SUBMISSION BY CLOTRADE AND THE EXPORT COUNCIL FOR THE CLOTHING INDUSTRY IN SOUTH AFRICA TO THE PARLIAMENTARY PORTFOLIO COMMITTEE
INTRODUCTION
On behalf of the Clothing Trade Council of South Africa (CloTrade) and the Export Council for the South African Clothing Industry, thank you for the invitation to address the Portfolio Committee today.
CloTrade and the Export Council, with jointly approximately 160 member companies nationally are the major industry representative bodies. We have been looking forward to this opportunity to address the committee since presentations were made to you earlier this year in May.
Unfortunately, given that the invitation was received only late last week some key CloTrade and Export Council representatives are unavailable. In one case attending the International Apparel Federation (IAF) meeting in Mexico to showcase a current initiative to achieve greater sub-Saharan African integration of textile and clothing manufacturers through a new body, the African Clothing and Textiles Industries Federation (ACTIF).
At the Growth and Development Summit in June 2003, President Thabo Mbeki echoing an earlier statement he had made at the opening of Parliament, stated that the Government 'have agreed to prioritise a number of labour intensive sectors such as clothing certainly it cannot be business as usual for these industries. Concrete programmes have to be developed as a matter of urgency to improve on what is already being done."
Since 2003 CloTrade has engaged with Government through the dti in a number of forums, e.g. the Textile Clothing & Development Council (TCDC) and the Industry Technical Task Team on a number of issues in pursuit of the industry's potential for job creation and implementation of Government policy. These issues have been.
1. IMPORTS
2. CUSTOMISED SECTOR PROGRAMME (CSP)
3. TRADE AGREEMENTS
4. EXPORTS
At the request of Government a council was established to enhance South Africa's position as a clothing exporter to the world. The Council has endeavoured over the years to ensure fair practice and has lobbied Government in the hope of creating mechanisms to assist exporters.
From an Exporter's point of view, the most crucial issue to be addressed is the Interim Development Programme which was devised to fill the gap between the DCCS and a future scheme to the year 2012. One of my colleagues will unpack this during the course of our presentation which will include the issue of single stage conversion.
OVERVIEW
in April 2005 in various business publications CloTrade published an open letter to the broader South African community. This highlighted the value of clothing manufacturing and how a national asset in CloTrade's opinion was in danger of being destroyed:
OUR VALUE
THIS NATIONAL ASSET IS IN DANGER OF BEING DESTROYED
STRONG RAND
IMPORTS
SAFEGUARD MEASURES
In order to combat the surge of imports from particularly China, CloTrade submitted a general Safeguard Application in terms of WTO rules to ITAC in June this year. To assist it to do so it retained an expert consultant. Unfortunately we still await a definitive response as well as a response to our request to make an oral submission. This is most disappointing as the purpose of the oral hearing would be to seek guidance from ITAC as to how CloTrade's application should meet ITAC's requirements, given the particular circumstances of the clothing industry as well as draw on the EU and US experience.
Countries such as Turkey took it upon themselves through Government and not industry to ensure the swift introduction of Safeguard Measures and thereby protect their clothing industry.
A task team set up by Government to establish injury to local industry has to date not yet published any of its findings, given that its brief was to investigate the flood of imports out of China and the consequence to the local clothing industry (April 2005.)
COUNTRY-OF-ORIGIN LABELLING
The clothing industry's concerns run deep as four years after an initial programme to set in motion a country-of-origin labelling programme gazetted as coming into effect on the 23 May 2005. It to date has still not been implemented. We understand that this will only now happen In January 2006. It is vital this is expedited.
SARS CUSTOMS I ILLEGAL IMPORTS
The local clothing industry would like to congratulate SARS on a programme of search and seizure which has been under way for the last few months. The industry understands the limitations that SARS is currently experiencing in bringing the perpetrators to book and trusts that Government will find a vehicle to enable SARS to proceed with criminal prosecutions.
CUSTOMISED SECTOR PROGRAMME (CSP)
This programme is intended to develop a five year strategic plan for the sector. It was scheduled to be finalised by all stakeholders in June this year for, as we understand, submission for final Government approval last month. Unfortunately once again, we have seen as with other initiatives, delays in its finalisation.
We are also extremely worried about the inexplicable "loss" in a draft CSP Document most recently submitted to CloTrade, of the urgent pre-requirement that the Interim Development Programme (DCC Extension) be finalized. The prejudice suffered to our exporters has been clearly pointed out to dti many times before.
CLOTRADE recognizes the importance of a CSP to which all segments of the supply pipeline can wholeheartedly subscribe and wishes to co-operate to translate this to reality soonest. It is therefore vital that an acceptable CSP be fast tracked as a matter of urgency.
TRADE AGREEMENTS
The clothing industry is pleased with the Minister's response with regard to the future of rules of origin whereby he has given to his trade negotiating team directives which would in effect assist our clothing industry in obtaining duty free fabrics not manufactured in South Africa.
INTERIM DEVELOPMENT PROGRAMME
I am the Chief Executive Director of an exporting company. We are responsible for the creation of 5000 jobs in Isithebe, a rural area in KwaZulu Natal.
Six years ago we decided to to go 100% export. At that time we employed 1000 people. Our growth during then and 1st April 2005 has been almost entirely due to the DCCS. For the period 1 April 2004 to 31 March 2005 we sold an average of 1 500 000 garments per month to the USA and earned the country over $40 000 000 in foreign exchange. Today we face closure. This is not just the case for my company but for all of us that are export companies or have export departments. At last estimate we totalled 14 000 direct jobs that will be lost. We have already retrenched 500 people this year.
There are certain people of high standing in Government who get quite hysterical at the mention of DCCS and yet, this scheme has shown that it has the ability to achieve what it was set out to do and that is, promote exports. It's only failure is that it may not be WTO compliant and we all agree that this matter has to be addressed and, through the Textile and Clothing Development Council (a dti initiative) the wheels were set in motion. A further perceived failure is that it is responsible for the loss of jobs amongst clothing companies that manufacture only for the local market.
This is, of course, nonsense. It is the tradability that promotes this view or, in simple terms, the fact that we are allowed to sell our DCCS to the local chain stores and they use them to offset duty on imports. Simple arithmetic will show that to make a decision to import a garment as opposed to having it made locally is not on. A buyer will pay a maximum of 40% duty on a garment. It will cost him 85% per Rand of DCCS that is the present market value, so his saving is 15% of 40%, or if you like, 6% of the cost of the garment. On top of this he has other import costs amounting to 2% 50 he only gains 4%. No self respecting chain store buyer is going to go to the trouble of importing for a 4% saving. The fact of the matter is, it is the strong Rand that is making him decide to import. A garment that costs R12.00 three years ago now costs him R6.50. The proof of the pudding is in the eating. Minister Mpahlwa has not allowed the issue of a single DCC since 1 April 2005, five and a half months, and yet the imports are still pouring into the country.
In May 2004 CloTrade and the Export Council for the Clothing Industry engaged the dti with a view to extend the DCCS beyond its expiry date of 1 April 2005. During this time a complaint was indeed received from the WTO regarding the DCCS. After much deliberation between the dti and both the Clothing and Textile Industries, and the advice of Dr Justin Barnes, it was decided by all parties that the way forward was to give ourselves time to research and develop an incentive scheme for the Industry that would be WTO friendly. It was agreed that no lapse in the incentive scheme could be tolerated by the industry because of the amount of jobs at stake. It was felt that two years would be sufficient time to develop this programme and that in the meantime we would have to prepare an interim scheme based on the DCCS. This whole procedure was agreed to by all participating parties and an Interim Development Programme was drawn up, signed by all participating parties, dti through ITAC, ITED and CloTrade and Texfed. This document was presented to Dr Ruiters, then Director General and the Minister for final signing off.
By the end of September 2004 we had not heard if our proposals had been accepted. We then tried to have a meeting with either Dr Ruiters or the Minister to discuss the matter. We eventually succeeded in meeting with Dr Ruiters on 29 October 2004, nearly a year ago. He assured us that our proposals had been accepted with regards the Interim Development Programme and that the "new" incentive scheme would run through to 2012. To date, none of this has happened. The Minister came back to us via a Textile and Clothing Development
Council (TCDC) meeting saying that if we reduced the Interim period to one year he would sign the document by 15 April 2005. We agreed but nothing happened. He has come back once more, this time about the tradability but still nothing has happened.
PREJUDICE SUFFERED BY EXPORTERS
It must be noted that the DCCS is an offset scheme to compensate exporters for the high cost of production and raw material inputs.
For the period 1 April - 30 June 2005, a total amount of R41 million worth of Duty Credits had been collectively earned that cannot yet be claimed by exporters as the necessary legislation has not been gazetted. The net result of this is that exporters have been placed under considerable cash flow strain. Exacerbating the cash flow implication, the lack of finality in the form of a legal notice now places these companies in an extremely difficult position on how to reflect the Duty Credits accrued to date in their year end financial reports. Auditors are also placed in a difficult position. For large exporters this will have a major impact on their access to funding from their bankers.
GOVERNMENT DEPARTMENTS ADVERSELY AFFECTED
The ITAC section responsible for the administration of the scheme who, already understaffed, will now be under further pressure to process 12 months of claims in 5 months, with exporters screaming for action due to their financial situation.
SARS Customs will also incur an additional administrative burden in having to process duty refunds once Duty Credits are finally available and duty paid in advance has to be refunded to exporters on presentation of certificates.
With exporters already under severe pressure, everything possible should have been done by the dti to assist them to meet the challenges. The financial prejudice and the unnecessary additional administration burden on all parties affected is deeply regretted, could and should have been avoided.
EXPORTS DECLINING
What is very disturbing is the growing number of exporters who have reported that they are not prepared to confirm any further export orders until the Interim Programme is firmly gazetted.
The latest export statistics reflect a year on year decline of 38% in exports. Based on the current declarations from exporters for this exercise, we could be looking at this trend continuing for the rest of 2005, if not deteriorating further. Everything possible should be done to reverse this.
POSSIBLE LOST OPPORTUNITY TO STOP JOB LOSSES
The recent development in the US and EU regarding the invoking of safeguard measures in the form of quantitative controls on a number of apparel categories from China that have been the traditional strengths of sub Saharan Africa, has created renewed interest in sourcing from Africa, by US and EU retailers. The indecision surrounding the Interim Programme is therefore leading to reticence amongst exporters at precisely the time when South Africa requires its apparel exporters to be highly motivated to go out and win back the market share lost to China over the past year and stop the job loss.
REQUEST FOR URGENT ACTION
The Export Council for the Clothing Industry in South Africa has now made numerous efforts and approaches to have the matter resolved. This has to be our final appeal to request that the Interim Clothing and Textile Development Programme be formally approved and gazetted as a matter of extreme urgency.
We have shown that the DCCS does not affect the import of garments, up over 30% from last year, but the effect on exports is disastrous - down over 30% from last year and falling.
The dti has kept us in the belief that the Interim Development Programme document would be signed off. We have quoted and sold export items that have included the DCCS in the costings. We stand to lose millions of Rand and thousands of jobs if this situation is not addressed.