital that the businesses had to borrow. SA had been too hesitant to build the manufacturing industry. All other sectors would grow if the manufacturing sector was strong.  The manufacturing sector would drive the mining sector, the services sector, etc.  There was a need to give incentives. SA manufacturers had always performed well and were technologically advanced. There was no demand in SA’s own economy to drive manufacturing and so manufacturers had to export. There was no problem with the capabilities of manufacturers but it was necessary to stimulate demand.

The DG informed the Chairperson that SAPPI had made a massive investment and had committed to Level 4 BEE. The President was pushing that everyone should buy furniture locally. It would revive the furniture industry and have a backward push to forestry.

Ms Mangole said that the SEZ in Mpumalanga was almost ready and the team went to Mpumalanga to train people. The team formed strategic partnerships and regularly ran workshops there on how the people could get incentives.

The Chairperson asked the DG to respond to Mr Mbuyane’s question about slide 17.

The DG explained that DTI did not give money to the British or to the UK. DTI gave the incentive. That incentive was based on how many jobs a company created. The massive call centres were required by companies like British Airways. To get those call centres, one had to work with the company that had the contract for the call centre. The incentive was given in the country.  DTI had targeted major global companies with English-speaking markets which was why DTI had targeted the UK, the US, Australia and so on. There had been lots of trade missions to the UK to get the business which was why South Africa had won the award from the UK Outsourcing Association that he had mentioned earlier.

He added that there were strict criteria to get the incentive and it was dependent on the amount of the investment made by the company, plus the number of ‘seats’ or jobs created. 90% of those employed by the call centres were youth.

The Chairperson recalled that when the Committee had visited a call centre a couple of years previously, their biggest challenge had been the retention of workers. There had been a high turn-over rate. They had wanted to focus on youth employment but could not keep youth, even when training them and providing transport. The hours were challenging for young people to stick to because the youth had wanted a life outside of work.

The DG stated that BPOs or call centres were called the ‘modern sweatshops’ because one sat there answering the phone for eight or nine hours a day. That was why the business was being attracted – the retention rate was 80% in South Africa. In London, the turn-over rate was 50%.  There had been an improvement in the call centres. They had improved the hours, gave proper breaks, massages, etc. It was labour intensive and employed young, which was what the country needed. That gave SA a competitive advantage.

Mr Cachalia stressed that one needed to be mindful when trying to reduce the cost of capital, both at a micro and macro level. It had to be done organically and if it was done artificially, it was not sustainable and would create market distortions. There were World Trade Organisation implications if it was done on a vertical cluster basis and that would come back to the country.

The DG believed that a country stayed poor if there was no manufacturing sector. If one left it to the market, there would be no industry in the country. One needed an active industrial sector to create a manufacturing sector. America was introducing tax incentives, tariffs, etc even though it had the perfect market. He noted that Australia had lost its entire automotive industry because it had wanted the market to work.

Outstanding Minutes
The minutes of 31 July 2018 were tabled. There were no changes. The Committee adopted the minutes.

The minutes of 4 September 2018 were tabled. The Chairperson asked the Members to note the resolutions recorded in the minutes. There were no changes. The Committee adopted the minutes.

The minutes of 5 September 2018 were tabled. There were several resolutions under point 4 with respect to the Copyright Amendment Bill that Members were requested to note. The Chairperson noted that the minutes were extensive in respect of the National Credit Amendment Bill. There were no changes. The Committee adopted the minutes.

The minutes of 11 September were tabled. The Chairperson noted that the minutes reflected the details of the international agreements to be discussed in the House. There were no changes. The Committee adopted the minutes.

The minutes of 14 September 2018 were tabled. The substance of the meeting was correct. The minutes related to the public hearings. There were no changes. The Committee adopted the minutes.

The minutes of 9 October 2018 were tabled. There were no changes. The Committee adopted the minutes

The minutes of 10 October 2018 were tabled. SASA and the sugar industry attended the meeting. The Chairperson noted that the minutes contained a resolution. An amendment was required to include the Chairperson’s signature. The Committee adopted the minutes.

The minutes of 11 October 2018 were tabled. The numbering of pages was corrected. The Committee adopted the minutes.

The minutes of 16 October 2018 were tabled. The Chairperson pointed out that there were several resolutions that Member should note. There were no changes. The Committee adopted the minutes.

Closing Remarks
The Chairperson informed the Committee that she would not be there the following morning and the whip would be chairing a workshop on SAEU (South African European Union collaboration) so there was a need to elect an acting Chairperson. The Committee Secretary managed the process. Mr Mbuyane nominated Mr Williams. His nomination was seconded by Mr Mahlobo. Mr Williams accepted the position and was duly elected.

Mr Radebe informed the Chairperson that all political parties in the Committee at the time agreed that the international agreements approved by the Committee in a previous meeting would go to the House as a single order.

The Chairperson thanked the DG for the best presentation she had ever seen in the Committee. It was clear, responded to issues, had excellent diagrams and did not spend pages on superfluous information or telling the Committee how good DTI was.

The DG acknowledged her thanks on behalf of his team, and especially the Director, Ms Varsha Harwath, who had developed the presentation.

The meeting was adjourned.