Report of the Select Committee on Economic and Foreign Affairs on the induction workshop held at the new DTI campus, dated 22 October 2004.

The Select Committee on Economic and Foreign Affairs, having attended the workshop thereto, reports as follows:

Delegation Ms ND Ntwanambi (ANC); Ms SE Mabe (ANC); Ms MP Themba (ANC); Mr DG Mkono (ANC); Mr SJ Sibiya (ANC); Ms S Chen (DA); Ms SJ Terblanche (DA); Mr K Sinclair (NNP); Mr M Erasmus (CS). Places Visited

Day 1: The New Dti Campus was visited where the workshop was conducted. The format of the workshop was that of multiple sessions on different aspects of the Department and the economy. This was followed by a tour of the new campus.

Day 2: The Committee visited BMW Rooslyn Plant in Pretoria and Industrial Development Corporation Offices as well as Khula Enterprise Finance, Sandton, Johannesburg.

Structure of Report The report presents the daily activity undertaken by the delegation while on the study tour. The report therefore outlines the various presentations introduced to the Committee by different divisions within the Department of Trade and Industry and associated entities. The report will then outline the concerns; questions; inputs; and recommendations that were raised by the Committee to the presentations thereto.

5. Day 1 : Presentations by the Department of Trade and Industry The delegation met with the Minister and officials from the Department of Trade and Industry: Mr M Mpahlwa (Minister of Trade and Industry); Ms L Hendricks (Deputy Minister for Trade and Industry); Dr A Ruiters(Director-General for the Department of Trade and Industry); and Mr M Ebrahim (Chief of Staff: Department of Trade and Industry). Deputy Minister welcoming the delegation reported that to create a conducive environment for businesses to thrive and become competitive, the Department was committed to look beyond Macroeconomic stability. As such, the Department of Trade and Industry had become an outwardly- focused, customer –centric organisation, with the principal focus on streaming its organisational structure for better coordination and service-delivery.

She affirmed that the Department was committed to bridging the gap between the ‘first’ and the ‘second’ economy.

The Minister leading the discussion on how the Department of Trade and Industry would be contributing to growing the economy in a manner that enables equity and job creation, firstly highlighted some of the fundamental economic challenges that were inherited in 1994; secondly, the government’s response to those challenges. He then reported on Dti’s long-term and medium –term strategy framework.

The economic challenges inherited in1994 inter alia include: High levels of tariff barriers which were due to South Africa’s import substitution strategy coupled with political and economic isolation; Deliberate under-development of other parts of the economy; High cost structure and restricted industrial capacity mainly linked to mining and agricultural sector; Decrease in per income; Extremely minute budgetary resource to meet social needs.

Through direct strategic responses and introduction of a comprehensive macroeconomic reform, the government has managed to remove the pressure on deficit financing, which has enable the country to carry out forms of social expenditure within a highly stable fiscal framework. Government has also managed to remove the balance of payment constraints.

Notwithstanding, he pointed out that government was still faced with severe challenges of high magnitude of income inequalities: ‘first’ and ‘second’ economy dichotomy; high levels of unemployment and poverty; insufficient variation in the size and number of enterprises; disparities in the racial composition of ownership, control and management in the private sector; and low level of value-add in the economy.

As such, government broad goals in the next seven to ten years will be premised on the following key strategic pillars:

Maintaining a stable macroeconomic environment and increase the level of investment in the economy; Accelerating the implementation of the microeconomic reform strategy; Strengthening targeted programmes at the second economy; Strengthening the ability of government across all spheres to implement, sequence, monitor and evaluate its policies.

5.2 Concerns and Recommendations Raised by the Committee Second economy: The committee commended the Minister on the points he has raised save to say that government has to try get the ‘trade-off’ precisely. While trying to strengthen the economic enterprise sector at the same time the Department should be able to evaluate the impact on the ‘second economy’. Secondly while adding value to export products government should put more effort in the beneficiation of the people in the rural areas. The committee further enquired about the step that the Department intends to take in terms of skills basis, funding and mentoring enterprises in the second economy.

The Committee was concerned that it was difficult to measure results at the grass-root level and asked if there were any strategies directed at micro-economic level.

The need to strengthen inter-departmental co-operation in dealing with the challenges of the ‘second economy’ was recommend.

The Committee further recommended in assisting and helping Enterprises. In the second economy there was a need to vigorously engage the banking sector.

The Committee raised the problem of viable business ideas, which was continuously hitting enterprises in the second economy more specifically when looking for collateral support in the banking sector. As such the Department should focus on programmes that would seek to develop viable business ideas for such enterprises. Global economy: The committee was concerned that there was still a myriad of barriers for the developing countries notwithstanding the existence of the multilateral trade agreements. The Committee noted that export trade was booming globally and enquired whether South Africa’s export share was improving. Members recommended that the Department should draw some experience from countries like China on how to improve South Africa export incentives.

Local Economy: The Committee asked if the Department as a participant in the economic cluster could set out the elements; qualitative targets and indicators of the high level project for the economy.

Members also echoed the need for economic integration with Africa to open up South Africa’s market.

Members further warned that South African companies should caution against leaning on the strength and weakness of the rand.

In general the following issues were recommended:

It was agreed that oversight and monitoring by the Committee was key in ensuring broader impact of Dti’s policies. There was a need to translate Dti’s vision to some of the institution falling within the purview of the Department of Trade and Industry, There was a need to raise the level of investment in manufacturing to increase the competitiveness of South African Enterprises. The need to strike a balance between what was consumed internally against what was being exported, and That the micro – reform strategy coupled by inter – department coordination would be the key in addressing the problems in the "second economy".

5.3 The Dti Strategy and Budget The Director-General leading the discussion reported that the dti’s division and business units were structured in a way that facilitates the achievements of its strategic objectives.

These divisions and business units were linked together in a value chain together to generate public value for economic citizens. Each unit had core sets of outputs, or products and services, that it was responsible for delivering.The dti Executive Board was responsible for ensuring the efficiency and the efficacy of that value chain between the dti divisions.

In addition, the dti Group comprised a range of public entities that had a specific mandate to fulfil and these were:

Development finance institutions - constituted by the Industrial Development Corporation, Khula Enterprises Finance (Pty) Ltd, National Empowerment Fund, and the Export Credit Insurance Corporation. Regulatory Agencies - constituted by the Competition Commission and Competition Tribunal, the National Gambling Board and the National Lotteries Board, the Micro Finance Regulatory Council, the Companies and Intellectual Property Registration Office, the Estate Agency Affairs Board and the International Trade Administration Commission. Specialised Service Agencies - constituted by support agencies such as Ntsika and Namac, the Council for Scientific and Industrial Research and the South African Bureau of Standards, SANAS and SAQI.

Dti’s key flagships projects for the next coming five years will inter alia be on: Operationalisation of the Apex Fund for micro – enterprises; Implementation of the broad – based black economic empowerment; Raising the levels of investment in the priority sectors of the economy; Increasing market access opportunities available to South Africa’s enterprises and increase export of South African goods and services; Contributing to building skills, technology and infrastructure platforms to make South Africa’s enterprises competitive; Repositioning the economy in higher value added activities; Providing economic citizens with better and easier access to redress; Strengthening the day-to-day operations that keep the economy functioning; and Improving the efficiency and capacity of the Dti to deliver.

Institutional Restructuring – focusing a large extent on giving effect to the objective of creating independent and administratively efficient institution, expanding the scope of certain agencies, as well as enhancing the general enforcement capability of various agencies

Modernising South African Laws _ so as to align with international agreements, strengthen best practices, and to provide for emerging market trends. Enhancing Implementation – by providing greater interpretation and certainty. Enhancing cooperative governance – in the light of the new Constitutional dispensation. New Policies – these include the launch of a new policy on Black Economic Empowerment, and standards and norms in the liquor industry.

Acts administered by the Department of Trade and Industry inter alia include:

The Committee requested the Department to outline its upcoming law reforms together with the timing of the grouping these laws. The Committee was of the view that explanatory memos to Bills were often technical and repetitive of what was already in the Bill. As such, it was proposed that explanatory memos to the Bill should focus on the policy imperatives underpinning the Bill and the history of the Bill. The Committee also recommended that there had to be broader incorporation of the public views before the Bill becomes tabled before the Committee for consideration and that through provincial legislatures public participation could be enhanced. The Committee was also concerned about the technicality of the language use in most of the Bills.

The design of the campus was a response to the call of Mapungubwe and entailed fast – tracking construction contract amounted to R450 million and contracts valued at R152 million were awarded to the HDE’s. A total of 21000 staff would be accommodated.

Under the leadership of Minister Mandisa Mpahlwa the Department of Trade and Industry is constituted as follows:

Deputy Minister – Ms HendricksDirector General – Alistair Ruiters8 Divisions26 Business Units35 Foreign Offices3 Provincial Offices Parliamentary Office1000 Staff19 Agencies

At the heart of the Dti structure were the eight enabling divisions in their order.

Division 1 : The Office of the Director-General

This division was at the center of the Dti organisation as it provides strategic support to the Minister and Deputy Minister and Director-General on strategy and planning; research and policy analysis; monitoring and evaluation; intergovernmental relations programmes; and internal audit.

Division 2 : Group Systems and Support Services Division

This division was inter alia responsible for providing support on human resources development; corporate affairs; financial management; facilities management; corporate governance; risk management and legal services.

Division 3: Marketing

The role and function of the Marketing Division within the Dti value chain was focused in positioning the Department of Trade and Industry as a partner for economic development. It was also responsible for promoting awareness about the Dti products and services to increase uptake and access.

Division 4: Enterprise and Industrial Development Division

Core business functions of this division inter alia include: small business development and promotion; cooperatives development; broad-based black economic empowerment; skills development; logistics and infrastructure; technology promotion; and national industrial participation programme.

Division 5: International Trade and Economic Development

Its core functions inter alia include negotiating international trade agreement; promoting economic integration in the continent within the NEPAD framework; managing tariff structures for South Africa; as well as promoting South African in multilateral trading systems.

Division 6: Consumer and Corporate Regulation

Key among its core functions was the task to manage some of the areas on current functions with the provinces, for example in areas of liquor; gambling; and consumer protection. It also oversees and ensures the enforcement and compliance in micro – lending; competition; intellectual property rights; and corporate company law.

Division 7: The Enterprise Organization Division

This division focuses on administering the Dti incentive schemes and these are: investment incentives, including the Strategic investment programme, infrastructure investment incentives, competitive funds, skills and support programme, black business supplier development programme, andsector partnership. Division 8: Trade and Investment South Africa

It core functions inter alia facilitating investment; export development and promotion; export marketing assistance; trade missions and busying missions; and development of sector strategies.

It was reported that out of the total budget allocation to the Department: 33% was spent on grants and incentives to support enterprises, in particular small business; 38% was transferred to the dti Agencies; 10% was spent on salaries; and the remainder was spend on procurement.

BMW plant Rosslyn addressed the Committee on the core business functions and some of its key successful corporate social responsibility programmes. The key product for the plant includes the 3, 5, 7 and 8 series for the local market and was also involved in component export business.

This world – class facility has spent R2 billion worth of investment between 2003 and 2005. BMW SA’s export markets include: USA, Africa, East Asia; Japan; Australian; and New Zealand.

However it was reported that there were some productivity improvements save for the volatility of the rand, which was making the plant to lag behind its global competitors. The following manufacturing challenges were highlighted:

Limited local market growth, Proximity to Export Markets, Global over capacity, European MIPD Challenge, Partnership and co- operation with trade unions, Continuing skills development, Employment equity and black economic empowerment, and HIV/Aids Management.

BMW has invested consistently on various corporate social responsibility programmes and these inta alia include:

school environmental educational development programmes Setting – up the Nelson Mandela Ndonga School and Clinic Creating Centres of Excellence – science maths and technology Setting – up Early Learning Centres

Notwithstanding the challenges stated above, it was reported that the plant has re- engineered to international benchmarks and export opportunities.

Concerns and Recommendation raised by the Committee

The Committee was concerned about the lack of female dealerships and whether there were mechanisms in place to attract female dealers. The Committee also enquired as to whether BMW had any relationship with South African Farmers on its demand supply for leather. Whether BMW had a skills developmental plan in place. However, in general the Committee was impressed by BMW’s investment model, with a manufacturing plant in South African and good corporate responsibility.

Integrated Manufacturing Strategy (IMS) was highlighted as one of the dti’s contribution to Governments Micro Economic Reform Strategy (MERS).Chief among mechanism in the implementation of the Integrated Manufacturing Strategy were Customized Sector Programme(CSP) for the priority sectors (including automotive industry).

The automotive customized sector programme was targeted at providing among other things:

policy certainty to all stakeholders in the automotive industry in South Africa. improve export competitiveness via trade agreements and opportunities. improve South Africa as an attractive investment destination. increase diversification of export products. Grow manufacturing employment levels and Increased integration of BEE in Manufacturing value chain. The motor Industry Development Programme in essence was intended to encourage manufacture of high volume products, obtain economy of scale benefits, and export competitively.

However the key strategy for the success of the Motor Industry Development Programme for the next coming seven years will be premised on the following pillars:

Legislation and regulatory environment – for policy certainty. Employment and labour issues – to increase employment levels in the automotive industry. Black Economic Empowerment – to double the number of BEE companies in the manufacturing activities in South Africa. Market access - to improve the industry’s competitive edge by gaining duty free access into markets via free trade agreements and encourage export orientated manufacturing activities in South Africa. Investments – to ensure that South Africa becomes an investment destination of choice for the next generation models and components for exports to world markets. Export – to keep up the 33% compounded annual exports growth rate momentum achieved to date and increase the access to more than 117 current destinations. Incentives – by expanding the specific automotive investment incentive to make it more accessible and address the gap to encourage the large scale investment in the component sector and to assist SMME exports. R& D, Technology and Innovation – so as to identify and pursue value adding niche areas and increase the industry’s competence. Product and Market Development – through identifying the concern areas where the MIDP objectives have not been successfully achieved and appoint MIDC Task Teams mandated to come up with recommendations to address and resolve the concern areas. Skills and Training – to increase the skills and training levels in the export value chain via suitable interventions.

The Department reported that the South African Automotive Industry was one of the leading manufacturing sectors in the economy and was contributing 6, 6% towards GDP and has been ranked 18^th in the world. Manufacturing plants were mainly concentrated in Gauteng, Eastern Cape and Kwa-Zulu Natal.

Recent investment announcement by the OEM’s inter alia include the R2 billion by BMW SA, The R3, 5 billion by Toyota SA and R1 billion by Ford ( first USA OEM to invest in export programme) for the next generation models. Above all, investments on the TISA investment pipeline would amount to R6, 3 billion.

In the light of the facts thereof, it is clear that the automotive industry was key growth area in South Africa economy and as such, the Department and the Committee repeatedly confirmed commitment to support the automotive industry as a major growth sector.

The Automotive Industry Development Centre: The South African Auto Industry in perspective Focusing on the present situation in South Africa’s automotive industry it was reported that future projections in the sector looked certain. However social, economic and political risks will still prevail.

Future challenges include integration of entire local value chain into global arena; job creation; equity and BEE; growth; and economic upliftment. External pressures from East and China; globalisation excess production capacity; and market downturn continued to exist.

In meeting the aforementioned challenges, institutional support to technological efforts of firms was identified as a key, through the establishment of basic industrial services; technology information centres; infrastructure development; and skills development and training.

Visit to IDC offices in Sandton: Presentation by KHULA

The presentation provided an update on key priority areas of critical intervention by Khula in the next coming six months.

Presentation by the IDC The presentation outlined IDC’s corporate profile, vision and mission; financial policy and financial track record; IDC’s financing process; organizational structure; evolution of IDC’s focus areas; and the key development objectives for the next coming three years.

It was reported that the IDC with R 24, 5 billion worth of capital and reserves has generated a net attributable income of R697 million for 2004 financial years. IDC’s total assets were valued at R 30, 9 billion.

In 2003/ 2004 IDC has approved finance to the value of R4, 8 billion representing over 3% of private sector fixed investment in South Africa. More than 250 entrepreneurs have also been assisted. The finance value to empowerment firms represented 53% of the number and 35% of the value of approvals.

The financial instruments offered by IDC for the new or existing investment projects inter alia include: equity funding; quasi-equity instruments; commercial long term loans; share warehouse; wholesale finance; export and import finance; short – terms trade finance; and venture capital and guarantees.

The key development objectives in the next coming three years will be focused on job creation; more equitable distribution of investments in rural, provincial and exploring township development; BEE; NEPAD support and fully operational existing local development agencies. Concerns and Recommendations by the Committee

The Committee was concerned about duplication of functions between Khula and the NEF financing products. The committee was concerned about the double guarantee imposed by the banks and Khula. The Committee was concerned that most of the provinces were under – served by these agencies. The committee proposed the possible need to review the legislation so as to narrow Khula’s mandate and streamline its activities. The committee was also concerned about the costs of loans which were too onerous on small enterprises. The Committee requested Khula to set out its short-term goals and objective targets in the next two to three years. The Committee enquired whether Khula and IDC had an action plan to meet some of the key challenges as outlined in their presentations. The Committee probed Khula and IDC on their measurable outputs since May this year. The Committee was concerned that Khula was not making the desired impact in the ‘second economy’. The Committee asked whether Khula had any programmes for the survivalist business and whether Khula had any relations with Banks. The Committee was concerned that the intermediaries were not providing good custom service to the developing businesses.

Khula responding to the questions reported that with the corporation, the Treasury was revising the mandate of the DFI’s.It was reported that 1, 1 billion has been dispersed since Khula’s inception. The CEO emphasized that Khula had to be measured in terms of equity distribution and sustainable enterprises and a report to that effect would be tabled before the Committee in due course.

To value, there was a need to change Khula internally and still cash – flow discipline.

On the issue of interest rates he pointed out that Khula’s facilities were geared towards flexible support products for the end users and the approach was purely based on a ‘means test" on the basis of each individual.