COSATU SUBMISSION ON THE INDUSTRIAL DEVELOPMENT AMENDMENT BILL


21 August 2001

  1. Introduction
  2. COSATU welcomes the opportunity to present a submission to the Trade and Industry Portfolio Committee and the Economic Affairs Select Committee on the Industrial Development Amendment Bill [B32-2001] (hereafter "the Bill"). We believe that the Industrial Development Corporation (IDC) has a central role to play in South Africa’s industrial development. While it is already making a significant contribution in this regard, we believe it could potentially be more effective. Although most of the proposed amendments in the Bill are not objectionable per se, we believe that they can be improved upon and furthermore that they are the not only amendments required to the Industrial Development Act.

    In this submission we thus propose amendments to the Bill, as well as additional amendments to the principal Act. COSATU believes that these legislative changes will better position the IDC to optimally contribute to our economic development. Alternative formulations are put forward as far as possible and appropriate, and are summarised in the table at the end of this submission. Firstly, however, we will briefly set out our vision of industrial policy and the specific role which we think the IDC should play within this.

  3. Role of the IDC in industrial policy

One objective of industrial policy is to drive a particular growth path or accumulation process which expands the capacity of the forces of production. In other words, policy needs to enable the economy to produce more. This is obviously not only a quantitative issue, as the nature of the accumulation process is paramount. The economy’s industrial base and productive capacity needs to be not only increased, but also moulded into a form appropriate for South Africa.

A basic strategic requirement for progressive industrial policy measures is for the state to play a planning, co-ordinating, and propelling role. Industrial policy measures need to have both a protective component, in maintaining existing production and employment, and a proactive role in identifying and dealing with blockages or opportunities.

Our understanding of industrial policy also includes a strong sectoral dimension. One aspect of this is a shift towards more labour-intensive sectors, partly through the building of up- and down-stream linkages from the traditional mining and agricultural sectors, as well as services. Potential job-creating sectors with high export potential include:

Labour-intensive sectors oriented to the domestic market and to some extent the region include:

The upcoming sector summits, agreed to at the 1998 Presidential Jobs Summit, will hopefully play a central role in defining sectoral growth strategies.

Whether or not the IDC is consciously integrated within government’s industrial strategy, it does have a major influence on our industrial structure and development by virtue of the massive resources at its disposal and the impact of its investment decisions on sectors, regions, and other enterprises. This includes average direct annual financing of over R4 billion per annum. The IDC is responsible for almost 6% of national fixed investment in the South African economy.

The activities of the IDC currently include the provision of seed capital, the provision of professional and advisory services, acquisition of shareholdings, the provision of wholesale and bridging finance, project development, and the provision of export finance.

Not only does the IDC invest directly in productive activity, but its funds are also instrumental in leveraging an even greater pool of finance. The IDC has considerable capacity and experience in project and investment management, and it is important that this capacity is used in a way that actively supports national objectives.

COSATU believes that government needs to play a more direct role in the control of the IDC, as a public institution. While government does currently provide the IDC with a mandate and sets key objectives, it accepts that the Board is responsible for the strategic directions of the IDC and management is responsible for day-to-day operations. Even though Board members are appointed by government, they are drawn overwhelmingly from the private sector and it is not clear to what extent government’s objectives are carried out. Furthermore, we believe the IDC needs to take a more "hands-on" policy in relation to its investments to afford the IDC more influence in the running of these enterprises

COSATU’s main critique of the IDC is that its investments have been excessively concentrated on mining-based, capital-intensive beneficiation, for example in steel, aluminium, heavy metals, potash, magnesium, and petrochemicals. This bias seems to have continued to the present. According to the IDC’s latest Annual Report, over half of its total financing (excluding International Finance and the IDC Technology Venture Capital Fund) went into these types of investments.

The average cost of a single job created by IDC investments was extremely high at R416 667. This is more than twenty times the accepted cost of creating jobs in more labour-intensive ways (at approximately R20 000 per job), and more than forty times the most "value for money" jobs in the region of R10 000. This is inappropriate for an economy such as ours, with extremely high labour abundance manifest in the massive levels of unemployment.

A publicly owned Development Finance Institution such as the IDC is ideally positioned to actively promote labour-intensive production. It should be investing in more labour-intensive sectors, and across the board should be promoting more labour-intensive production methods and development of appropriate technologies. Linked to this is the need for a shift away from an excessive focus on large-scale mining-based beneficiation projects. This is not to suggest that such investments have no place in our industrial strategy, which they certainly do, but rather that there needs to be a more diversified approach to the IDC’s investment strategy with a far stronger focus on more job-creating projects.

The IDC’s investments also appear to be excessively export-oriented. The expansion of market opportunities for South African producers and the generation of foreign exchange are indeed important objectives. However, this should not supplant a strategic thrust towards the broadening of the domestic market and the production of goods and services geared towards the meeting of basic needs. The development of innovative productive technologies for indigenous conditions may also have the positive spin-off of creating new niche products for the developing world. Examples of this potential comparative advantage include the innovation of the Freeplay radios, or the low-cost basic computers which India has developed.

In terms of spatial development, the IDC continues to have an excessive focus on a few provinces such as the Western Cape and KwaZulu Natal, with minimal investments in some other provinces – including economically underdeveloped provinces which need the economic stimulation of state-driven investment.

In terms of the IDC’s promotion of black economic empowerment, COSATU believes that this should focus on the creation of new productive capacity rather than on takeovers and acquisitions. Instead of investing scarce capital in "warehousing" shares for listing by empowerment groups as it has done in the past, the IDC should be investing in black-owned SMMEs, co-operatives, and large enterprises which will create jobs and contribute to South Africa’s economic development. Such an emphasis is consistent with the thinking in, for example, the report of the Black Economic Empowerment Commission.

The vision of industrial policy, role of the IDC in this, and critique of the current orientation of the IDC as discussed above inform COSATU’s approach to the Bill. In particular, we have identified amendments which would better position to the IDC to play the type of role discussed above.

  1. Proposed amendments

The amendments which COSATU is putting forward fall into two categories: firstly, amendments to sections already in the Amendment Bill (discussed in section 3.1 below), and secondly, additional amendments to the Act which should be included in this Amendment Bill (discussed in section 3.2 below) .

    1. Amendments already in the Bill
    2. COSATU proposes the amendment of the following clauses of the Bill as set out below:

      1. Objects of the IDC

Section 3 of the Act sets out the Objects of the IDC, and section 1 of the Amendment Bill puts forward various amendments in this regard. Among these are six additional proposed amendments, set out in section 1.(b) of the Amendment Bill. These essentially set out objects for the IDC of promoting the economic development of the historically disadvantaged; promoting entrepreneurship especially through SMMEs; investing in employment-creating activities in underdeveloped areas; leveraging FDI; promoting knowledge-based industries and technology-based firms; and enhancing corporate governance.

We are not opposed to these amendments, but propose the following modifications:

1.(b) "(c) to strive for the retention of existing employment in South Africa and the creation of new employment, including through the promotion of labour-intensive production and the specific promotion of labour-intensive sectors;

1.(b) "…(d) to foster [entrepreneurship especially in the area] the development of small and medium enterprises and co-operatives;"

      1. Powers of the IDC

Section 4 of the Act sets out the powers of the IDC. Section 2 of the Amendment Bill proposes a number of amendments to this section. These include the extension of activities to the region and continent, the raising of the IDC’s borrowing capabilities, and a range of additional powers in support of government’s industrial policy.

We have a specific concern with clause 2.(c)(o) of the Amendment Bill (page 3 line 42) which proposes that the IDC have the power "to assist South African exporters and importers of capital goods and services through extended credit facilities at favourable interest rates". Differential interest rates are a critical tool of industrial policy, which have been used to positive effect in other countries to promote particular sectors, regions, or types of production as per industrial policy priorities. This would be one of the key mechanisms in the IDC’s own industrial policy toolbox.

However, we are not convinced that the activities identified in the proposed amendment for this facility – the export and import of capital goods and services – are necessarily the priority targets for this support. For example, while some import of capital goods will always be necessary, is there a logic to subsidising this through favourable interest rates rather than promoting the domestic production of capital goods which would enhance our industrial capacity and assist in relieving balance of payments constraints? In terms of export, it is also not clear to us why only capital goods are identified for export promotion, given South Africa’s labour-abundance. Surely the domestic production and export of capital goods should be part of a balanced strategy which also draws on our relative factor abundance.

4. Powers of the corporation

For the purposes of attaining its objectives, and with due regard to its role as a public sector development institution, the corporation shall have the power-

….

(o) to [assist] advance South African [exporters and importers of capital goods and services] economic and industrial development through extended credit facilities at favourable interest rates, taking into account all relevant factors, in particular:

    1. economic sustainability;
    2. potential for employment creation, and in particular labour intensive production;
    3. potential to stimulate local economic development particularly in underdeveloped regions;

(iv) potential to facilitate the meeting of basic needs, reconstruction and development within historically disadvantaged communities.

(v) potential multiplier effects in stimulating other enterprises and sectors.

      1. Reporting requirements to Parliament

Section 11 of the Amendment Bill deals with the requirements on the Minister to report on the IDC to Parliament, and effects basically technical amendments to the existing Act. We believe that Parliament has a crucial oversight role to play over the IDC as a public institution, especially in terms of the extent to which it meets its objectives and contributes to South Africa’s economic development. The Bill and Act refer to the tabling of "a balance sheet and profit and loss account showing separately the financial details in connection with any industrial undertaking established and conducted by the Corporation…"; the report of the Board and annual address of the chairperson or in the absence of this a "full report of the operations of the corporation".

We are not convinced that the requirements set out in the Amendment Bill necessarily ensure substantive and adequate reporting to Parliament on the IDC’s actual activities. These requirements should be beefed up and tightened up of to ensure that Parliament is able to effectively exercise its oversight responsibilities.

11.(b) the annual report of the corporation, which must include amongst others:

    1. information regarding the activities of the board, including information regarding any Director’s direct or indirect material interest in any matter dealt with by the Corporation;
    2. information regarding the activities of the corporation, including comparative data regarding the categories and sizes of enterprises benefiting from the corporation’s assistance, as well as sectoral and provincial comparisons;
    3. information regarding employment created by each undertaking, including relevant statistics on the number of direct, indirect, permanent and short-term jobs created;
    4. such other information as the Minister may in writing require.

 

    1. Additional proposed amendments
      1. Project criteria

The criteria that the IDC use to select and prioritise projects and to allocate resources go to the heart of its role and strategic orientation. COSATU is concerned with what appears to be an increasing commercial bias of the IDC, which should not be its core role. The financing by the IDC of enterprises like McDonald’s and Nando’s – as is currently the case - is neither strategic to South Africa’s economic development nor in any way geared towards the meeting of basic needs. Such businesses can presumably be financed through the market, whereas the IDC can venture onto strategic investments where the market does not provide finance.

COSATU argues for a reorientation of the IDC’s strategic focus, particularly towards productive job-creating investment with strong up- and down-stream linkages with the rest of the domestic economy. Of course not every project will meet every objective – some may be capital-intensive but may generate valuable foreign exchange; others may be highly lucrative and serve to cross-subsidise other more developmental projects. Nevertheless, it is critical to have appropriate guiding criteria within which such decisions can be made.

While this is to an extent an issue of policy and political mandate to the IDC, there is also a legislative aspect. Section 5(a) of the Act stipulates that "every application or proposal dealt with by [the IDC] is considered strictly on its economic merits, irrespective of all other considerations whatsoever". Even though "economic merits" is not defined, it can be taken as referring to the narrow business case for any particular investment. This suggests that considerations such as black economic empowerment, job creation, building domestic productive capacity and so on will not be factored in to the IDC’s investment decisions. This seems to be inconsistent with the proposals in the Amendment Bill and with government’s own vision for the IDC.

Similarly, section 3(b) of the Act also refers to the IDC operating on "sound business principles". While no-one would argue for it to operate on "unsound business principles", the issue is that what may be considered appropriate for the profit-maximising private sector is not appropriate for a public corporation aimed at South Africa’s industrial development.

3.(b)…to this end the economic requirements of the Republic may be met and industrial development within the Republic may be planned, expedited and conducted [on sound business principles] in an economically sustainable manner.

5. It shall be the duty of the corporation so to exercise its powers-

(a) that every application or proposal dealt with by it [is considered strictly on its economic merits, irrespective of all other considerations whatsoever] must take into account all relevant factors, and in particular its

    1. economic sustainability;
    2. potential for employment creation;
    3. potential to stimulate local economic development, particularly in underdeveloped regions;
    4. potential to facilitate the deliverymeeting of basic needs, reconstruction and development within historically disadvantaged communities; and

(v) proof of compliance with national labour regulations, where a proposed initiative is undertaken in relation to an existing company.potential multiplier effects in stimulating other enterprises and sectors.

Such a shift would obviously have implications for the IDC’s operations and procedures. Project appraisal would require not only a narrow financial evaluation based on market prices, but also a quantification of broader externalities and developmental concerns, such as direct and indirect job creation, local economic stimulation, spatial development, potential up-and down-stream linkages, the transformation of ownership patters in the economy, and so on. For example, shadow pricing should be used to assess projects’ broader socio-economic impact. This could in fact count against investments which may in market or narrowly economic terms seem viable but are unviable in other respects, for example excessive capital intensity. A regulation to the Act could set out more detailed criteria, evaluation methodology and relative weighting for the different criteria. While there is clearly a role for the discretionary judgement of IDC management and staff, this should be within clear guidelines which advance government’s objectives.

Furthermore, the IDC should use the leverage afforded by its resources to promote maximum compliance with minimum standards in labour and environmental law. Already the IDC actively promotes environmental standards by "insisting on environmental impact assessments on any new industrial developments, that conform to accepted standards, and aims to protect the environment as far as possible by:

Similarly, the IDC should assist in promoting maximum compliance with South Africa’s labour legislation. While this is obviously not the primary function of the IDC, it would be wrong to channel public funds to enterprises which do not adhere to the laws of the land. At a minimum companies benefiting from IDC assistance should be able to demonstrate compliance with their statutory obligations. The actual requirements could be spelt out in subsequent regulations.

 

 

    1. that the corporation –
    1. will not undertake any activity under section 4 unless it has been furnished with proof of compliance with national labour legislation; and

(ii) will require ongoing proof of compliance with national labour legislation for any period during which it provides any form of assistance in terms of section 4,

as set out under regulations developed in consultation with the Minister of Labour.

      1. Representivity and accountability of the Board

As discussed in section 2 above, COSATU is concerned that government is not exercising enough control over the IDC as a public asset. Excessive power seems to vest in the Board for the strategic direction of the IDC, and there appears to be insufficient accountability to government’s mandate.

It is also problematic that the great majority of Board members come from the private sector, rather than representing the various stakeholder interests in a more balanced way. To an extent this may arise from the inadequate guidelines laid down by the principal Act for the selection of Board members.

Recent controversies around the management of state-owned enterprises sharply raise the need for strong regulation and accountability. Reported scandals and dubious practices in the IDC Board and management itself also point to this. Apparently in recognition of the questions being raised about members of the IDC Board benefiting from IDC loans, the Minister of Trade and Industry committed to urgently publishing a full list of such information. It has now been reported that this will be delayed and will be contained in the Annual Report.

We call on the Portfolio Committee to look into ways of strengthening the accountability of the IDC Board and management in order to ensure that it effectively carries out its public mandate. Measures should include:

Firstly, in terms of the criteria for appointment of board members, we propose the substitution of section 6.(4) of the principal Act with the following:

The directors of the board must be representative of the public, private and development sectors -

    1. with appropriate expertise knowledge or experience in industrial and economic policy,
    2. with an understanding and appreciation of the role of the corporation, as a development finance institution, in reconstruction and development, particularly the social and economic empowerment of historically disadvantaged communitiesindustrial policy in reconstruction and development; and
    3. taking into account the need to ensure that the board is broadly representative of the various economic, sectoral and development interests affected by industrial policy.

Secondly, it is proposed that safeguards be built into the legislation to avoid conflicts of interests or abuse of position, or even perceptions thereof. Such provisions are standard in legislation governing the governance of public institutions, and it is in fact anomalous that the Industrial Development Act does not currently contain such clauses. We thus propose the amendment of section 8 of the principal Act as set out below:

8. [Members of Parliament, provincial legislature or municipal not to be directors] Conditions of qualification of directors

(1) No person shall be appointed, nominated or elected or remain a director or alternative director who -

    1. is a member of parliament, any provincial legislature or any municipal council;
    2. is not permanently resident in the Republic;
    3. has at any time been convicted of an offence involving dishonesty, or has been sentenced for any other offence of imprisonment without the option of a fine;
    4. has improperly benefited directly or indirectly, materially or otherwise from his/her position as director; or
    5. has failed to comply with subsection 2.

(2) If a member of the board, or his or her spouse, immediate family member, life partner or business associate has any direct or indirect financial interest in any matter to be dealt with at any meeting of the board, that member

    1. must immediately after that interest has come to his or her attention, disclose that interest and the extent thereof in a written statement to the chairperson of the board, who must table that statement at the beginning of the next meeting of the board;
    2. may not attend the portion of the meeting during which the matter is considered;
    3. may not in manner take part in consideration of that matter by the board; and
    4. may not in any manner endeavour to influence the opinion or vote of any other director of the board in connection with that matter.
  1. Summary of proposed amendments

Sect-
ion of Bill

Sect-ion of Act

Current provision in Act/proposal in Bill

COSATU proposal

Summary of motivation

1.(b)

3.(c)

New clause

Insertion of the following:

1.(b) "(c) to strive for the retention of existing employment in South Africa and the creation of new employment, including through the promotion of labour-intensive production and the specific promotion of labour-intensive sectors;"

Making employment retention and creation an explicit objective of the IDC.

1.(b)

3.(d)

1.(b)"(d) to foster entrepreneurship especially in the area of small and medium enterprises;"

1.(b)"(d) to foster [entrepreneurship especially in the area] the development of small and medium enterprises and co-operatives;"

Broadening the objective of promoting SMMEs to include co-operatives.

2.(c)

4.(o)

4. Powers of corporation

For the purposes of attaining its objectives the corporation shall have the power-

….

(o) to assist South African exporters and importers of capital goods and services through extended credit facilities at favourable interest rates;

4. Powers of corporation

For the purposes of attaining its objectives, and with due regard to its role as a public sector development institution, the corporation shall have the power-

….

(o) to [assist] advance South African [exporters and importers of capital goods and services] economic and industrial development through extended credit facilities at favourable interest rates, taking into account all relevant factors, in particular:

  1. economic sustainability;
  2. potential for employment creation, and in particular labour intensive production;
  3. potential to stimulate local economic development particularly in underdeveloped regions;
  4. potential to facilitate the meeting of basic needs, reconstruction and development within historically disadvantaged communities.
  5. potential multiplier effects in stimulating other enterprises and sectors.

The provision of extended credit at differential interest rates should not only be used for the export and import of capital goods and services. Appropriate criteria for the use of this industrial policy instrument are thus proposed in the drafting.

11.

19.(b)

19.(b) the report (if any) of the board submitted, and the address (if any) of the chairman of the board delivered, at the said meeting, or if no such report was submitted or delivered, a full report on the operations of the corporation during the said financial year.

  1. the annual report of the corporation, which must include amongst others:

(i) information regarding the activities of the board, including information regarding any Director’s direct or indirect material interest in any matter dealt with by the Corporation;

(ii) information regarding the activities of the corporation, including comparative data regarding the categories and sizes of enterprises benefiting from the corporation’s assistance, as well as sectoral and provincial comparisons;

(iii) information regarding employment created by each undertaking, including relevant statistics on the number of direct, indirect, permanent and short-term jobs created;

(iv) such other information as the Minister may in writing require.

The Amendment Bill currently sets out essentially technical amendments to the reporting requirements of the IDC to Parliament. It is proposed that these be beefed up in order to enhance the oversight of elected representatives over this public institution.

 

3.(b)

3.(b)…to this end the economic requirements of the Republic may be met and industrial development within the Republic may be planned, expedited and conducted on sound business principles.

3.(b)…to this end the economic requirements of the Republic may be met and industrial development within the Republic may be planned, expedited and conducted [on sound business principles] in an economically sustainable manner.

A narrow business orientation is inappropriate for the IDC as a public sector development finance institution. More suitable wording is proposed to reflect this orientation.

   

It shall be the duty of the corporation so to exercise its powers-

(a) that every application or proposal dealt with by it is considered strictly on its economic merits, irrespective of all other considerations whatsoever;

It shall be the duty of the corporation so to exercise its powers-

(a) that every application or proposal dealt with by it [is considered strictly on its economic merits, irrespective of all other considerations whatsoever] must take into account all relevant factors, and in particular its -

    1. economic sustainability;
    2. potential for employment creation;
    3. potential to stimulate local economic development, particularly in underdeveloped regions;
    4. potential to facilitate the deliverymeeting of basic needs, reconstruction and development within historically disadvantaged communities; and
    5. proof of compliance with national labour regulations, where a proposed initiative is undertaken in relation to an existing company.potential multiplier effects in stimulating other enterprises and sectors.

"Strict economic merits", while not defined, is too narrow a criterion for the selection of IDC investments. More appropriate criteria are proposed.

 

5.(b)

Proposed new clause

5.(b) that the corporation –

(i) will not undertake any activity under section 4 unless it has been furnished with proof of compliance with national labour legislation; and

(ii) will require ongoing proof of compliance with national labour legislation for any period during which it provides any form of assistance in terms of section 4,

as set out under regulations developed in consultation with the Minister of Labour.

The IDC should use the leverage of its investments to promote maximum compliance with our labour legislation. Drafting is proposed to ensure that enterprises benefiting from public funds comply with minimum requirements.

5.

9.

8. Members of Parliament, provincial legislature or municipal not to be directors -

No person shall be appointed, nominated or elected or remain a director or alternative director who [is a senator or a member of the House of Assembly or a provincial councillor] is a member of parliament, any provincial legislature or any municipal council;

 

8. [Members of Parliament, provincial legislature or municipal not to be directors] Conditions of qualification of directors

(1) No person shall be appointed, nominated or elected or remain a director or alternative director who -

    1. is a member of parliament, any provincial legislature or any municipal council;
    2. is not permanently resident in the Republic;
    3. has at any time been convicted of an offence involving dishonesty, or has been sentenced for any other offence of imprisonment without the option of a fine;
    4. has improperly benefited directly or indirectly, materially or otherwise from his/her position as director; or
    5. has failed to comply with subsection 2.

(2) If a director of the board, or his or her spouse, immediate family member, life partner or business associate has any direct or indirect financial interest in any matter to be dealt with at any meeting of the board, that member

    1. must immediately after that interest has come to his or her attention, disclose that interest and the extent thereof in a written statement to the chairperson of the board, who must table that statement at the beginning of the next meeting of the board;
    2. may not attend the portion of the meeting during which the matter is considered;
    3. may not in manner take part in consideration of that matter by the board; and
    4. may not in any manner endeavour to influence the opinion or vote of any other director of the board in connection with that matter.

This proposal brings the Industrial Development Act in line with legislation governing other public institutions, in terms of stipulating the basic conditions of eligibility for directors and safeguarding against possible conflicts of interest.