Revised Industrial Policy Action Plan: briefing by Minister of Trade and Industry

Meeting report

Revised Industrial Policy Action Plan (IPAP)
Dr Rob Davies, Minister of Trade and Industry, gave a detailed briefing to the Committee about the Industrial Policy Action Plan (IPAP). When Cabinet adopted the National Industrial Policy Framework (NIPF) in 2007, this viewed the Industrial Policy as a long term industrialisation programme that would facilitate diversification beyond traditional commodities, increase value additions in tradable goods and services, ensure increased participation in Broad Based Black Economic Empowerment (BBBEE) and marginalised regions, and contribute to building industrial development on the African continent.

During the years 2007and 2008 the Cabinet approved IPAP and already significant progress had been recorded in the strengthening of competition legislation and practises, lowering of tariffs on key input industries such as primary chemicals, aluminium, and machinery and textiles not produced in South Africa, the development of new architecture for Clothing and Textile industries, and significant investment and job creation in Business Process Services. The IPAP mostly reflected what he termed as “easy-to-do” actions rather than “need-to-do” actions to achieve structural change. For the period 2010 to 2013, IPAP was seen as the product of economic sectors to respond to the demands of the new administration for strategic higher impact industrial policy interventions.

He noted that before the global economic crisis, South Africa achieved relatively high growth rates but this masked key structural problems. Growth that was driven by unsustainable increases in credit extension and consumption grew by 7.7% yearly. Production sectors like agriculture, mining, and manufacturing only grew by 2.9% annually. Unemployment had remained high but had never fallen below 22.8%.

Dr Davies set out some of the constraints to the IPAP. First-order cross-cutting constraints experienced included currency over-valuation and volatility, the high cost of capital relative to key competitors, failure to adequately leverage public capital and other large ‘fleet’ procurement expenditure, monopolistic pricing of key intermediate inputs, and unreliable and expensive rail and ports systems. For sector specific opportunities, detailed key action plans would be developed for each sector with clear actions, responsibilities and milestones.

Dr Davies then turned to industrial financing. The cost of capital in South Africa was found to be high, relative to South Africa’s top trading partners. Despite massive private credit extension only a small proportion was being channelled towards fixed investment. Fixed investment was concentrated on the public sector, debt-driven consumer sectors, and capital-intensive mineral-energy sectors. It was also noted that investment was not being channelled significantly to more labour-intensive and value-adding sectors.

Dr Davies noted that IPAP advanced a number of economic objectives. These included rural development, through agro-processing, bio-fuels, forestry, cultural industries, tourism, and aquaculture. It created imperatives and opportunities in the Green Economy. It could provide for downstream mineral beneficiation. It ensured that there was stronger integration between sector strategies and skills development plans. It also led to macro-economic stability

Dr Davies set out that progress was still required to further elaborate other economic policies and integrate inter-related policies and key departments and agencies into the New Growth Path. These would include the development of a framework response to the International economic crisis, the formulation of industrial policy and action plans, work on the Green Economy, Rural Economic Development, enterprise development, tourism development, knowledge economy, and the social and informal economy.

To scale up Industrial Policy, a comprehensive and integrated policy response was required. Several initiatives would be necessary to achieve this. Firstly, there was a need to strengthen coherence between macro and micro-economic policies. He suggested that macro-policies that were more supportive of IPAP and other production sectors should be introduced, so as to achieve a competitive and stable exchange rate regime, and competitive real interest rate regime relative to key trading partners. Micro-economic interventions that were supportive of key macro-economic objectives must be developed. There should be promotion of new entrants to increase competition and improvements be made to trade balance.

The second intervention lay in industrial financing. A critical determinant of profitability and investment was the cost and availability of capital, on terms comparable to competitors. Recent improvements in investment rates had been driven by public investment. Development banks had played a critical role in channelling finance to productive activities in countries that had industrialised rapidly. Therefore, IPAP would focus on securing and channelling concessional Direct Foreign Investment (DFI) funding, and strengthening the conditionalities and impact associated with on-budget incentives.

Dr Davies noted that a review of the business model of the Industrial Development Corporation (IDC) was planned, so as to free up capital for IPAP, and other value-adding and more labour-intensive sectors. An intra-governmental process was needed to identify and create long-term ongoing sources of concessional funding for IDC. Conditionalities in relation to employment intensity, market behaviour, and localization of supply chains were to be strengthened.

Another aspect concerned leveraging of procurement. At the moment, large public procurement was conducted on more of an ad-hoc than strategic basis. There were no medium and long-term procurement plans. There was limited leveraging of domestic production. Many sectors in the IPAP would depend on leveraging public expenditure. Procurement would be strengthened in order to deliver greater industrial development and net economic benefits. The whole procurement policy, legislation and practice would be overhauled so as to incentivise local production and BBBEE on routine purchases, while also ensuring value for money for the State. Discretionary points with BBBEE Codes and local procurement would be aligned. Import fronting would be eliminated. Further, the role of DFIs in locking in domestic and regional procurement would be strengthened. This meant that  would have to include local production conditionalities in their lending conditions. The “Proudly South Africa” campaign would be revamped with higher profile campaigns, and the National Industrial Participation Programme (NIPP) and the Competitive Supplier Development Programme would be integrated.

In terms of developmental trade policies, the National Industrial Policy Framework had identified tariffs as industrial policy instruments. There would be ongoing Developmental Tariff reforms introduced. The scope was to increase tariffs on products with scope for significant potential creation or retention of decent jobs and import replacement. There was also a plan to explore stronger conditionalities on tariff increases. The trade valuation methodology would be reviewed so that it could be aligned with major trading partners. Market standards would also be strengthened. This meant the development of additional standards in areas such as solar water heaters, diesel particulate filters, furniture, bio-diesel, and many others. Local products would have to get accreditation in conjunction with Proudly South Africa.

Dr Davies then described the effect of competition. There were challenges with respect to monopolistic provision of strategic goods and services and low levels of effective competition. The new focus of the Competition authorities would be on intermediate industrial products such as steel, chemicals and cement, infrastructure and construction, airfares, food, and banking. There would also be a stronger focus and follow-up on anti-cartel findings and policy advocacy with government.

Dr Davies noted that three clusters had been identified.
Cluster 1 would quantitatively focus on new areas such as metals fabrication, capital and transport equipment sectors; green and energy saving industries; and agro-processing.
Cluster 2 would broaden interventions in existing IPAP sectors. These included automotives, and components, medium and heavy commercial vehicles; minerals, plastics, pharmaceuticals and chemicals; clothing, textiles, footwear, and leather; bio-fuels; forestry, paper and pulp furniture; cultural industries and tourism; and business process outsourcing.
Cluster 3 sectors had planned to develop long-term advanced capabilities. They included nuclear and advanced materials and aerospace capabilities.

Dr Davies then described the impact of what he had set out. It was envisaged that the revised IPAP would create 825 706 direct decent jobs over ten years, and 2 477 118 indirect and direct decent jobs in the same period. It would also bring significant improvement to the trade balance, mitigate the balance-of-payments threat to sustainability of the public Capex programme, and diversify and grow exports in areas such as capital equipment, automotive components, and agro-processing. Lastly, it would build long-term industrial capabilities and was likely to increase returns through investment, skills development, and upward movement in value chains.

Discussion
Ms M Shinn (DA) asked how the government was going to ensure that South Africa produced goods that were put out into the market, not stay in workshops. She also enquired how many of these jobs were likely to be in the private and public sectors.

Dr Davies replied there was a major imbalance in the South African economy. Therefore, it was not intended that goods be produced that people could not use. The plan was to correct past imbalances. Most of the jobs were going to come from the private sector.

Mr M Oriani-Ambrosini (IFP) stated he did not understand whether the philosophy underlying IPAP was to make money or whether it would rather cost money.

Dr Davies explained that the Ministry and Department were looking to create a competitive industry that, on a sustainable basis, would create decent work in the country. The establishment and development costs of what would become a competitive industry was often something that the private institutions would go into, as shown by the experience in Asian countries. The establishment and development costs would need to be harmonised, and constraints that could arise as a result of that would need to be addressed in order to create conducive conditions for these kinds of industries to emerge.

Mr L Greyling (ID) wanted to find out if the Department had interrogated the plans of each department in terms of infrastructure-build programmes, especially job creation and industrialisation. He asked if the plans had been interrogated fully, or if any changes had been suggested to the way in which the plans were rolled out.

Dr Davies said each committee had to take responsibility for its own department. Some of this would happen at the level of government, but Parliamentary oversight would play an important role in this regard. A lot of discussion was needed around this issue.

Ms C Kotsi (COPE) commented that South Africa could not compete with China and India on clothing. She asked if it was not time to look more closely at what Africa could produce. She also o asked the Minister to comment on the issue of high labour costs versus low productivity.

Dr Davies elaborated that South Africa was not trying to compete with China. Research indicated that there was a need to find an individual “niche” market, such as fast fashion, something which would respond to seasonal demands. That was the biggest opportunity for the country. But the problem in the textile industry lay not in spending money but in investment. He agreed that labour costs were high but refuted the claims of low productivity, citing companies that had won international awards for productivity. He reiterated that finding a niche market was the way to proceed.

Ms F Hajaig (ANC) enquired if the Department had looked at how this was going to assist in the development of Africa.

Dr Davies responded that the Council of African Ministers of Industries needed to start promoting conversations and cooperation around industrial policy issues. Value chains would be identified, and also possible ways in which other neighbouring countries could cooperate in value chains in South Africa, which would also benefit other countries in the region.

Mr B Radebe (ANC) asked if the unions and other stakeholders had bought into the IPAP plan. He wondered if South Africa was not in need of a stronger currency when it was importing, as imports seemed to be on the increase, and the strength of the currency was affecting the implementation of the plan

Dr Davies explained that customised sectors, the National Economic Development and labour Council (Nedlac) and manufacturers at different levels were engaged on this issue. Discussion and dialogue was ongoing. It seemed that everything was moving in the same direction.

Dr Davies clarified that the strength of the currency in fact made imports cheaper. South Africa was importing many products that could have been produced locally. This was an issue that needed a thorough investigation and debate, and the results would not be seen immediately.

The Chairperson commented that more engagements on this plan were needed. Consequently, the Committee was planning to hold more public hearings about the IPAP. It was described as an ambitious plan. However, from what she had read and heard, she was convinced it would be a success if there was collaborative commitment within government departments.

Gambling legislation
The Chairperson advised the Committee that the Gambling legislation would not be discussed at this meeting because the report was not finalised, and no recommendations had been received from parties other than the DA and ANC.

The meeting was adjourned.