Report: Budget Vote 31: Trade and Industry, dated 8 May 2002

The Portfolio Committee on Trade and Industry, having considered Budget Vote 31, reports as follows:

Introduction

The committee examined the budget of the Department of Trade and Industry (Vote 31) for the 2002/3 financial year as well as the forward estimates for 2003/4 and 2004/5 included in the Estimates of National Expenditure.

Main features
The main features of the 2002/3 budget are:

- The Department is allocated R2 468,6 million for the financial year 2002/3, while forward estimates anticipate it receiving R2 627,0 million and R2 787,5 million in the years 2003/4 and 2004/5 respectively. This compares to the R2 214,6 million voted in last year's budget which rose to R2 280,1 million in the Adjusted Appropriation for 2000/1. The Department's budget for 2001/2 is broadly in line with last year's forward estimate for 2001/2 (which was R2 465,1 million), as is the amount anticipated for 2003/4. The Department's budget can thus be described as a constant budget with minor fluctuations.

- The 2002/3 budget is divided into six programmes, compared to the previous five. These are: Programme 1, Administration, (6,9 % of the total), Programme 2, International Trade Development, (2,7%), Programme 3, Enterprise and Industry Development, (33%), Programme 4, Consumer and Corporate Regulation (5,4%), Programme 5, The Enterprise Organization (34%) and Programme 6, Trade and Investment South Africa (18%). The programmes broadly correspond to the Department's operational divisions.

- After growing for several years, the budget for Programme 1 stabilizes and in fact decreases slightly from R179,5 million in the adjusted appropriation for 2001/2 to R169,6 million in 2002/3

- The budget for activities falling under Programme 2 is stable with R65, 9 million budgeted for 2002/3 compared to the R65, 5 in the Adjusted appropriation for 2001/2. The main activities budgeted for under Programme 2 are multi-lateral and bilateral trade negotiations, the promotion of African economic integration and the activities of the Commission for International Trade Administration (previously known as the Board of Tariffs and Trade)

- The budget for Programme 3 is reduced slightly from R854, 3 million in the Adjusted appropriation for 2001/2 to R815, 1 million in 2002/3. Programme 3 is the Department's largest programme and includes mostly transfer payments to associated Council of Trade & Industry (COTII) institutions. The decrease in expenditure in the present and previous budget year reflects the normalization of expenditure following significant one off transfer payments to re-capitalize Khula, initial start up contributions to the National Empowerment Fund and increased contributions to Namac, Proudly South Africa and THRIP.

- Programme 4's budget is increased from R96, 8 million to R134, 1 million. Some of the increase is accounted for by transfers to the Companies and Intellectual Property Office (CIPRO).

- Programme 5's budget increases from R628, 1 million to R840, 2 million. 97% of the expenditure under this programme consists of transfers under various business support programmes. The increase is largely accounted for by anticipated better take up of improved support programmes, and expenditure is expected to rise further to R963, 8 and R1 021 million in 2003/4 and 2004/5.

- The budget for programme 6 is stable being R455, 8 million in the Adjusted appropriation for 2001/2 and R443, 6 million in 2002/3.

- Transfer payments account for approximately 82% of the total budget. A significant part of these transfer payments are made to associated DTI "family institutions". There are 17 public entities and 3 other bodies that report to the Minister of Trade and Industry. These now participate in regular meetings of the Council of Trade and Industry Institutions.

- The budget for 2002/3 can also be divided into the following functional categories:

Ø Transfer to associated COTII R690 mn 28%
Ø Institutions
Ø Incentives and Offerings to
Ø Business R1 320mn 53%
Ø Human Resources R290mn 12%
Ø Operations R170mn 7%

The amount for incentives and offerings to firms is up from the approximately R1 billion in 2001/2.

- The Director General indicated that new systems were being put in place to promote greater efficiency in the use of resources. Although these appeared to focus on minor "house keeping" matters, they were part of a process of getting the Department to operate faster, smarter and quicker in delivering services. For example, an investigation by the Department found that in the recent past 48% of incoming telephone calls were dropped. This has now been reduced to 29%

- The Department also reported further significant improvements in organizational efficiency during 2001/2. For example, the average time to register companies or close corporations at the Companies and Intellectual Property Office (CIPRO) has been reduced from 21 to 3 days.

- Once again, this year's budget includes in the Estimates of National Expenditure a table of "output indicators" and "targets" for Programmes 2-6. A feature of the Committee's interaction with the Department this year was that we were provided at our request, with a detailed Report on the extent to which output and service delivery targets identified in the 2001/2 budget were delivered upon.

- The latter report, which the Committee regards as a major step forward in its budgetary oversight, indicates that by and large the Department attained most of the output targets identified in 2001/2. The report also indicates that there were improvements in organizational efficiency, corporate governance and work environment.

- In terms of employment equity, the Department reported that it had enhanced the Public Service Commission's targets of achieving 50% equity by race and 30% by gender and set itself a target of 80% equity by race and 50% by gender. We were told that it had surpassed the latter targets, although there is still a need to address the issue of gender equity in the more senior grades.

- The improvement in the Department's record on spending observed in 2000/1 was continued in 2001/2. There is now a reasonable alignment of budgeted and actual expenditure with underspending anticipated to be a little over 10% in 2001/2 (excluding some reductions and anticipated commitments to be rolled over) compared to the more than 30% recorded before 1999.

- The Estimates of National Expenditure 2002 do not sufficiently address the financial and resource transfers to provinces, neither do they adequately reflect the impact of the Department's spending in the various provinces. The Department through a range of economic development agencies currently funds and coordinates various economic programmes in the provinces and local municipalities.

The Committee also had an opportunity, as in previous years, to engage on budgetary issues with four of the DTI's associated institutions- the Industrial Development Corporation, the Council for Scientific and Industrial Research, Ntsika and Khula. Highlights of these discussions included:

The Industrial Development Corporation (IDC)

- The IDC made 515 investment approvals worth R9, 3 billion during 2001, more than double the amount in the previous year. These assisted in the creation or sustaining of 20 000 job opportunities and generated R10, 5 billion in additional export earnings.

- The IDC is also extensively involved in projects elsewhere in Africa. Over the past year it increased its African portfolio from 30 projects in 9 countries to 47 projects in 16 countries. Approvals in other African countries total almost R7, 6 billion since 1998.

- The Corporation reported further progress in its efforts to promote Small and Medium Enterprise development as well as Black Economic Empowerment. The proportion of approvals going to empowerment companies was 33 % in 2001 compared to 27% the previous year. By value, this represents around 16% of total approvals. Although the Corporation does not directly service the micro or very small business sector, it has taken some steps to make its facilities available to smaller enterprises. 68% by value of its portfolio is with clients with an asset base below R120 million.

- The IDC remains financially strong with capital and reserves of R24, 4 billion (larger than any bank in the country). Its involvement in two poorly performing steel projects-Columbus and Saldanha- did, however, involve it in a capital loss. R5, 5 billion was injected into the restructuring of Saldanha and its incorporation into Iscor. This restructuring is now complete and Saldanha is now debt free, selling its products on the domestic as well as export markets.

The Council for Scientific and Industrial Research

- The CSIR's annual turnover is R810 million, of which 60% emanates from clients and contracts. The Council will receive just over R300 million from government this year, approximately the same as in the previous budget year.

- The CSIR participates in the COTII. The Council indicated that together with the DTI a number of medium term objectives had been agreed, including enhancing science and technology contributions to industrial technology policy development, raising awareness in industry of technological development, contributing to development of SMMEs, BEE and access by women to technology through its Technology for Women in Business project. It also has 60 rural development projects, many in poverty nodes identified by government.

- The CSIR is also involved in initiatives, projects and contracts in 17 other African countries and is contributing both to NEPAD and preparations for the World Summit on Sustainable Development. It has also been awarded contracts by major International Firms including Rolls Royce, Boeing, Daimler Chrysler and the European Commission for two food related projects.

- The CSIR confirmed that the trend identified last year of declining private sector involvement in Research and Development (R & D) continues to be a cause for concern. We were told that South Africa spends around 0,7% of its GDP on R & D, much less than successful industrializing countries. Less than half this comes from the private sector: Reasons which the Council said were cited for this included:

1. Less attractive tax incentives for R & D in South Africa than other jurisdictions.
2. The fact that incentive schemes such as SPII were based on the matching grant principle meant that there was no real incentive to begin completely new projects.
3. An environment that did not sufficiently encourage university-based researchers to develop commercial applications of their research.

Ntsika Enterprise Promotion Agency

- Ntsika is continuing to re-focus its activities away from its previous main activity of accrediting -service providers to a demand driven provision of particular services to small business. Its focuses will be on information provision, training and advisory services.

- Ntsika is also carrying out a review of service provider intermediaries it has worked with, and will be dis-accrediting those that have not met defined performance criteria.

- Ntsika reported that from the time of its inception in 1996 until the end of 2001, it had supported 349 service providers, trained 2 435 employees of service providers and developed 2 310 business links. Service providers trained or assisted over 100 000 entrepreneurs in over 79 000 enterprises. Jobs created or sustained over this period are estimated at over 98 000.

- In 2002/3 Ntsika plans to support 280 service providers, train 1 050 staff of service providers and develop 1 120 business links. It expects service providers to train or assist 60 900 entrepreneurs in 81 500 SMMEs, thereby assisting in creating or sustaining 40 000 jobs.

- Ntsika is allocated R40 million in the current budget, an increase from the R35 million it received in 2001/2. It is anticipated that it will receive R50 million in the 2003/4 and R60 million in the 2004/5 budgets. The agency expects, however, to receive a substantial increase of donor funding rising to R35,1 million in 2002/3 compared to R12 million in 2001/2. We were told that this money was confirmed. Including other smaller allocations, Ntsika would spend R85, 1 million in 2002/3 compared to R64, 4 million in 2001/2

Khula Enterprise Finance

- An impact assessment study on Khula's products between 1996 and March 2001 carried out by UNISA's Market Research Bereau found that these had contributed to the creation and sustaining of 788 650 jobs over this period. 70% of these were in survivalist enterprises, with a high attrition rate.

- Khula plans to approve loans of R106 million and guarantees of R406 million during the current financial year, leading to the creation or sustaining of 124 498 jobs. It aims to ensure that administrative expenses do not exceed 8% of the value of its activities and that a return is secured on its capital not less than the rate of inflation.

- Khula welcomed the fact that DTI plans to hive off funding of survivalist enterprises to a new fund, saying this will help Khula to refocus its activities.

- Recapitalisation remains an issue for Khula, and we were told that Khula will not be able to achive its targets unless further capital is obtained. We were told that of the R200 million requested from DTI two years ago, Khula received R81 million in 2000/1 and R30 million in 2001/2. Of the funding requested within the framework of its current five-year projection, we were told that Khula had received R70 million from the DTI and that the re-valuation of some properties in its portfolio would add a further R120 million. No further commitments have been made by the DTI

Comments

The committee is pleased to report continued progress in the management, presentation, and reporting on the DTI's budget. In our last year' s report, we noted that programmes were more closely aligned to the major activities of the Department, that there was more effective financial reporting that better control systems were in place and that the trend evident in previous years of significant understanding was being corrected. All these achievements have been carried over into this year's budget. In addition, we now have the Department reporting to the Committee on the extent to which it has delivered on output targets.

In our view the latter represents an important step forward for our Committee in terms of its monitoring and oversight of the Department's work, as well as an important step towards effective outcomes based budgeting. The next challenges to take this process further are, in our view:

- To find a mechanism to present and discuss with the Committee proposed output targets ahead of their presentation in documents tabled at the time of the budget speech.

- To develop a coherent and convincing methodology to indicate the extent to which the output targets have impacted on the identified outcome targets viz "to lead and facilitate access to sustainable economic activity and empowerment for all South Africans through higher level of investment and increased access to international markets for South African products, and to create a fair, competitive and efficient market place for domestic and foreign enterprises as well for consumers". We were told that during the course of this year, the Department hoped to put in place reporting systems that would at least enable it to identify more clearly what proportion of its total funding was being deployed to support SMMEs.

As indicated above, the Committee found that in general there was improved delivery in 2001/2 on the output targets identified. A few matters of concern were however, identified by the committee these included

- Whether sufficient resources are being allocated to support our team involved in the WTO negotiations. This is not a simple matter. The cost of maintaining one person in Geneva is equal to employing 6 persons at director level, and the Department has already deployed the previous Deputy Director General of International Trade to head the team in Geneva, while establishing a dedicated team led by the former Minister-Counselor in Geneva in Pretoria. The Committee is nevertheless of the view that the WTO negotiations are of critical importance and pose many challenges. We look forward to engaging further with the Department on how these efforts can be re-enforced in, including ways in which Parliament and our Committee can assist in this regard.

- The time it is taking for the National Empowerment Fund to become operative. After many years, the NEF has at last received some funding from the Department and IDC to cover operational expenses and to launch its venture capital fund, but the NEF Corporation's substantial capitalization has yet to take place. The Committee urges the Department to ensure that this takes place expeditiously, and indicates that it will be seeking progress reports from relevant departments in the near future.

- It is our earnest hope that the recently established Cooperatives division will be in the near future in consultation with stakeholders; devise an effective support programme for cooperatives.

The Provinces and Local Authorities

The Department will be requested to comment on the issue of provincial transfers indicated above, including possibly extrapolating some figures in respect of individual provinces by the time the Budget Vote debate takes place in the NCOP. With the objective of strengthening the relationships between the various economic development role players, nationally, provincially and locally, we would also be interested in receiving reports quantitatively measuring the employment, investment and economic empowerment impact, as well as indicating successes and challenges in the various provinces and municipalities. We are aware that some of this information can only be supplied by MECs with regard to funds generated from provincial revenue. In this respect, we call on the Minister to request these inputs from MECs via the Min-MEC process. MECs could also be instrumental in generating an economic status report from local authorities in their respective provinces. It is envisaged that the NCOP debate will provide a useful forum for MECs to deliver initial reports this year, and more comprehensive reports in coming years within the MTEF framework.