Report of the Portfolio Committee on
Trade and Industry on the Annual Reports of the Department of Trade and
Industry and its Entities for the 2008/09 financial year, dated 25 February
2010
Executive Summary
1.
Introduction
Due to the
national elections following the period covered by the Annual Reports under
review, the Portfolio Committee on Trade and Industry took into cognisance the
decision to reconfigure Cabinet and the changing functions in the respective
votes, including the establishment of the new Department of Economic
Development. The comments, conclusions and recommendations of the Committee
reflect its position within this changing environment.
The 2008
State of the Nation Address (SONA) outlined the policy priorities that
Government would pursue in the 2008/09 financial year. A number of these
related to trade and industry interventions in order to further accelerate
sustainable economic growth and development through industrialisation and
international trade in order to increase employment and equity.
The
Portfolio Committee on Trade and Industry elected to strategically oversee a
selection of Annual Reports of entities reporting to the Department of Trade
and Industry annually to ensure that the selection received adequate interrogation.
The Committee had oversight meetings to oversee the Annual Reports of the
following entities over the period 7 October to 10 November 2009:
§
The Department of Trade and Industry (DTI)
§
Competition Commission
§
Competition Tribunal
§
Industrial Development Corporation (IDC)
§
Khula Enterprise Finance Ltd (Khula)
§
National Empowerment Fund (NEF)
§
South African Micro-finance Apex Fund (SAMAF)
§
Export Credit Insurance Corporation (ECIC)
This
report provides an overview of these meetings, as well as the key issues and
recommendations emerging from the deliberations.
2.
Highlights noted by the Department of Trade
and Industry
The
Minister of Trade and Industry, Mr Rob Davies, highlighted a number of
developments in the Department. The next IPAP would be finalised in the next
few months and the release of the paper on Southern African Customs Union
(SACU) by the World Trade Organisation (WTO) was imminent. The Deputy Minister
Maria Ntuli, with a team from the Empowerment and Economic Development
Division, undertook a fact finding visit in the provinces, their findings would
be shared with the Committee early in 2010. Ms Jodi Scholtz had also joined as
Chief Operating Officer to “incrementally” improve service delivery
efficiencies across DTI operations.
The Director General, Mr Tshediso
Matona briefed the Committee on the implications of the Medium Term Budget
Policy Statement (MTBPS) for the DTI during 2008-2009. Against the economic
environment’s canvas, he highlighted several points noting the strategic
objectives, achievements, challenges, and thematic progress in industrial
development, trade, investment and exports, broadening participation,
regulation, and administration and co-ordination.
§
Manufacturing sector: This has been hit
hardest by the negative economic growth due to the global economic crisis with
a 3 per cent decline in the second quarter of 2009, which is ‘bottoming out’. Consequently about 484 000 jobs in key sectors had been affected between the
last quarter of 2008 and the third quarter of 2009. More than half of these
jobs had been in the formal manufacturing and wholesale sectors.
§
The MTBPS: Implications for the
Department included adjusting the orientation of industrial incentives to more
labour-intensive industries; implementing a coherent rural development
programme; utilising trade, industrial and competition policy to promote
exports and to create jobs through increasing competitiveness, raising
productivity and lowering costs for both businesses and households; accessing
growth opportunities in Africa; and rationalising public entities and agencies.
§
Audit Report: The DTI achieved an
unqualified audit report and under spent by 1 per cent of the budget or R69.9
million.
3.
Key issues identified by the Committee on
the DTI in general
The Committee identified key issues
in the annual reports and during the engagement with DTI and its entities and
consequent deliberations. It found that the non-financial performance
information provided helpful information for its oversight but suggested that this
could be improved by including an impact assessment. In addition, the DTI
should ensure that strategic targets for outputs were in line with not only the
challenges but with what could be realistically achieved. It noted the
reconfiguration of the DTI and its agencies in relation to the Department of
Economic Development. It also noted the importance of geographical coverage in
the interest of overcoming the imbalances in development.
§
Economy: Structural deficiencies
in the economy and spatial inequalities needed to be addressed urgently through
the provision of industrial development initiatives in all provinces. The
pressure on the economy was increased by unfair competition, particularly in
textiles and aluminium industries, due to subsidised and illegal imports from
§
Trade development and
regional integration: The dichotomy between the need to generate more foreign
revenue through foreign direct investment and value-added exports and the
increasing emphasis on South-South strategies was increasingly important.
The implementation of the
interim EPA posed a direct threat to SACU, the oldest customs union
internationally and consequently to SADC relations and therefore regional
integration and development.
§
Small and medium
enterprises (SMEs) and co-operatives: The Committee noted the importance
of SMEs and co-operatives in overcoming inequalities and advancing geographic
spread. It is of the opinion that the limited developmental financial and other
support being provided to co-operatives is an impediment to overcoming poverty
and economic development. However, it welcomed the Government’s commitment to
observe the 30-day payment cycle for SMMEs.
§
Gambling and revenue
generation: Earlier legislation in this area had encouraged a situation of increased
demand for gambling opportunities before a socio-economic study could be
conducted on its nearly fifteen years of activities. At issue is the
Government’s position on gambling given the justification from various
stakeholders that employment and revenue generation as well as BBBEE benefits
were contributing to economic development and community cohesion.
§
Impact of vacancies on
service delivery: The appointment of a chief operating officer was
constructive; however, the core challenges around reducing the 18 per cent
vacancy rate remained, including the number of terminations at senior level,
and the availability and retention of staff.
4.
Competition Commission
The
Committee was briefed by the Commissioner of the Competition Commission, Mr
Shan Ramburuth, regarding the activities, achievements and challenges of the
Competition Commission for the 2008/09 financial year. Key investigations that
had been initiated and completed; the implementation of the amended Corporate
Leniency Policy; and the future strategic priorities were highlighted.
In its deliberations, the Committee
raised the impact of investigations on prices and indicated its interest in
pursuing this further. It also raised the issue of independence and
accountability of the Competition Commission and the criteria being used to
identify priority sectors for investigation; consequent costs of
investigations; the use of settlement agreements and the use of money received
from fines.
5.
Competition Tribunal
Mr Norman
Manoim, the Chairperson, and Mrs Lerato Motaung, the Registrar, briefed the
Committee on the Tribunal’s performance for the 2008/09 financial year. The
briefing outlined the nature of the Tribunal’s work, performance statistics,
important decisions during the year, its participation in international bodies,
financial management statistics and information about Tribunal Members and
staff.
In its deliberations, the Committee
clarified the independence of the Tribunal in relation to the Minister of Trade
and Industry and the Competition Commission. Further clarification was sought
on the compliance with the conditions set for large mergers. It discussed the
measures implemented to ensure that corruption by respondents colluding with
staff was prevented and called for rigorous attention to the lack of redress
for victims of cartels and the possibility of using private enforcement by
individuals to enhance competition.
6.
Industrial Development Corporation
Mr Nimrod
Zalk, the Deputy-Director General of the Industrial Development Division from
the DTI, provided a background in terms of the environment within which the IDC
was operating in. The Chief Executive Officer, Mr Geoffrey Qhena, briefed the
Committee regarding the results of the IDC’s 2008/09 Annual Report. The
briefing highlighted the IDC’s role and objectives, its achievements and
financial statistics, as well as its activities related to the funding of
distressed companies and its prospects for the next five financial years.
In its deliberations, the Committee
focussed on the IDC’s alignment with the objectives of the Industrial Policy
Action Plan and the support provided to companies in distress, as well as the
need to increase such support. Related to this was the Committee’s concern at
the length of time it took for applications to be processed and the reasons for
the rejection of applications. The economic opportunity costs in relation to
IDC’s funding for the creation of direct and indirect jobs against job losses.
The Committee was impressed by the
business performance of the IDC; nevertheless, the increasing trend in
impairments, namely client indebtedness risk, notwithstanding the economic
climate, was a cause for concern as was the relatively high increase in
performance bonuses given the current economic climate. On the governance side,
issues around the conflict of interest in terms of assisting companies in which
IDC board members have a direct interest do not, in the Committee’s opinion,
promote an environment of fair practice.
7.
Khula Enterprise Finance Ltd
Mr
Setlakalane Molepo, the Managing Director, briefed the Committee on Khula’s
performance for the 2008/09 financial year. The briefing highlighted Khula’s
mandate and target market, the achievements for the financial year, its
operational and financial results and strategy implementation. In addition, it
provided examples of success stories and the progress made in the development
of Khula Direct’s business plan. Khula also emphasised its recent focus on
rural development. In its deliberations, the Committee raised a number of
issues some of which had already been focussed on during the year but were
still outstanding. In particular, the implementation plan for Khula Direct and
its funding options.
Another
area was the need to penetrate rural areas, improve industrial areas in rural
areas and to support emerging black farmers. The Committee, once again, pointed
out that the promotion of small enterprises was not receiving sufficient
attention compared to countries such as
8.
National Empowerment Fund
The
briefing was made by Ms Philisiwe Buthelezi, the Chief Executive Officer, and
Mr Andrew Wright, the Chief Financial Officer. During their briefing to the
Committee, they outlined the NEF’s mandate, key strategic objectives, the NEF’s
organisational structure and historical background. Furthermore, they reported
on the performance of the Financial Management and Asset Management Divisions, as
well as the annual financial results. Further, it noted the capacity
constraints in reaching out to the various provinces.
Serious issues were identified by
the Committee during its deliberations including the decline in the BBBEE
ownership from about 8 per cent on the Johannesburg Stock Exchange before the
financial crisis to around 2 per cent. Once again, the need and availability of
business planning toolkits was raised, as well as the budgetary significant
allocations to remuneration and the merits and criteria against which
performance bonuses had been awarded. In addition, the Committee pointed out
its inability to determine whether the NEF had performed well during the
2008/09 financial year given the data provided. It also urged the NEF to establish
a stronger presence in outlying areas.
9.
South African Micro-finance Apex Fund
SAMAF’s mandate is to focus on
providing financial and non-financial support to the micro-finance sector in
order to promote equity, particularly in rural areas and among the most
vulnerable. Mr Sithembele Mase, the Chief Executive Officer, briefed the
Committee on SAMAF’s performance for the 2008/09 financial year. His briefing
included information about the rationale for SAMAF; its mandate and alignment
with government objectives; its strategic goals and objectives; highlights of
its national footprint and network disbursements; challenges and binding
constraints it faced; its employee competency profile; and action plans and
risk mitigation.
A number of issues which were raised
by the Committee during its deliberations are related to poor systems and lack
of alignment between objectives and actual performance. The sharp rise in
impairment provisions or what is commonly understood as indebted clients reveal
limited monitoring and a flawed early warning system to detect defaulters and
no systematic legal recovery measures. SAMAF’s continuous qualified audit
reports due to the structure of some of the agreements between SAMAF and the
institutions that it had funded simply underlines this state of affairs. The
current lack of risk taking cover for co-operatives with a capital asset base
of less than R1 million and a membership of 200 individuals deepens the
vulnerability of individuals with no recourse if funds disappeared.
10.
Export Credit Insurance Corporation
The ECIC
helps secure export transactions involving South African contractors bidding to
provide capital goods and
Dr Patrick Kohlo, the Chief
Executive Officer, and Ms Sedzani Mudau, the Chief Financial Officer, briefed
the Committee on the ECIC’s performance for the 2008/09 financial year. The
ECIC underlined the impact of US dollar financing and insurance on its
financial accounts; its financial performance and the associated risks it
faced. The three key risks were identified as succession risks, concentration
risks and matching interest rates to enhance competitiveness relative to
international competitors.
Furthermore,
the ECIC had to achieve a balance between excessive portfolio exposure, in
During its
deliberations, the Committee supported the ECIC’s relationship with the
bilateral investment treaty policy framework. Given the ECIC developmental
mission the Committee suggested that the ECIC’s continued concentration in
The ECIC
received an initial cash injection from the DTI of R2 billion in 2000
thereafter it has been funding its activities from the returns on its
investments and premiums received. These premiums are charged relative to the
client’s risk profile. The recent restructuring of the ECIC has led to more
efficient
11.
Conclusions
11.1
The Committee welcomes the DTI’s recognition that urgent
measures must be developed and implemented to arrest the decline in
11.2
The Committee also supports the Executive’s refusal to sign
the interim EPA, which threatens regional integration in particular through
undermining the terms and spirit of the SACU Agreement. It also agrees with the
Government on the need to broaden and strengthen trade relations in the South
while retaining strategic trading agreements with traditional partners in the
11.3
The Committee recognizes the relationship between
employment, industrial development, trade and economic growth and the need to
harness positive performance in this relationship to eradicate poverty and
enhance community cohesion. Given the inequalities in
11.4
Acknowledging the independent operations of the Competition
Commission and the Competition Tribunal, the Committee believes these two
entities have a critical role to play in protecting consumers from unfair and
unrealistic prices but also through robust business operations developing
11.5
Annual Reports underline the complexities in the concurrent
character of gambling operations and its socio-economic impact. The Committee
continues to deliberate on these issues to arrive at the optimum operation in a
developmental state. The distributive model in the National Lotteries Board
remains a concern for the Committee.
11.6
Robust oversight by the Portfolio Committee on Trade and
Industry was facilitated by the transparent engagement of the Minister and his
two deputy Ministers as well as the Director General and senior staff in the
Department of Trade and Industry. We extend our appreciation to DTI and look
forward to continuing with this constructive working relationship.
11.7
The Committee also wishes to thank its Committee support
staff in particular the Committee Secretary, Content Advisor and Researcher for
their conscientious commitment to their work.
The Chairperson thanks all Members of the Committee for their active
participatory oversight, deliberations and constructive recommendations to the
House.
12.
Recommendations
The DTI and the relevant entities
are required within three months following the adoption of this report to
provide a written report on the measures they have implemented to address the
following recommendations.
12.1
As the IDC will be playing a critical role in the
acceleration of the industrial base, it will require significant
recapitalisation. The last time IDC was capitalised was in the 1940s and only
its judicious investments have enabled it to provide certain finance. However,
the current financial demands on it are unsustainable without recapitalisation.
The earlier legislation passed in 1940 should be reviewed and aligned with its
expected role in a developmental state. The DTI should provide the Committee
with a report on the measures that can be developed to underpin the processes
of recapitalisation and the review of the existing legislation.
12.2
The Development Finance Institutions should submit bi-annual
reports on their non-financial performance indicators. Information should
include:
§
Number and percentage of previously disadvantaged
beneficiaries receiving funding and other support, particularly in rural areas
and in designated groups including women, youth and people with disabilities.
§
Value of funding received by these beneficiaries.
§
Outputs that are being generated by these beneficiaries.
§
Impact of the funding and support provided, such as job
creation and SMME development.
§
Cost of the funds to lenders i.e. applied rates.
§
Percentage of individuals and enterprises able to repay
their loans and the assistance given to these.
12.3
The DTI must submit a comprehensive qualitative and
quantitative report on incentive schemes. The report should include:
§
Details of each project and/or beneficiary receiving an
incentive.
§
The returns on these investments in terms of the creation of
additional long-term sustainable jobs, the number of jobs retained, the
downstream effect on new sustainable jobs and the stimulation/injection into
the South African economy in terms of projected and actual economic growth.
12.4
The ECIC should submit bi-annual reports on the
implementation of the Interest Mark-Up Agreement approved by the National
Treasury. Information should include:
§
Number of export projects being approved.
§
Companies benefitting, as well as a breakdown of their representivity
in terms of designated groups.
§
Value of these projects.
§
Geographical spread of its portfolio.
12.5 The National Lotteries Board, in
conjunction with the DTI, should submit a review of the distributive model for
the National Lotteries Distribution Trust Fund, as well as the amendment of the
legislation including issues pertaining to the accountability of the
Distributing Agencies.
The Report
of the Portfolio Committee on Trade and Industry on the Annual Reports of the
Department of Trade and Industry and its Entities for the 2008/09 financial
year.
1. Introduction
The Annual
Reports, which address the period 1 April 2008 to 31 March 2009, dealt with the
period only a month prior to the national elections. A number of significant
programmatic changes within the new term made it clear that all of the
programmes referred to in these Annual Reports would undergo changes in line
with the fresh configuration in the Cabinet and priority functions including
the establishment of the new Department of Economic Development.
The
purpose of an annual report is to reflect policy implementation and the
efficient use of resources for effective service delivery, as well as outputs
in line with the organisation’s strategic plan and outcomes in line with its policies.
Oversight
on Annual Reports takes into account significant changes in policy direction
and any valid impediments to implementing targeted outputs as stated in the
Strategic Plan. Thus, the Portfolio Committee on Trade and Industry took into
account the decision to reconfigure Cabinet and the changing functions in the
respective votes. The comments, conclusions and recommendations of the
Committee reflect its position within this changing environment.
2. State of the Nation Address
The 2008 State
of the Nation Address (SONA) outlined the policy priorities that Government would
pursue in the 2008/09 financial year. These are noted below with a focus on the
issues affecting trade and industry, namely to:
§
Further accelerate sustainable economic growth and
development through industrialisation and international trade in order to
increase employment.
§
Implement the Industrial Policy Action Plan (IPAP) in order
to accelerate economic growth and development, as well as supporting industrial
policy development through tax incentives and industrial policy initiatives.
Furthermore, an action plan was to be developed for mineral beneficiation,
consumer durables, retail, construction, creative industries, agriculture and
agro-processing.
§
Support the automotive sector through the Motor Industry
Development Plan (MIDP).
§
Improve the effectiveness of Second Economy and poverty
eradication interventions.
§
Intensify efforts to scale up assistance to co-operatives
and small enterprises by providing training and improving access to markets.
§
Introduce the system of preferential procurement for
specific products to Government from small, medium and micro enterprises
(SMMEs). Government would also work towards meeting the 30 day payment period.
§
Finalise the Economic Partnership Agreements (EPAs) through
ongoing negotiations with the European Union.
§
Further consolidate the Southern African Development
Community (SADC) free trade area (FTA).
§
Establish a one-stop investor call centre to assist
investors with land acquisition, infrastructure and environmental impact
assessment.
3. Process
The
Portfolio Committee on Trade and Industry elected to strategically oversee a
selection of annual reports of entities reporting to the Department of Trade
and Industry annually to ensure that the selection received adequate
interrogation. This year it focused on overseeing the annual reports of:
§
The Department of Trade and Industry (DTI)
§
Competition Commission
§
Competition Tribunal
§
Industrial Development Corporation (IDC)
§
Khula Enterprise Finance Ltd (Khula)
§
National Empowerment Fund (NEF)
§
South African Micro-finance Apex Fund (SAMAF)
§
Export Credit Insurance Corporation (ECIC)
The
briefings for these entities were over the period 7 October to 10 November
2009. This report provides an overview of these meetings, as well as the key issues
and recommendations emerging from the deliberations.
4.
Department of Trade and
Industry
4.1. Overview
The
Minister of Trade and Industry, Mr Rob Davies, highlighted a number of
developments in the Department, namely that:
§
The next IPAP was to be finalised shortly and would be
presented at the Cabinet Lekgotla.
§
The release of the World Trade Organisation’s (WTO) paper on
the Southern African Customs Union (SACU) Trade Policy for public comment was
imminent.
§
In terms of small business and cooperatives development, the
Deputy Minister, Ms Maria Ntuli, and a team from the Empowerment and Economic
Development Division had been visiting the provinces and would be presenting
their findings.
§
The Chief Operating Officer, Ms Jodi Scholtz, had been
appointed recently to incrementally improve efficiencies across the DTI
regarding service delivery.
The Director General, Mr Tshediso
Matona, briefed the Committee on the 2008/09 Annual Report, and made a
reference to the implications of the Medium Term Budget Policy Statement
(MTBPS) on the DTI. During his briefing, he covered the economic context within
which the DTI had been operating, its strategic objectives, achievements, thematic
progress and challenges, as well as the implications of the MTBPS.
Mr Matona pointed out that economically,
the country had experienced negative economic growth due to the global economic
crisis (a 3 per cent decline in the second quarter of 2009), but the downturn
appeared to be bottoming out. Mainly the manufacturing sector was affected with
the key affected groups being metal and metal products, the automotive industry,
capital equipment and clothing and textiles. Trade performance had worsened as
exports declined by 6 per cent between January and February 2009, which had led
to an increase in the balance of payments deficit. There had been a shedding of
jobs in key affected sectors between the last quarter of 2008 and the third
quarter of 2009 resulting in the loss of about 484 000 jobs. More than half of
these jobs had been in the formal manufacturing and wholesale sectors. The Government’s
infrastructure development programme had, however, provided a demand pull for
certain sectors.
The DTI’s strategic objectives were
outlined and these related to the five themes within which the DTI’s seven
programmes/divisions are divided into. The themes are industrial development;
trade, investment and exports; broadening participation; regulation; and
administration and coordination.
§
Industrial development: The DTI highlighted
several achievements during the 2008/09 financial year. These included
references to interventions under the National Industrial Policy Framework
(NIPF) and its Action Plan; Technology and Innovation initiatives and the
performance of the National Industrial Participation Programme (NIPP).
§
Trade, investment and
exports:
The DTI reported on the trade agreements that it had finalised and those that
it was in the process of negotiating, as well as its regional and continental
integration activities.
§
Broadening participation: The Director General
outlined achievements relating to Broad-based Black Economic Empowerment
(BBBEE); gender and women’s economic empowerment; and communication and
marketing. He noted that sector transformation charters for forestry, tourism,
construction and transport had been gazetted and that work was underway in
terms of assessing the alignment of the BBBEE and Preferential Procurement
Policy Framework Acts and the establishment of the Black Economic Empowerment Advisory
Council.
§
Regulation: The Director General
mentioned the various bills that had been enacted and that would be introduced
in Parliament, as well as the regulations that were being reviewed by the
Department. In addition, he outlined the progress that had been made in terms of
consumer redress and awareness and educational campaigns.
§
Administration and
co-ordination: The Department had focused on strengthening its own institutional
capacity during the 2008/09 financial year. This included reducing its vacancy
rate and developing its employees through a number of initiatives. The
Department had also strengthened its key corporate governance structures. Finally,
it had achieved an unqualified audit report and under spent by 1 per cent of
the budget (namely R69.9 million) at the end of the 2008/09 financial review.
The implications of the MTBPS for
the Department included adjusting the orientation of industrial incentives to
more labour-intensive industries; implementing a coherent rural development programme;
utilising trade, industrial and competition policy to promote exports and to
create jobs through increasing competitiveness, raising productivity and lowering
costs for both businesses and households; accessing growth opportunities in
Africa; and rationalising public entities and agencies.
4.2. Key issues raised by
the Committee
The following issues emerged during
the Committee’s study of the Annual Reports, its engagement with the entities
and consequent deliberations:
4.2.1. General
§
Performance Information: The Committee commented
that the non-financial performance information provided was helpful, and
suggested that this could be improved by including an impact assessment and
ensuring that strategic targets for outputs were in line with not only the
challenges but with what could be realistically achieved.
§
Impact of the Department
of Economic Development: The Committee enquired whether the DTI had considered the structuring
of its agencies in relation to the Department of Economic Development. The DTI
reported that there was a process to transfer some of the agencies to the new
Department but it wanted to do that while breaking down silos and thus COTII
meetings will continue and the functional relationships between entities will
not change.
§
Effectiveness of
programmes:
The Committee asked the DTI how it ensured that critical mass was reached in
its various programmes and what the challenges were in this regard.
§
Policy Statements: The Committee
encouraged the DTI to produce documents on major policy issues facing the
country beyond those related to trade negotiations and industrial development.
The DTI informed the Committee that the next IPAP would be released soon. It
also indicated that a competitive exchange rate would be required in order to
meet its objectives. Other policies that were being reviewed included the SMME
and co-operative programmes.
§
Structural deficiencies
in the economy: The Committee commented that the DTI kept speaking of further adjustments
and improvements in the way it conducted its task, which implied that they were
maintaining and improving what had already been established. However, in the
Committee’s view, there is a need to refocus efforts in certain areas. The DTI
agreed that unemployment had not reduced in spite of ongoing economic growth
prior to the economic recession, and that structural changes were necessary.
This had been the reason why the DTI had been targeting labour-intensive parts
of the economy and manufacturing was an important catalyst in this regard.
§
Electricity supply: The Committee enquired
whether a study had been conducted on the impact of the irregular supply of
electricity by Eskom. The DTI replied that it was developing a response to the
electricity cuts and that the worst impact would be no electricity to firms. In
the Committee’s opinion this is an area that needs to take full advantage of
the “no silo syndrome” that now prevails and to tackle the challenges posed by
an irregular energy supply.
4.2.2. Industrial
Development
§
Spatial distribution of
activities:
The Committee commented that not all provinces were included in the industrial
development initiatives and enquired about the strategies that the DTI would
implement to correct this disparity. It
also enquired why there had been no representation of the
§
Automotive industry: The Committee noted
that the MIDP primarily benefitted vehicle and component manufacturers and that
most of these manufacturers were foreign-owned. It thus appeared that taxpayers
were funding the flow of dividends and profits out of
The Minister responded
that all developing countries that were industrialising had an automotive
sector otherwise they faced deindustrialisation.
§
Business Process
Outsourcing and Off-shoring (BPO&O): In response to the Committee’s enquiry
on projections for the 17 BPO&O applications, the DTI stated the BPO&Os
would be created over the following three years. The jobs created would be
monitored and incentive benefits would be disbursed on the basis of job
creation.
§
Imports of subsidised
products:
The Committee enquired about the challenges that textile and aluminium
industries were experiencing regarding imports of subsidised products from
The Minister responded that
there were challenges with
The DTI was proposing the
revamping of their credit system to promote investment in the clothing industry
by providing credits for companies that produce value added products rather
than only those involved in exporting. Another solution could be countervailing
duties to address subsidised products. This could be a problem as it would
damage foreign relationships. The DTI has however increased tariff rates and were
cracking down on illegal imports. The DTI also reported that in September 2009
SARS (South African Revenue Services) seized R60 million worth of illegal
clothing and textile imports and raided 47 stores that did not have proper
proof of import documentation.
§
Incentives: The Committee noted
that incentives were an important part of the DTI’s work, especially since 54
per cent of the DTI’s budget was allocated to incentives and requested a
breakdown of the types of incentives. The DTI indicated that both new and
existing firms that were expanding their capacity benefitted from its incentive
schemes. It also indicated that a large number of incentives were supplied by
the DFIs, namely off budget support. These schemes included the MIDP, which was
one of the DTI’s largest off budget incentive schemes; the SMEDP (Small Medium
Enterprise Development Programme, now the Enterprise Investment Programme),
which was the largest incentive scheme that was included in the DTI’s budget; other
sector focused programmes, such as those within the BPO&O and the film and
TV industries; and on co-operatives and black business supplier development
programmes.
Further, in response to the
Committee’s enquiry on how incentives for polymers benefitted the country apart
from developing skills and providing training, given that the raw materials were
being imported. The DTI stated that incentives for polymers allowed for a shift
in emphasis and increased value addition in downstream sectors, as polymers were
the building blocks of plastics fabrication. Polymers were also found to
increase employment. Polymers were mainly produced by SASOL and the pricing of
imported raw materials was important. ITAC had recently decided to lower the
tariffs on polymers; however, areas of demand were required.
4.2.3. Trade, investment
and exports
§
South-South relationships: The Committee commented
that there was a dichotomy between the need to generate more foreign revenue
through foreign direct investment and value-added exports and the increasing
emphasis on South-South strategies, as the existing South-South relationships
have led to an increasing trade deficit, while the North-South relations
provided South Africa with a surplus on its trade account but appeared to have
a lower priority. Given this dichotomy, the Committee enquired what the DTI was
doing in terms of exports to
The Minister acknowledged
that trade with
§
Economic Partnership Agreements: The Committee averred
that the implementation of the interim EPA could damage SACU and SADC relations
and requested more information in terms of the impact of the Interim EPAs on
§
Illegal imports: The Committee enquired what
the risk of illegal goods was and the nature of the DTI’s relationship with
SARS in this regard. The DTI responded that it formed part of the joint Illegal
Imports Task Team along with the SARS, which was a major player in curbing
illegal imports. The Minister also stated that there was a 60 per cent
difference between the declared value of imports from
4.2.4. Broadening
participation
§
Co-operatives: In response to the
Committee’s enquiry on the percentage of support for co-operatives and the mechanisms
to properly measure the outcomes, the DTI confirmed that only a small percentage
of the DTI budget was allocated to co-operatives and this was for specific
processes such as start-ups. However, the DFIs also supported the movement
separately. The DTI added that it had initiated an incentive programme for
co-operatives, which had disbursed R9 million within the first year, mainly in
rural areas. This was intended for small co-operatives which received about
R300 000 as working capital. The Minister reported that there has been a
policy change that would consider co-operatives as separate entities that are
different from other enterprises and that there were discussions under way at
NEDLAC regarding a policy framework for co-operatives.
§
Development Finance Institutions: The Committee asked
whether additional investment or cash injections would be received by the DFIs and
what the DTI’s position was on this. The Minister mentioned that in other
countries regular injections are provided to DFIs to enhance their ability to
meet their development objectives. A few proposals would be made as part of the
reviewed IPAP.
§
South African Women Entrepreneurs’
Network (SAWEN): The Committee noted that the DTI had worked on stabilising the network
and reviewing the strategy, and enquired whether there were any challenges and
when the process would be finalised. The DTI explained that SAWEN was being rearranged
institutionally. In the past, it was led as a Section 21 company that was not
registered at the DTI but was being assisted by the DTI. However, the DTI wanted
to rearrange this network as there had not been an optimal working relationship
with the provincial legs of SAWEN.
§
Small, Medium and Micro
Enterprises: The Committee asked whether the 30 day payment cycle had been observed
for SMMEs. The DTI reported that through SEDA, the DTI had launched a call
centre where SMMEs could call to enquire about payments. In addition, the DTI
had been working with National Treasury to make the 30 day payment policy part
of all Departments’ performance contracts.
4.2.5. Regulation
§
Consumer protection: in response to the Committee’s
enquiry about the functioning of consumer protection, the DTI indicated that
the new Consumer Protection Act would increase consumer protection once implemented
in 2010. This would protect consumers in terms of product quality, product
recalls, and labelling, as well as unfair contract terms.
§
Gambling: The Committee enquired what
the Government’s position on gambling was; given that various stakeholders were
advocating increased gambling and justifying this on the basis of its employment
and revenue generation, as well as its BBBEE benefits. The DTI assured the
Committee that gambling was not being viewed as a revenue stream but its
intention was to curb the surge of illegal gambling. However, there were
loopholes for the introduction of some gambling activities.
The DTI was currently
conducting an impact assessment and would not be signing any new legislation
for additional gambling activities until the assessment has been considered. In
addition, the DTI acknowledged that it did need to make a clear policy
statement regarding Government’s position on gambling and that Parliament’s
voice was important in this regard. The Committee informed the Minister that it
had already completed the first phase of its oversight on gambling legislation
and its socio-economic impact, but were continuing with the second phase in
January 2010 and would complete its final phase which included a report to the
House at the end of the first quarter in 2010.
4.2.6. Administration and
co-ordination
§
People with disabilities: The Committee noted
that only one per cent of employees represent people with disabilities. The
Minister responded that the disability representation was low. However, this
percentage largely represents the
§
Staff turnover: The Committee
questioned the Department on the core challenges around reducing the 18 per
cent vacancy rate including the number of terminations at senior level. The DTI assured the Committee that it was
committed to reducing the vacancy rate. It explained that it could not compete
with the private sector in terms of salary but needed to improve the quality of
the work and prioritise the industrial sector. It also reported that it was
recruiting from the same skills pool as the Department of Economic Development;
therefore there was a need to grow the skills pool for industrial policy
development using an internship programme and to provide observations about
economic education to the Department of Higher Education.
§
Staff intimidation: The Committee expressed
its concern about allegations of staff intimidation within the DTI Group,
specifically related to CIPRO. The Minister reported that he had become aware
of serious allegations against CIPRO and that the DTI would be launching a full
forensic investigation in this regard.
§
Training: The Committee suggested
that the DTI’s Centre for Entrepreneurship could be open to all, including
non-graduates. The DTI confirmed that the Centre was open to all entrepreneurs for
assistance.
§
Audit reports: The Committee noted
that the DTI had consistently received unqualified reports. However, the Auditor
General (AG) mentioned issues for attention such as inconsistent leave records,
the lack of a human resource plan for a major part of the financial year and
inadequate systems for the safe keeping of documentation. In addition, there
was non-compliance in terms of the preparation and approval of the strategic
plan for the 2008/09 financial year.
The DTI responded that the
AG had only highlighted technical compliance issues and that the DTI would
respond to these appropriately. The leave records were problematic as the
PERSAL system was still a manual one. The first Human Resource Plan had been
submitted in September 2008; therefore, the compliance issues have since been
met. In terms of record keeping, there was a centralised record management
function but the number of staff was inadequate. The DTI was now in the process
of scanning records so that these could be available electronically. The
Committee welcomed the tightened and improved controls for the withdrawal of
documents.
§
Fruitless and wasteful
expenditure: The DTI reported that the fruitless and wasteful expenditure of R86
000 had been incurred in situations where the DTI had paid for staff or
international delegates to attend conferences or meetings and then these
individuals were not able to attend. This was monitored and recorded
meticulously by the Department.
§
Performance agreements of
Senior Management Service posts: The Committee noted that the majority of the
performance contracts seem to have been completed already, but asked what the
expected deadline was for the outstanding contracts. The DTI reported that the
outstanding contracts were due to terminations or new appointments, as new
employees are allowed a period of 3 months
before they signed the contracts.
§
Relationship of
government to business: The Committee asked the DTI to outline how it relates to
organised business and those businesses outside of formal business
associations. DTI explained that it related to organised business and labour
through NEDLAC and its sector strategies, conferences and trade missions. The
Department continued to highlight that organised business was facing huge
challenges such as limited ability to service international arrangements. The
DTI had been attempting to assist them with trade missions.
5. Competition Commission
5.1. Overview
The
Competition Commission is responsible for promoting and maintaining competitive
practices in
The
Committee was briefed by the Commissioner of the Competition Commission, Shan
Ramburuth, regarding the activities and achievements of the Competition
Commission for the 2008/09 financial year. The Commissioner highlighted some of
the key investigations initiated and completed; the implementation of the
amended Corporate Leniency Policy; and the future strategic priorities.
The
amended Corporate Leniency Policy was significant as it would allow the
instigator of a cartel to apply for corporate leniency; provide more legal
certainty; instate a marker procedure for potential applicants; allow for oral
submissions by applicants; and shift responsibility to the Enforcement and Exemptions
Division. These changes have resulted in a significant increase in the leniency
applications since July 2008.
One of the
concerns raised by the Commission was that the litigation process was being
unnecessarily delayed where members of cartels prevented matters from being
heard on its merits by arguing on legal technical points. There also appeared
to be some public confusion on the role of the Competition Commission in
relation to other consumer rights institutions and what constituted misconduct
in terms of the Competition Act resulting in a number of complaints being
received and not referred for investigation by the Commission.
5.2. Key issues raised by
the Committee
§
§
Cost of investigation: In response to the cost
of cases the Commission said that it considered the cost of investigating and
litigating a case against the probability of successfully winning the case.
Therefore it would not embark on a case that involved a high cost and a low
probability of success.
§
Priority sectors: The Committee queried
what the criteria had been for identifying the Commission’s four priority
sectors. The Commission responded that the sectors were identified on the basis
of whether they involved markets that affect the majority of the population,
particularly the poor; whether enforcement activities were aligned with
government strategy and policy; and/or whether it affected the cost of doing
business.
§
Fines: The Committee enquired how
money received from fines was applied. The Commission responded that fines
received were transferred directly into the National Revenue Fund and did not
benefit the Commission.
§
Settlements: The Committee enquired
about the principle that informed settlements and the perceptions around it. The Commission responded that settlements were not
necessarily the cheapest way out for transgressors. The principle applied in
the decision on whether or not to reach a settlement was to compare the
settlement with what the Commission would have fined the company had it pursued
the case and obtained a judgement. If the settlement was far less, the
Commission would not settle.
§
Impact of cartel investigations
on prices:
The Committee further enquired whether the actions taken prohibit similar
conduct in future. The Commission responded that
there was anecdotal evidence that indicated that prices had been reduced when
cartels were broken up. “For instance, prices had dropped in the mining sector
in the North-West and
The Commission gave the example of the case
against the pharmaceutical company, Glaxo-Welcome, concerning the cost of
anti-retrovirals (ARVs), Glaxo-Welcome had patent rights on the treatment and
the initial monthly cost of ARVs was R4 000. The settlement and agreement
allowed for the manufacture of a generic equivalent, resulting in a reduction
in the monthly cost of ARVs to R400.
§
Banking inquiry: The Committee had not yet
received the 28 recommendations made for the Banking Sector. The Commission
responded that the report was available on its website and that it could make
this available to Parliament. Initially the delay in releasing the report was
due to time lags where the lawyers of the various banks were blanking out
confidential information from the report. Given the impact of the international
financial crisis and its economic consequences the Commission was persuaded by
National Treasury to withhold the report until December 2008.
§
Statutory deadlines: The Committee requested
that the Commission provide it with the statutory deadlines for the
finalisation of merger cases. The Commission indicated that the deadlines after
all notification requirements were fulfilled were as follows: for small and
intermediate mergers – 20 business days (and an extension of not more than 40
business days), and for large mergers – 40 business days (and extensions may be
granted by the Tribunal for not more than 15 business days at a time).
§
Mergers: The Committee requested
a breakdown of the 414 merger notifications received in terms of the size of
these mergers. The Commission reported that 8 were small mergers, 303
intermediate mergers and 103 were large mergers. Further whether any of the merger cases
received in the 2008/09 financial year had not been completed and how many had
not been completed. The Commission responded that 41 merger cases were not
completed during the 2008/09 financial year but had been completed since.
§
Legislation: The Committee enquired whether
the Commission was aware of any laws that allowed anti-competitive practices.
The Commission replied that it was aware of specific legislation including
petroleum, certain health care products and the tariffs set by Independent
Communications Authority of South Africa (ICASA). It also alluded to previously
regulated industries and sectors that were involved in anti-competitive
practices such as milk production,
§
Empowerment of the public: with reference to community
outreach programmes the Commission responded that it targeted consumer organisations
and trade unions rather than communities. However it concurred that there was a
need for consumers to become more discerning to ensure that firms took
competition matters seriously. The Commission considered itself to be a public
policy agency that fixed markets in “an holistic manner rather than fought
individuals’ battles”.
§
Human resources: The Commission gave a division
and level breakdown of its 14 newly employed staff members had been employed as
shown in the following matrix:
|
MONTH |
DIVISION |
LEVEL/ PEROMNES GRADE |
POSITION |
NUMBER |
|
Apr ’08 |
Enforcement
& Exemptions |
7 |
Analyst |
1 |
|
Jul ’08 |
Enforcement
& Exemptions |
7 |
Analyst |
1 |
|
|
Corporate
Services |
10 |
Financial Assistant |
1 |
|
Sep ’08 |
Enforcement
& Exemptions |
8 |
Junior Analyst |
1 |
|
|
Policy
& Research |
8 |
Junior Analyst |
1 |
|
Oct ’08 |
Legal
Services |
5 |
Senior Legal Counsel |
1 |
|
|
Legal
Services |
7 |
Legal Counsel |
1 |
|
|
Policy
& Research |
7 |
Analyst |
1 |
|
|
Corporate
Services |
18 |
Catering assistant |
3 |
|
Dec ’08 |
Corporate
Services |
11 |
Temp Receptionist |
1 |
|
Jan ’09 |
Corporate
Services |
18 |
Temp Catering Assistant |
1 |
|
|
Enforcement
& Exemptions |
5 |
Technical Consultant |
1 |
|
TOTAL |
14 |
|||
However the Committee also requested a statistical breakdown
of the representivity, gender and people with disabilities for the entire staff
complement. The Commission indicated that the institution was well represented
in terms of gender and race. There had been a high turnover due to high levels
of young, upwardly mobile staff but also a tendency of staff to return to the
organisation recently including three senior managers.
§
Financial statements: The Committee required clarification
around the misstatements referred to by the Auditor-General; the reason for the
operating deficit; and the intention for the accumulated balance sheet surplus.
The Commission reported that the misstatements were due to allowed adjustments
after 31 May 2009 in terms of the Public Finance Management Act. This
adjustment entry was due to the transfer of the Corporate Services Division to
other premises; rental income of approximately R400 000 that had not been
received for four months. The Commission had had operating deficits over the
last two years as it had been able to rely on accumulated surpluses brought
forward from previous years, which was expected to be exhausted in 2009/10. The
Commission was liaising with the DTI with regards to the shortfalls it was
experiencing and its additional funding requirements. The Commission had also
submitted, to the DTI, its bid for additional funding for the Medium Term
Expenditure Framework period. The final allocations were not yet available.
6. Competition Tribunal
6.1. Overview
The Competition
Tribunal’s core mandate was to regulate corporate mergers and adjudicate cases
of anti-competitive behaviour in accordance with the Competition Act.
Mr Norman
Manoim, the Chairperson, and Mrs Lerato Motaung, the Registrar, briefed the
Committee on the Tribunal’s performance for the 2008/09 financial year. The briefing
outlined the type of work the Tribunal had been involved in, performance statistics,
important new decisions it had taken during the year, its participation in
international bodies, some of its financial management statistics and
information about Tribunal Members and staff.
6.2. Key issues
The following issues emerged during
the Committee’s deliberations:
§
The Committee noted that there appeared to be a close
partnership between the Commission and the Tribunal. This relationship could
create a perception of a lack of independence, as the Tribunal judges the
findings and work of the Commission but also collaborates with it. In addition,
in terms of the Commission and Tribunal’s findings, there appeared to be a
tendency of agreeing with one another. The
Tribunal responded that the two institutions functioned independently and that it
had differed with the Commission on a number of occasions. Recently, there have
been opposing opinions on about four merger cases.
§
Collusion: In response to the
Committee’s query on Tribunal’s role in terms of dealing with alleged collusion
between domestic importers and foreign companies in terms of practices, such as
under-invoicing. The Tribunal responded that it had jurisdiction over foreign
cartels that have a direct economic impact on
§
Corruption: Regarding the measures to
ensure that corruption by respondents colluding with staff was prevented. The
Tribunal responded that its system was designed to curb corruption. Some of the
measures that were being implemented included the opportunity for private
individuals to bring cases directly to the Tribunal, the Commission was required
to publicly exhibit its evidence and the Tribunal members heard cases in groups
of three and had to reach consensus on its decisions.
§
Impact of fines: In response to a
question posed to the Commission, the Tribunal indicated that there was no
evidence that companies, previously found guilty, were found to be involved in
the same type of misconduct later. It could therefore be assumed that fines
levied have been successful.
The Committee enquired about the impact of the Tribunal’s
activities on the public. The Tribunal responded that it publicised its
outcomes, including consent orders and that the public had been allowed to make
submissions during the processes. Furthermore, its opinions have led to some
prices being lowered, the improvement of the perception that the system had
teeth and had negatively impacted on firms’ reputations that have been found
guilty.
§
Victims of cartels: The Committee noted
that the lack of redress for victims of cartels gave the impression that
nothing could be done by consumers. The Tribunal indicated that the possibility
of ring-fencing fines for dedicated uses, such as funding private litigation of
guilty cartels by victimized individuals, could be considered instead of
submitting these fines into the National Revenue Fund for general use.
The Committee commented that the Legal Aid Board should be
sensitized about private litigation. The Tribunal responded that there had been
indirect redress for individuals. In addition, private litigation was a
possibility provided that the Legal Aid Board was given funding for this
purpose.
§
Private Enforcement: A member of the
Committee suggested that the system could be improved by adding an element of
private enforcement with the option of receiving treble damages regardless of the
Commission’s activity, as the possibility of suing for costs would widen the
ability to litigate. The Tribunal expressed the opinion that the efficacy of
competition law may be dampened if litigation options are liberalized, as the
civil courts may reduce damages awarded as the number of claims increase.
§
Compliance: The Committee enquired
whether companies failed to meet the conditions set out for them in terms of
mergers. The Tribunal indicated that in most cases the conditions were adhered
to. In one case, the divestiture of a firm’s dominant position was not effected
on time but had been complied with since then.
§
Qualifications of
Tribunal members: The Committee enquired what qualifications were required for one to
serve on the Tribunal. The Tribunal explained that the President is responsible
for the appointment of Tribunal members on the advice of the Minister. The main
qualifications required were law, commerce and/or public administration.
7. Industrial Development
Corporation
7.1. Overview
The IDC’s
primary role was to support industrial capacity development and promote
entrepreneurship in
Mr Nimrod
Zalk, the Deputy-Director General of the Industrial Development Division, the
DTI, provided a background in terms of the environment within which the IDC was
operating in. The Chief Executive Officer, Mr Geoffrey Qhena, briefed the
Committee regarding the results of the IDC’s 2008/09 Annual Report. The briefing
highlighted the IDC’s role and objectives, its achievements and financial
statistics, as well as its activity related to the funding of distressed
companies and its prospects for the next five financial years.
The IDC indicated that they were
widening their geographical spread and addressing regional equity issues by
opening eight regional offices and providing support to projects in rural areas
and townships and diversifying sectors which it funded.
In terms of funding distressed
firms, the IDC intended to invest R6.1 billion over two years. However, it
indicated that this type of investment would not be sustainable over the long
term.
The IDC said that there needed to be
better packaging around interventions and indicated that it was working on
packages for the textile industry along with the DTI and other incentives available.
7.2. Key issues
The following issues emerged during
the Committee’s deliberations:
§
Employment creation: The Committee noted the
statistics provided in terms of the direct jobs to be created through the IDC’s
funding. However, it enquired whether the IDC had conducted a study to
reconcile the jobs lost versus those created, as employment retention was
critical. The Committee commented that the IDC’s defensive and offensive thrust
of job creation was appreciated. The IDC responded that it was consciously
making an effort to create new jobs and retain existing jobs; it indicated that
it would only be able to reconcile jobs lost versus those created at the IDC
client level but the DTI might be able to do this at a national level.
§
Distressed companies: Given the uncertainty
of the length of the international economic crisis, the Committee enquired
about the IDC’s ability to assist distressed companies. The IDC responded that
it had planned to provide funding of R6.1 billion over the next two years, but
was willing to invest more, if required. However, stress testing on what the IDC
could still absorb before the taxpayer had to cover costs had been conducted
and showed that it could absorb up to R12 million. The funds would be funded
off its balance sheet and not government finance for recapitalisation. However,
it was taking into account the increased risk and adjusting its lending rate
accordingly.
In response to the perception that it bailed out companies
at the expense of the taxpayer the IDC stressed that as a policy-based
development institution, it allocated funds where there were possibilities of
maximising impact, such as green sectors. Therefore it did not see its role as
bailing out uncompetitive firms, but rather funding firms on the basis of
viability.
The Committee commented that industrial development
presupposed planning and this should be given urgent attention during the
crisis, as there was a social impact of investing additional money when
previous investments had not provided any returns. The IDC should consider the
viability of the sectors it was assisting after the crisis. The Committee also
acknowledged that the current crisis would have a material impact on
§
Disability fund: The Committee noted
that the IDC had provided R50 million for the disability fund. The Committee
enquired whether the R50 million was allocated for this fund or had this
actually been distributed, and who adjudicated the disability fund. The IDC responded
that the R50 million had been approved for the Disability Fund. The return
expectation on this fund was a much lower rate (i.e. prime minus one). The IDC
emphasised that even though funds were available, there was not necessarily
uptake of the fund.
§
Shares in companies: The Committee enquired
if there was a differing approach in financing companies that IDC had shares in
versus those that it did not own shares in. It requested percentages in this
regard. It also enquired whether there were maturity dates for shares held as
security or would these be held indefinitely. In response the IDC said it
financed companies regardless of whether or not it held shares in the company,
as it had many instruments that it used to fund companies, including guarantees,
equity, quasi-equity and straight loan mechanisms. For instance, an equity
stake could be used to limit the debt burden on start-up firms. These types of
investments would be sold after a period of time and the funds would be
reinvested elsewhere. Some of these investments were earmarked on the basis of
the IDC’s strategic objectives. The IDC indicated that it did not buy shares
except as part of its mandate to provide development finance.
§
Conflict of Interest: The Committee commented
that some board members could have direct interest in some of the companies
being assisted and access would thus be easier for these firms. It asked what
the IDC’s policy was in this regard and how frequently had companies linked to
board members accessed funds. The IDC responded that non-executive directors
with interest in companies were required to disclose this. It had a process
where a separate committee considered applications to ensure that directors
with interest were not involved in granting funds to such companies. However,
it would raise this issue with the chairperson of the board in terms of
strengthening measures in this regard.
§
Regional development: The Committee enquired
whether the IDC had considered supporting industrial parks within townships.
The DTI responded that the IDC worked with other DFIs, such as the Development
Bank of
§
Alignment with the
Industrial Policy Action Plan: The Committee asked whether the IDC was aligned with the IPAP.
The IDC indicated that it worked closely with the DTI to assist in achieving the
objectives of IPAP. However, it did not place any preference on particular sectors
but assessed the level of impact of different sectors and determined how these
could benefit from support. The IDC also mentioned that it was hard to predict
where demand would come from; it therefore approached funding on a company to
company basis, so as not to exclude any companies.
§
Applications: The Committee enquired
what the process was for the approval of an application and the length of time
involved from the point of receipt to actual disbursement, as the Committee had
received a letter of complaint from one of the IDC’s clients in the
The Committee enquired whether the IDC had learnt any
lessons from the applications that have been rejected. The IDC indicated that
usually rejected applications were due to companies having unreasonable
expectations of the IDC. For instance, where a company was no longer viable, it
might approach the IDC for funds to repay bank loans or to buy out shareholders.
§
Purpose of funds: The Committee enquired
about the primary purpose of the funds given. The IDC responded that it
provided both bridging and medium to long term financing to firms.
§
Municipal development
agencies:
The Committee requested data on the development agencies that have been
established. The IDC indicated that it had established and supported 32
agencies that were at different development stages, primarily in areas where
the local government was not strong.
§
Defaults: The Committee noted an
increasing trend in the movements in impairments from 2007/08 to 2008/09; an
approximate 200 per cent increase. The Committee asked the IDC to clarify this and
contextualise the increase in terms of its objectives and the way forward. The
IDC pointed out that impairments have been rising in the economy, and were not
necessarily higher in the IDC. It noted that its ability to raise additional
external funds would be brought into question, if this trend continued.
§
Agriculture: The Committee asked
whether the IDC had any interest in agricultural projects related to
restitution. The IDC indicated that it had a dedicated agricultural section that
cooperates with the Land Bank and other existing players.
§
Remuneration: The Committee commented
that there was only a 5.7 per cent increase in remuneration packages while
performance bonuses increased by 55.9 per cent, which did not correlate with the
current economic climate. It requested clarification from the IDC in terms of
the criteria and merits upon which the bonuses were given. The DTI responded
that the IDC competes with the financial sector for its human resources and its
remuneration packages were lower than these. The criteria for performance
bonuses were based on sound performance and governance principles, and were linked
to the IDC’s financial performance. The DTI explained that an appropriate
comparison had to be made with the private sector when assessing the IDC’s
expenditure on personnel.
§
Investment: The Committee
questioned the decline in capital gains. The IDC indicated that the reduction in
capital gains had been erratic, as the IDC only sold its investments in order to
reinvest elsewhere. The figure thus depended on the timing of large investment
projects.
8. Khula Enterprise Finance Ltd
8.1. Overview
Khula currently
operated as a financial facilitator for the development of the rapidly growing
SME sector of the South African economy. It achieves this by providing finance,
mentorship services and small business premises to SMEs through a network of
partnerships. Its current model is that of a wholesaler but it is developing a
direct model that will be implemented once the business plan has been completed
and approved by Cabinet.
Mr
Setlakalane Molepo, the Managing Director, briefed the Committee on Khula’s
performance for the 2008/09 financial year. The briefing highlighted Khula’s
mandate and target market, the achievements for the financial year, its
operational and financial results and strategy implementation. In addition, it
provided examples of success stories and the progress made in the development
of Khula Direct’s business plan.
During the
briefing, Khula highlighted the need for the recapitalization of its wholesale
model in order to support the country’s growth strategy and effectively deliver
on its mandate. Other concerns were decreased approvals (from R605 million in
2007/08 to R315 million in 2008/09) due to the international economic crisis
and the stricter requirements of the National Credit Act and the bad debts
provision rose from 9.7 per cent in 2007/08 to 17.4 per cent in 2008/09.
8.2. Key issues
The following issues emerged during
the Committee’s deliberations:
§
Khula Direct: The Committee referred
to the request that had been made to Khula, as part of the its budget report, to
provide the Committee with the funding options to finance Khula Direct before
the recapitalisation option was considered. The Committee also commented that
Khula Direct, as a concept, had the potential to provide a fantastic service
but this would only become viable once a good implementation plan has been developed.
Khula responded that it was committed to having the Committee interrogate its proposed
business plan at a later stage of its development. Khula explained that the request
for recapitalisation was related to the operation of the wholesale model. Since
June, a strong, dedicated team has been working on the business plan for Khula
Direct.
§
Impairment provisions: The Committee enquired
why there had been an increase in bad debt provisions and why the debt to
equity ratio has occurred and how it would be corrected. In addition, it
questioned whether the 17 per cent provision of bad debts was a realistic
figure. Khula responded that it believed the provisions were adequate. The
increase in impairment provisions was due to the economic slump and Khula had
stepped up its monitoring systems. It also indicated that its customers would
suffer for longer due to their relative size.
§
Rural development: The Committee noted
that rural areas need to be penetrated and industrial areas in rural areas needed
to be improved. In particular, Khula should be supporting emerging black
farmers. Khula indicated that it had been assisting emerging farmers with the
acquisition of land and production inputs through its Land Reform Empowerment
Facility. In addition, it was involved in rural areas through its Khula
Institutional Support Service, which was responsible for mentorship. This
service also had a strong agricultural focus.
§
SMEs: The Committee commented
that comparing peri-urban areas in
Given the inequality that
exists in the country, the Committee asked how Khula measured its success and
what the cost of delivery was. Khula replied that the success of SMEs was
measured by the number created and the distribution thereof in terms of equity
principles. Khula indicated that a study had been conducted in 2007 looking at
the impact of Khula’s interventions and a new one was currently due. In
§
Partnerships: The Committee requested
Khula to expound on its existing partnerships and noted that SMEs required non-financial
support, particularly technological support. Khula listed a number of
partnerships that it was currently involved in, including partnerships with
regional DFIs and Small Enterprise Development Agency (SEDA). Khula indicated
that they provided the following support to SMEs: business plan development
through SEDA and post-investment support through the mentorship programme for
credit indemnity depending on length of loan. It also indicated that it would
consider technological support and industrial aspects in future.
§
Property sector: The Committee commented that it was important
to see businesses thriving in townships but there were challenges in rural
areas as businesses could not afford to be in malls. Khula responded that most
of the properties in its portfolio fell into areas that were previously
disadvantaged urban areas. It intended to assist in removing the perception of
squalor and there was work underway in Gugulethu to do so.
§
Mentorship programmes: The Committee
questioned whether outsourcing the mentorship programme was not negatively
impacting on Khula’s ability to provide funding to its recipients. Khula
replied that the cost of outsourcing was less than having permanent employees
that were only used periodically. The programme is monitored in-house and the
mentors received payment gradually up to the point where the business plan was
approved by Khula.
§
Employment equity: The Committee asked
whether employment equity in terms of persons with disabilities was sufficient
and what would be done to improve representivity in this regard at a higher
employment level. Khula replied that it was committed to increasing this ratio.
The person with a disability employed worked in the call centre answering clients’
technical areas, so this was not an administrative position.
§
Poor Board attendance: The Committee commented
on the bad attendance of certain Board members. It asked who appointed these
directors and took responsibility that they fulfilled their duties and whether
they received emoluments despite their bad attendance. Khula indicated that the
Board had written to directors that had not been attending and these have
resigned since. They had also not been remunerated for meetings that were
missed.
9. National Empowerment Fund
9.1. Overview
The NEF was
a facilitator of BBBEE participation through the provision of financial and
non-financial support to black empowered businesses. In addition, it was
promoting a culture of savings and investment among black individuals.
The briefing
was made by Ms Philisiwe Buthelezi, the Chief Executive Officer, and Mr Andrew
Wright, the Chief Financial Officer. During their briefing to the Committee,
they outlined the NEF’s mandate, key strategic objectives, the NEF’s organisational
structure and historical background. Furthermore, they reported on the
performance of the Financial Management and Asset Management Divisions, as well
as the annual financial results.
9.2. Key issues
The following issues emerged during
the Committee’s deliberations:
§
Loan disbursements and
impairment provisions: The Committee
enquired what objectives and targets had been set for loan disbursements and commented
that loan impairment provisions should be evaluated, as it was too high. The
NEF responded that loan impairments had increased from 19 per cent in 2007/08
to 24 per cent in 2008/09. This was determined by considering operational indicators such as loan repayments against
instalments, which was a key red flag that contributed to year end impairment
provisions. This provision was also benchmarked against other DFIs and the
private sector.
§
Merging financial
intermediaries: A member of the Committee commented that the cost of the operation and
administration of DFIs was top heavy in terms of salaries and infrastructure.
He suggested that entities dealing with the funding of non-commercial
transactions should be merged to lower operational costs. The NEF replied that
there were clear differentiators between the various DFIs. The NEF considered
the whole BBBEE spectrum and not just SMEs. It was also the only DFI having a BEE
facilitator status and it expressed an opinion that if it was lumped together
with other DFIs this role may be watered down.
§
Black ownership: The NEF had mentioned
that before the financial crisis, the BBBEE ownership was about 8 per cent on
the Johannesburg Stock Exchange and was now around 2 per cent. The Committee
asked the NEF to clarify this statement. The NEF explained that most of the BEE
deals that were concluded during the expansionary phase of the economy have
shed some value due to the economic crisis. In addition, the value of stocks
and shares in which the BEE shareholders had invested in have decreased.
§
Performance: The Committee commented
that it was unclear whether the NEF had performed well and requested the NEF to
outline its successes and failures. The NEF explained that its performance
objectives were divided into four key segments, namely: fund management, asset
management, the cash portfolio and operational environment. The NEF indicated
that it has developed the ability to sustain itself and it was continually monitoring
and benchmarking its activities against its peers in the private sector and
other DFIs. The NEF noted that the overall impairment provisions were being
increased and the 24 per cent provision was too high. In terms of asset
management, the Asonge share scheme distributed R1.2 billion to shareholders
and R140 million bonus shares. The return on the cash portfolio was also higher
than expected in terms of the crisis.
§
Business plan toolkit: The Committee, referring
to a reference made by the NEF to a new business plan toolkit that it had
created, enquired whether there were other toolkits available and, if so, why
had the NEF developed a new one. The NEF responded that over 3 000 registered
users have accessed its website to use the NEF business plan toolkit. It stated
that there was a clear demand and need for tools, such as the business plan
toolkit, due to the lack of experience and skills among black people to develop
viable businesses. However, the development of similar toolkits would be
welcomed.
§
Remuneration and performance
bonuses:
The Committee commented that a significant amount had been spent on
remuneration and also questioned the merits and criteria against which
performance bonuses were awarded. The NEF responded that it based its
performance bonuses on four issues, namely the NEF’s performance against expected
objectives and targets; the creation of a credible private equity fund or
venture capital black-owned private equity fund; the establishment of systems
and infrastructure; and the calibre of employees. The NEF operated and competed
for skills with other traditional white-owned private equity funds. It
therefore required employees from those types of firms in order to maintain a
high calibre of staff; hence relatively high remuneration packages were required.
The NEF was of the opinion that it had been prudent with the level of its
compensation.
10. South African Micro-finance Apex
Fund
10.1. Overview
SAMAF was
established to provide financial and non-financial services to financial
intermediaries serving the micro-finance sector. Mr Sithembele Mase, the Chief
Executive Officer, briefed the committee on SAMAF’s performance for the 2008/09
financial year. His briefing included information about the rationale for
SAMAF; its mandate and alignment with government objectives; its strategic
goals and objectives; highlights of its national footprint and network
disbursements; challenges and binding constraints it faced; its employee
competency profile; and action plans and risk mitigation. Some of the key
challenges it faced included:
§
The slow uptake of funds approved for financial
intermediaries, as financial intermediaries were unable to adequately report in
terms of section 38 (i) (d) (i) of the Public Finance Management Act (PFMA) and
as a result were becoming financially distressed and closing down.
§
An ongoing technical audit qualification, due to 27
inherited loan agreements that would be expiring in 2010. These contracts were
poorly drafted and have an element of control in terms of AC132 and IAS27 Generally
Accepted Accounting Principles (GAAP) and International Financial Reporting
Standards (IFRS) standards.
§
An inadequate legal-policy framework such as board members
only having an advisory role and not fiduciary powers.
§
SAMAF was not able to litigate defaulting borrowers, due to
unclear powers within the PFMA.
§
SAMAF’s financial systems did not align with government
financial systems (BAS), as it operated on an accrual accounting basis while
BAS operated on a cash accounting basis. Therefore manual reconciliations had
to be done.
§
There was an inadequate policy framework for developmental
micro-finance special deposit taking as co-operative and commercial banks with
less than R1 million assets and 200 members did not benefit from deposit
insurance scheme indemnity cover.
10.2. Key issues
The following issues emerged during
the Committee’s deliberations:
§
Wholesale model: SAMAF informed the
Committee that it implemented a wholesale model that provided loan funds and
access to credit for micro-finance lenders to access funding.
§
Defaulting borrowers: The Committee enquired
whether the DFIs shared a common database of defaulters and whether any legal
action had been instituted against defaulters. SAMAF replied that they did have
a database of defaulters. In terms of legal action against defaulters, they responded
that currently they did not have a legal status of their own, as they were a
trading entity of the DTI. Therefore, the executive authority had to sue
defaulters, which was a major impediment.
§
Impairment provisions: SAMAF indicated that 30
per cent of their loans were not being recovered in 2007/08 and at the end of
2008/09 60 per cent was not being recovered. This was mainly due to the global
economic crisis; however, the debts have not been written off yet. SAMAF had
embarked on a debt collection strategy. They also reported that there had been an
improvement in repayments during the current financial year.
§
Funding: The Committee enquired
about SAMAF’s sources of funding. SAMAF responded that the DTI was its sole
funder, as it was not allowed to leverage capital elsewhere. It indicated that
in other countries, similar institutions were allowed to gain other funding
without these types of restrictions, which limited its ability to expand its
reach.
§
Audit Opinion: The Committee enquired
about the reason for SAMAF’s qualified audit report. SAMAF replied that the audit
opinion related to the structure of some of the agreements between SAMAF and
institutions that had been funded. These agreements placed SAMAF in control of
these institutions. Only 27 out of 42 institutions were currently having this
issue. SAMAF was attempting to renegotiate these agreements. So far, 11 institutions
had signed, some institutions had closed down while others were in the process
of negotiating. The ones that had closed down had to be liquidated in order for
SAMAF to write the agreements off their books. This process should be completed
by end of December 2009.
§
Co-operatives: Co-operatives with a
capital asset base of less than R1 million and 200 membership did not have an
insurance deposit to cover risk taking. Therefore, there was no recourse for
poor people if funds disappeared as no insurance exists. SAMAF responded that
it currently served this segment of co-operatives and that there was a policy
gap that had to be addressed.
§
Performance: The Committee noted
that there was a large disparity between the performance targets set and the
actual achievements. SAMAF provided a written explanation for these variances.
§
Employees: During its
presentation, SAMAF outlined three competencies that its employees should have
in order to operate effectively in this environment. These competencies were
around developmental, financial and social arenas. In response, the Committee
enquired how SAMAF secured employees with this combination of competencies.
SAMAF reported that there was no specific industry producing this type of employee.
Internally, SAMAF performed profile matching and training to fill gaps among
staff and develop their knowledge of due diligence, analysis of financial
statements (financial skills), developmental aspects, ability to teach issues
and people skills/leadership to interact with communities. This type of
training was also being performed at the financial intermediary level.
11. Export Credit Insurance
Corporation
11.1. Overview
The ECIC
was established to provide medium to long term insurance on behalf of the
government on contracts in connection with export transactions,
foreign investments and loans, or similar facilities relating to the capital
goods and services market. In so doing, it helps secure export transactions
involving South African contractors bidding to provide capital goods and service
contracts abroad. Thereby supporting the Government’s strategic priorities of
accelerating economic growth, creating and maintaining employment opportunities
and reducing economic equalities domestically.
Dr Patrick
Kohlo, the Chief Executive Officer, and Ms Sedzani Mudau, the Chief Financial
Officer, briefed the Committee on the ECIC’s performance for the 2008/09
financial year. The areas they covered included the ECIC’s vision, mission,
mandate and strategic goals; its performance in terms of its strategic goals;
the impact of US dollar financing and insurance on its financial accounts; its
financial performance and the challenges it faced. The three risks identified
were:
§
Succession risk in terms of recruiting and retaining scarce,
specialised skills. Due to the scarce skills required, the ECIC had to train
its employees in-house. This process took approximately three years. However,
due to the specialised skills base developed, there was a problem retaining
staff as employees were easily poached.
§
Concentration risk where an event in a country or region
where the ECIC had excessive exposure might lead to devastating consequences
for the ECIC.
§
Risk associated with Interest Make-Up affected the
international competitiveness of rates offered by the ECIC; lack thereof could
seriously impede growth in the insurance portfolio, as the cost of insurance
affected the ability of contractors to win project tenders. The ECIC stated
that it had the means to pay for the interest make-up but did not have the
right to do so.
11.2. Key issues
The following issues emerged during the
Committee’s deliberations:
§
Predecessor: The Committee asked for
clarity on who had been performing the ECIC’s role before 2001. The ECIC responded that before 2001, Cape
Guarantees Insurance Corporation (CGIC) operated the business on behalf of the
ECIC, while the ECIC reinsured them. CGIC was owned by the banks, which were also
the ECIC’s clients and were benefitting regardless of the risk that they faced
in terms of insurance claims.
§
Funding: The Committee enquired
where the ECIC was receiving funds from. The ECIC replied that initially it
received R2 billion in 2000 from the DTI and it received funds from premiums
earned and returns on investments since then.
§
Bilateral Investment
Treaty Policy Framework: The Committee asked to what degree the ECIC related to the
bilateral investment treaty (BIT) policy framework. The ECIC replied that the
ECIC’s board had a representative from the National Treasury and the DTI, and
the credit insurance committee was attended by representatives from the National
Treasury, Departments of International Relations and Co-operation and Trade and
Industry, as well as the South African Reserve Bank. The credit insurance committee
dealt with BITs and were guided by the experts from these government
institutions.
§
Delay in Approving the
Interest Make-Up Agreement: The ECIC clarified their earlier statement on the potential
loss of $500 million due to the delay in the National Treasury approving the
interest make-up (IMU) agreement. IMU support assists exporters by allowing
them to have a fixed loan with a South African bank at an interest rate that is
competitive relative to the interest rates available to their foreign
competitors. The previous IMU agreement had expired in March 2008 and the
replacement agreement was only approved 15 months later. Initially the Treasury
delayed the approval, however at the time of approval the country had entered
the international financial crisis and the cost to government of the initial
design of the IMU agreement would be too great. As a result, the ECIC had to
renegotiate the agreement with banks and the IDC. The new agreement was then
signed in June 2009. During this period, projects to the value of $500 million
had been approved by the Board for cover subject to the approval of the IMU agreement.
However, none of these projects would have been successful if the IMU agreement
had not been approved and would thus have led to the loss of these export
contracts.
§
Concentration in Africa: The Committee commented
that South Africa has a large market in Africa and suggested that if the ECIC concentrated
its business in Africa, the development situation may be improved. The ECIC
explained that the existing high concentration was as a result of Southern
African countries having a natural tendency to do business through the ECIC
because it was the only export credit agency in Africa. The ECIC mainly worked
with domestic businesses that were involved in projects outside of the country.
§
Awareness of the ECIC: The Committee asked how
aware the national players were of the ECIC. The ECIC responded that it held a
number of workshops in provinces to raise awareness about its work; however,
this may not be sufficient but it would look into the matter.
§
Premiums: The Committee enquired
whether the ECIC worked on the basis of higher risk attracts higher premiums.
The ECIC replied that it was filling a market gap and did raise premiums based
on the risk profile of a client. However, it also only engaged with projects that
promoted development unless Government insisted on the ECIC engaging under
national interest, in which case Government took the risk.
§
Decision-making: The Committee asked what
influenced the ECIC’s decision-making process. The ECIC explained that it was a
self-sustaining, profit-making company that had to consider developmental
issues. Furthermore, the Committee enquired whether the ECIC evaluated financial
intelligence in countries where it provided insurance. The ECIC replied that it
did thorough research and analysis in risk profiling before insuring a project.
§
Financial Crisis: The Committee enquired what
impact the financial crisis had had on the ECIC’s activities. The ECIC
responded that the crisis had not really affected development in Africa and
therefore there had not been a direct impact in terms of its revenue source.
§
Legislative gaps: The Committee noted
that the ECIC had mentioned that the current legislation might not be
resonating with its abilities and was some what restrictive. A more elaborate
explanation was requested. The ECIC highlighted that Sections 9.1 and 9.2
stipulated the classes and special conditions under which the ECIC may provide
insurance. However, they argued that this restricted their ability to actively
support the participation of SMEs in the export sector and other situations
where the national interest may be served.
§
Restructuring: The Committee asked
what the effects of downsizing in the organisation had been. The ECIC replied
that no staff had been dismissed. Staff had been redeployed to other areas and
salaries remained the same. The ECIC also noted that operational efficiency had
improved since the restructuring and that there had been no legal
ramifications.
12. Concluding Remarks
12.1
The Committee welcomes the DTI’s recognition that urgent
measures must be developed and implemented to arrest the decline in South
Africa’s Industrial base and invigorate the manufacturing sector. It believes
that the Industrial Development Corporation can effectively use its sound,
robust and resilient financial base to strengthen South Africa’s industrial
resurgence.
12.2
The Committee also supports the Executive’s refusal to sign
the interim EPA, which threatens regional integration in particular through
undermining the terms and spirit of the SACU Agreement. It also agrees with the
Government on the need to broaden and strengthen trade relations in the South
while retaining strategic trading agreements with traditional partners in the
Europe.
12.3
The Committee recognizes the relationship between
employment, industrial development, trade and economic growth and the need to
harness positive performance in this relationship to eradicate poverty and
enhance community cohesion. Given the inequalities in South Africa, all
initiatives should strive to address these, particularly in terms of the
geographical spread.
12.4
Hence, the Committee’s continuing concern at the slow
performance in Khula, the National Empowerment Fund, and the South African
Micro-Finance Apex Fund.
12.5
It welcomes the support from the National Treasury for the
Export Credit Insurance Corporation, despite the earlier delays. However, it
noted that the current legislation did not resonate with the ECIC’s abilities
to actively support the participation of SMEs in the export sector and other
situations where the national interest may be served. Furthermore, the ECIC’s
retention of trained staff should be addressed creatively.
12.6
Acknowledging the independent operations of the Competition
Commission and the Competition Tribunal, the Committee believes these two
entities have a critical role to play in protecting consumers from unfair and
unrealistic prices but also through robust business operations developing South
Africa’s competitive advantage.
12.7
Annual Reports underline the complexities in the concurrent
character of gambling operations and its socio-economic impact. The Committee
continues to deliberate on these issues to arrive at the optimum operation in a
developmental state.
12.8
The distributive model in the National Lotteries Board
remains a concern for the Committee.
12.9
Robust oversight by the Portfolio Committee on Trade and
Industry was facilitated by the transparent engagement of the Minister and his
two deputy Ministers as well as the senior staff in the Department of Trade and
Industry. We extend our appreciation to DTI and look forward to continuing with
this constructive working relationship.
12.10
The Committee also wishes to thank its Committee support
staff in particular the Committee Secretary, Content Advisor and Researcher for
their conscientious commitment to their work.
12.11
The Chairperson thanks all Members of the Committee for
their active participatory oversight, deliberations and constructive
recommendations to the House.
13. Recommendations
The DTI and the relevant entities
are required within three months following the adoption of this report to
provide a written report on the measures they have implemented to address the
following recommendations.
13.1
As the IDC will be playing a critical role in the
acceleration of the industrial base, it will require significant
recapitalisation. The last time IDC was capitalised was in the 1940s and only
its judicious investments have enabled it to provide certain finance. However,
the current financial demands on it are unsustainable without recapitalisation.
The earlier legislation passed in 1940 should be reviewed and aligned with its
expected role in a developmental state. The DTI should provide the Committee
with a report on the measures that can be developed to underpin the processes
of recapitalisation and the review of the existing legislation.
13.2
The Development Finance Institutions should submit bi-annual
reports on their non-financial performance indicators. Information should
include:
§
Number and percentage of previously disadvantaged
beneficiaries receiving funding and other support, particularly in rural areas
and in designated groups including women, youth and people with disabilities.
§
Value of funding received by these beneficiaries.
§
Outputs that are being generated by these beneficiaries.
§
Impact of the funding and support provided, such as job
creation and SMME development.
§
Cost of the funds to lenders i.e. applied rates.
§
Percentage of individuals and enterprises able to repay
their loans and the assistance given to these.
13.3
The DTI must submit a comprehensive qualitative and
quantitative report on incentive schemes. The report should include:
§
Details of each project and/or beneficiary receiving an
incentive.
§
The returns on these investments in terms of the creation of
additional long-term sustainable jobs, the number of jobs retained, the
downstream effect on new sustainable jobs and the stimulation/injection into
the South African economy in terms of projected and actual economic growth.
13.4
The ECIC should submit bi-annual reports on the
implementation of the Interest Mark-Up Agreement approved by the National
Treasury. Information should include:
§
Number of export projects being approved.
§
Companies benefitting, as well as a breakdown of their
representivity in terms of designated groups.
§
Value of these projects.
§
Geographical spread of its portfolio.
13.5 The National Lotteries Board, in conjunction
with the DTI, should submit a review of the distributive model for the National
Lotteries Distribution Trust Fund, as well as the amendment of the legislation
including issues pertaining to the accountability of the Distributing Agencies.
Report to be considered.