Incentive Report 2018/19 by DTI

Meeting report

2018/19 Annual Incentive Report: Industrial Financing Division
The DTI team included Ms Malebo Mabitje-Thompson, Deputy Director General (DDG): Incentive Development and Administration; Ms Shareen Osman, Chief Director: Project Development; Ms Nontombi Matomela, Acting General Chief Operations Officer; Ms Susan Mangole, IFD Chief Operations Officer; Ms Nonkululeko Shinga, Chief Director: Innovation and Technology.
 
Ms Mabitje-Thompson noted that her division was no longer called IDAD, but is now IFD (Industrial Financing Division). She explained the purpose and objectives of IFD which is a client-facing division.

— Incentive Clusters
There are five main Incentive Clusters:
1. Manufacturing Investment
2. Innovation
3. Service Investment
4. Infrastructure Support
5. Export Promotion

Some programmes being tried out within the Cluster Development Programme would be phased out, with some of the support programmes being included in either the Special Economic Zones (SEZ) or the Critical Infrastructure programmes going forward.

— Incentive Performance Overview
Approvals were made to a value of R8.9 billion; the approvals are how much IFD could provide in financial support. Total actual investment (disbursement) was R41.4 billion. The projected investment was R31.3 billion. Of the R8.9 billion that IFD committed to industry, IFD was able to disburse R5.1 billion to support industry. That R5.1 billion was part of the budget IFD had for 2018/19. IFD support is broken down into three main packages: loans (where IFD works with IDC); tax allowances (where IDC works with SARS); and grants (managed by IFD or DTI itself). Of the companies which IFD supported, 82% had a B-BBEE status of level 1-4, 10% had level 5-8 B-BEE status and 8% were not required to have B-BEE status as these companies were within the SEZs.

Achievements under the categories of Supporting Local Manufacturing, Catapulting Economic Inclusion, Driving Innovation in the Fourth Industrial Revolution, Building Skills and Creating Jobs, and Encouraging Foreign Investment were noted (pg. 7). The last category included not just encouraging foreign direct investment, but also exports from South Africa to foreign destinations.

A large amount of IFD support is in Gauteng, followed by KwaZulu-Natal and the Western Cape. Support was also provided in the Eastern Cape, Mpumalanga, Limpopo, North West, Northern Cape, and Free State. The Free State remains a concern due to investments not coming through at the level IFD expected it to be at this stage.

Within key sectors such as agriculture, value-adding agriculture was supported, e.g. packaging, polishing of goods to ready them for export, and processing (where the nature of an agricultural product is changed from one form to another (such as processing apples into apple juice). Clothing, textiles, leather and footwear was an important sector for the economy, particularly for the employment of women. IFD is increasingly funding mineral beneficiation projects. Within the key sectors IFD has supported, 31 525 direct jobs were projected to be retained.

— Performance Per Incentive
Manufacturing Investments Cluster
The Black Industrialist Scheme (BIS) in 2018/19 injected R490 million into projects to support the expansion of manufacturing exports. The target was 100 black industrialists. Fifty more approvals were made in 2018/19 than previously; of these approvals, most of these enterprises were investing in technologies and capabilities that allows them to be resource efficient (both energy and water, due to being new enterprises. Ownership breakdown was 54% black African, 30% Indian, and around 28% female ownership. Examples of businesses approved in 2018/19 were Nocks Oil; Proximo 101 Investments; Sycamore Trading. Notably, Sycamore Trading was able to create both more downstream and upstream jobs as it continued to grow.

The Section 12I Tax Incentive Allowance promotes manufacturing in the country by investing in manufacturing assets and the training of staff to improve labour productivity and the skills of the labour force. In 2018/19, IFD supported investment of over R1.8 billion (projected foreign investment). Of that investment, there is a projected investment from small, medium and micro enterprises (SMMEs) of R136 million that will enable SMMEs to create jobs. An example is Aspen Pharmacare. In the Incentive Report, Members could see that there was a good balance between supporting fairly old companies, which are the main job creators, and supporting new companies. New companies are also helping to put IFD on an industrial path that readies it for the Fourth Industrial Revolution (4IR).

The Automotive Incentive Scheme (pg. 16) aims to build and sustain the South African auto sector. One of the requirements for the scheme introduced in the 2018/19 was that there must be a job loss standstill. If a company was going to lose jobs, then IFD would not be in a position to support it. Specifically, such a company should not shed jobs within the IFD investment period, which is three to five years. The bulk of the incentives go to new enterprises for specific economic reasons, that sometimes are unique to new enterprises.

Agro-Processing Support Scheme: The scheme had 2 283 projected new direct jobs and 2 071 jobs to be retained. For every R1 made, IFD was able to secure a R5 investment. Of IFD-supported entities, 84% of inputs were locally procured and/or locally sourced (means grown in South Africa). One of the assisted companies was Sea Harvest.

Aquaculture Development and Enhancement Programme: The scheme supports both coastal and inland aquaculture. There are a growing number of inland provinces that are now coming on board, and are raising several consumable species in fresh water. There has been increased production of tilapia, mussels, trout, and catfish. There has also been an increase in the work done to add value to those species through cleaning, canning and packaging. DTI is looking at inland aquaculture to become an important sector for import replacement and exports. An example of a beneficiary is Larostar (Pty) Ltd t/a Silver Lakes Farm in Gauteng.

Innovation Cluster
This cluster is involved in aiding South Africa to become part of the producers within the 4IR.

Technology and Human Resource for Industry Programme: The programme has supported 79 black students, and 45 female students to gain experience in research and technical skills; the students were part of university programmes for developing new technologies. Ten higher education institutions are participating in the programme including those from previously marginalized areas such as University of Venda, University of Limpopo and University of the Western Cape. Other universities (which were not previously excluded) include University of the Witwatersrand and University of Stellenbosch.

R106.4 million was approved for black-owned SMMEs and R61.6 million for female-owned SMMEs. These technologies have not been used previously in the South African economy; the technology is new both locally and globally. Footwear Industry Training (Pty) Ltd was a grant recipient, and a project at the company supported the involvement of students and a CPUT-based lead researcher; the company is developing materials that could appear in footwear in the future. Other new materials are already in aeroplanes; people have developed technologies that will place South Africa in the value addition chain of aeroplane manufacturing.

Support Programme for Industrial Innovation: R4 million was injected into innovative projects run by black-owned SMMEs. Due to risks involved in producing these products, there was reluctance from others to invest. Three projects supported by IFD have developed commercialized products which support the 4IR. IFD is helping projects to get products patented locally and globally. For example, Esquire Trading (Pty) Ltd produces surgical swabs and dressing made from new materials, which are antimicrobial. The Department hopes that this programme will assist SA companies with exporting and to come into the health sector, where companies could provide innovative products responding to increasing needs of the health industry. The Department noted that Esquire is 51% black female-owned, and is a level 1 B-BEE contributor. The jobs at Esquire are relatively few now, since the company’s technologies are still in the development stages, but DTI hopes to create more jobs when the products come into the market. It also hopes to gain a foothold for South Africa in the research and development (R&D) value chain of the health sector.

Service Investment Cluster
Global Business Services: A priority is to increase export revenue for South Africa, and increase job creation. Within the companies that IFD supports, more than 16 000 jobs have been retained. R302.6 million in disbursement has supported an actual export revenue of over R3.9 billion. For example, CCI Call Centres (Pty) Ltd has created around 5 000 jobs, with 75% black staff and 60% women staff; this is significant because 60% of young black women aged 18 to 25 years are unemployed in South Africa.

Film and Television Production Incentive: IFD has supported 25 black emerging filmmakers, who were supported with an investment of R90 million in their local productions. Ms Mabitje-Thompson commented: We are proud that we now can add to the library of movies that we have supported. With productions from Limpopo and the North West, the aim is not only to tell South African stories, but also to open avenues for local producers, as well as various capabilities in makeup, wardrobe, and other parts of the film value chain. The Department is exposing local films to the international arena, and making sure that through exposure, these filmmakers can get contracts, even going beyond producing films (although the Department’s support is of film production) – 28% of IFD support was for female-owned productions, and 62% to black-owned productions.

Infrastructure Support Programme
Special Economic Zones: These are geographically designated areas of South Africa set aside for targeted economic activities. There are SEZs in the Western Cape, the Free State, Gauteng, Limpopo, Mpumalanga, KwaZulu-Natal and the Eastern Cape. The Department aims to create clusters of activities within investor-friendly locations, where it is easy for an investor to come and set up very quickly, so that it can support the creation of jobs at a faster rate than it would ordinarily be able to.

Critical Infrastructure Programme: Support was given to 12 industrial parks located in former homelands, which are owned by provincial governments and managed by provincial government agencies. DTI is currently working with parks to ensure that the parks are investor ready; and that DTI can go to investors with collateral, which would enable such investors to support the parks. DTI wants to support both local and foreign investors of the parks.

Export Promotion Cluster
Export Marketing and Investment Assistance Scheme: DTI supports companies at a sectoral level, with its sector-specific assistance, and also with the capital project visibility programme. The focus of this scheme is on growing South Africa’s international footprint in terms of the products it exports to the rest of the world. In the 2018/19, there was approval for 307 SMMEs across 12 different industries.

Sector-Specific Assistance Scheme: In 2018/19, R59.2 million was invested in emerging exporters, and a diverse range of industries was supported inclusive of agro-processing and clothing, textile/leather and footwear. Ms Mabitje-Thompson commented that what was important was recognition that the local market is not sufficient to help South Africa with the challenge of producing jobs. It is important to explore other markets, and South Africa takes full advantage of those markets, so it is able to deal sufficiently with domestic challenges

Discussion
The Chairperson noted the presentation and said that the Committee was in good hands. The Committee always made a comment about the DTI delegation but today it could say that it was in safe hands. On incentives, he pointed out that one should not see incentives as competition; it is a broadening of the economic development space when looking at the issue of black industrialists. It was also important to have a sense of how the government is contributing to the growth and development of the South African economy in terms of its approach to black industrialists. This would be linked to the kind of relationship that we are building with the BEE Commission.

The Chairperson asked about declining applications for incentives; it might be important to know what is contributing to the decline. South Africa has looked internally; it is hoping for foreign investment in the incentives space; is there anything happening in that space at the level of foreign investment?

Mr M Cuthbert (DA) stated that IFD is generally one of the better-performing divisions within DTI, and that the Committee values IFD’s good work. He thought that the project on Global Business Services (where South Africa had long ago lost its competitive edge to countries such as India and Mauritius) was a good thing; it was labour-intensive work and not necessarily highly-skilled, so it was good to bring in such work to South Africa.

He had some concerns: The first was about the incentive transfer to Aspen Pharmacare. He pointed out that Aspen was a funder of the President’s internal election campaign; it was a very large contributor to the campaign. In light of that, is IFD under the impression that there is a conflict of interest? He was led to believe that there were a number of Automotive Incentive Scheme (AIS) approvals waiting, and had been waiting for several months. It was as a result of the adjudication committee not sitting for a period of time, by virtue of the chair not having been renewed yet. Could they get an update on the progress of the adjudication committee? The second concern related to the 12I allowances; he asked what was happening with the allowances, and he was under the impression that there was a delay. Surely there are severe economic implications if the allowances are delayed? The delays relate to investor certainty and similar issues. The last question was on the Automotive Industry Transformation Fund that was set up by automotive OEMs where they would be able to forgo BEE requirements by providing funds to this central fund that would then be used for transformation and development. Could the Committee get a progress update on what is happening with that fund, what is the possible size of that fund, and where are they at this point?

Ms N Motang (ANC) asked how DTI, in collaboration with the B-BBEE Commission, dealt with fronting. On beneficiaries that had already been funded by IFD, how does it identify those who have already been funded? Do the requirements for the Automotive Incentive Scheme include a commitment to local procurement?

Mr W Thring (ACDP) expressed appreciation for the report. He noted there were one or two slides that did not have the updated information. He would appreciate updated information. This reported ended in March 2019 – he would have appreciated having the first and second quarter 2029/20 report as requested by the Committee, because that update and advance preparation before the Committee gets to the 2019/20 annual report. On slide 6 what is the total budget for IFD, and what were its 2018/19 set targets that had been reached? He was not able to see that on the slide. A vast amount of disbursement goes to Gauteng. Gauteng is certainly the economic capital of the country in terms of GDP. Could there be an inversion investment, or countercyclical investment where one would begin to look as some of the smaller provinces that actually need investment, particularly where those smaller provinces have a higher proportion of unemployment? We continue to give money to the baby which makes the loudest financial noise. DTI had mentioned that the leverage in the automotive sector was 1:5: for every one job created – another five jobs created either upstream or downstream. The automotive sector has an investment multiplier of 10.1. Mr Thring called those facts fantastic. However, he asked what about the other industries; what about the other sectors? What is the multiplier effect in the other sectors? Slide 28 mentioned 500 000 jobs in terms of agreements DTI has with businesses in the next five years. That is 100 000 or so plus per year. Could DTI unpack how that will be achieved?

Ms Y Yako (EFF) asked how DTI feels about Aspen shedding jobs as she heard that the company was preparing to shed jobs. What is the update there – is DTI speaking to Aspen? Why is DTI’s contribution not making a difference there? She noted that there were minimal women in terms of business support by DTI. Has DTI done a study to find out why women are reluctant to come into some industries? On SEZs, she felt that the SEZs should be closer to the people and not based where it is easier to do business. SEZs should come to where people are, such as townships and rural areas. She did not know if DTI had any plans, besides the industrial parks, that will take SEZs to the people, so that they do not have to migrate to other cities, and will have better access to information. She asked why Northern Cape is receiving such a small amount in terms of approvals. Is it because there is no economy growing there? Or is it because there are no initiatives within the Northern Cape? IFD had given the Eastern Cape R3.9 billion – was that yielding any results in the economic growth of Eastern Cape?

Mr F Mulder (FF+) noted the graph on slide 6 and asked about if these were percentages for portion of budget spent or were the number of businesses? On the summary of approvals per province (slide 8), looking at the amounts invested in Limpopo and Gauteng versus the jobs created; is it more expensive to invest in certain areas? There is a huge difference in the amounts invested – R246 million in Limpopo, and R3.6 billion in Gauteng, yet the number of jobs created is more or less the same. One can only respond to what one sees and as far as the report is concerned, the work must be complimented. But is there a more in-depth report available? How does IFD oversee the businesses which were assisted? Are the businesses audited, and do they show sustainable jobs being created? What about market share improvement? On slide 35 on exports, everyone was aware that due to the currency situation which is currently more than R15 per dollar, that South Africa is in a very attractive export situation. Why is a relatively small amount of money invested in incentives for export?

Ms J Hermans (ANC) referred to the question of Aspen and the potential conflict of interest. Does Aspen receive funding or is it a tax incentive? The Committee had noted the date of the reporting period, but if Aspen enjoys either funding or a tax incentive, when did it start, so that the Committee can see if there was a conflict of interest. South Africa is facing an unemployment crisis. IFD funds innovation, which leads to job losses in some cases. IFD funds job-creating initiatives. In its planning, how does IFD maintain a balance between innovation and job creation?

Ms P Mantashe (ANC) praised the work done by IFD. She asked if in future IFD would extend full-scale support to the oceans economy. A large ocean is close to the Eastern Cape, and it is a large area compared to Gauteng. However Gauteng got more money for this incentive despite it having no sea. Since the Eastern Cape has a large coastal area, it would create more ocean economy jobs, and it would improve the economic situation of that poor province, which was robbed of its human resources by other provinces. An improvement in the Eastern Cape’s economic situation would enable change in the delivery pattern offered by a progressive government. She wanted to see practical examples of mineral beneficiation or what type of beneficiation is it? South Africa has been saying that is has been robbed of its minerals that have been taken abroad, without South Africa benefitting from its own underground works. We need practical examples.

Ms Mantashe said that there is a "new product" referring to cannabis which is the wealth of Eastern Pondoland in the Eastern Cape. How would IFD ensure that it supports those farmers in the future? For South Africa, it would be a goldmine for that poor province. There is a need to move away from the traditional businesses that IFD used to support. There is need of IFDs assistance in job creation. When would the second round of revitalization of industrial parks (which are the closest to the people) be expected? She understood SEZs, and did not need to be convinced; it is not easy to take SEZs closer to people, because South Africa’s ports are far away from the people. The intention was that South Africa’s production could be exported easily from the ports. On the unfriendly nature of the application process for incentives: how would IFD assist people to access the application process? There are a lot of businesses out there that need those incentives, but cannot access them due to the unfriendly nature of the applications. IFD offers incentives to companies who say that they do not shed jobs in the three to five year investment period. What is IFD’s safety net? How does it monitor if the companies have not shed jobs within that period? She had seen in the report, for example, that as 1 000 jobs were created, 500 were lost. How does IFD ensure that companies do not shed jobs after it has given companies support? That would be like sending a baboon to the maize field to take two cobs, and when it reaches the end of the field, you have one. She would be comforted if Members did not politicize the economy of the country. She knew that the economy is political, but when one talks of Aspen’s beneficiation, or conflict of interest, she had not observed a conflict of interest in the presentation. She wished that the Committee would not politicise this, because it is the life and death of our country.

The Chairperson stated that the problem you will have is that there are politicians in the room, and you would not be able to avoid political issues. On slide 15 on Aspen, in the presentation, an issue is explained in terms of the slide; it gives a sense of progress. He was sure that in the annual report, there was a discussion about progress. In the presentation itself, it might be difficult to ask a question. The support that was given did what was required; the company is doing very well. He noted Mr Cuthbert was asking if the Aspen contribution to Mr Ramaphosa's campaign was a conflict of interest. He suggested that the Committee may be asking a question which should rather be asked of Aspen. The Committee could ask Aspen if it contributed, and if this contribution was a conflict of interest. For the DTI team at the meeting, it was an irrelevant issue. If there was still an issue Mr Cuthbert wanted to raise, he could talk to that.

Mr Cuthbert said that he disagreed with Ms Mantashe. She was entitled to her view, but he was entitled to his view as well. He asked how tax payers’ money was being spent, because it was tax payers’ money that was being raised through the fiscus and given as incentives to businesses to create jobs. He asked if there was any kind of clientelistic relationship between people who are receiving incentives, and those who are contributing to campaigns. He noted that news reports said that Aspen had a R2 billion contract with the Department of Health. The gentleman quoted in the presentation, Mr Stavros Nicolaou, was the man who was tasked with giving the donation to the CR17 campaign. He did not mention political parties; he had mentioned President Ramaphosa in his individual capacity, because this related to a state matter. It was currently something in the purview of the Public Protector as well, so that was why he had raised Aspen. He would like DTI to answer that question, because he believed that it was in the public interest, and if it was not answered in the meeting, then he would submit his question as a written and oral question in the House to be taken up further.

The Chairperson replied that Aspen, on their own, contributed funds to Mr Ramaphosa's campaign. He asked if the question could be directed to the right place; it could be taken to Parliament as well. Mr Cuthbert could then ask the question to the President, which would be in order. But in terms of the Committee presentation, is it really relevant?

Mr Cuthbert responded that he believed that the Aspen question was relevant, because the DTI is a stakeholder of government; it has a relationship with Aspen; there is a relationship between the President and Aspen. He thought that it was fair game for Members to ask such questions because surely that would come into the frame of thinking when making a decision that costs hundreds of millions of rands to pump an incentive into a particular company.

Ms Yako did not think that Committee members could be told what Members can and cannot ask. We cannot be told what questions are good and what questions are bad. We ask these questions because we want to know. In reply to Ms Mantashe, the SEZs should never be centred on one thing, which is ports. SEZs should be taken to where the people are. She said that Ms Mantashe cannot tell fellow Members that they ask silly questions or that Members cannot ask certain questions. Questions are asked for a certain reason. It is important for constituencies to know, and for Members to give constituents feedback. She did not think it was fair or respectful to Members to be told that when they seek clarity, they are stupid, or such questions should not be asked in the first place.

Ms Mantashe responded that she would clarify her understanding. SEZs are at ports for the purpose of easy export. She never said that anyone is stupid and that she did not think that she had that capacity to judge people. She wanted to ask the DDG if Aspen receives funding, or if it benefited from a 12I tax incentive.

The Chairperson said that the Aspen question was an issue he was trying to separate. He suggested to Mr Cuthbert and Ms Yako that in terms of accounting of those companies supported, the company should be addressed. How companies use the resources and who companies actually contribute to, it would be easier to ask the company directly. Or Members could ask the Presidency directly about conflict of interest. The Chairperson saw the 2018/19 Annual Incentive Report as a complete presentation. IFD has given support, has done quite well, and there was actually progress. IFD could be asked the question on whether they have ever noticed that there was a conflict of interest. Or the Committee could raise a question to the Executive or the President on conflict of interest. He said that Ms Yako was right – the Committee could raise any issue, but as a Chair, he was making a suggestion that it was an issue that Members may have to discuss at other levels. But for the Committee and the information given by DTI, he thought that it was important for him to say that the Aspen question was irrelevant, and then the Committee could proceed.

Responses
Ms Mabitje-Thompson appreciated the praise from the Members. For public servants, the appreciation meant a lot, because of the pressures that public servants face at times. It would be good to take an appreciation of the report by Members back to the IFD division. She explained the general approach to the support that IFD offers. One of the things which IFD does not do (because it is irrelevant to its work) is do an audit of the alignments (political or otherwise) of companies it supports. IFD follows a guideline that is published on who qualifies and who does not qualify. Based on that guideline, IFD is essentially bound to contract and engage with the companies in that manner. IFD would not go into other issues too much, except for asking about the project in question, and the types of outcomes it requires from that project.

On the Global Business Services (GBS): DTI is doing better in this sector. South Africa did not lose much to India and Mauritius, because DTI’s proposition is different. Unlike India, DTI is not saying come to South Africa for the lowest wage that one can pay a worker. It is saying come for value that one can get, including the quality of labour that one can get in South Africa. The types of companies that DTI would attract would be the ones who would not want to align themselves with sweatshops. Such companies would know that when they are here in South Africa, there are laws and ways of doing things that DTI would assist on. DTI’s value proposition is different to India in those respects. The proposition is different on some of the services that DTI goes into. For example, when DTI does its global survey of where South Africa is in the sector, one of the things that the companies are telling DTI is that they would not go to India for client services because of the nature of Indian society, where people have to be told this is how you take care of a client; that is if a problem arises that is outside of the script, they are unable to take care of it. Companies say that that is the reason they come to South Africa, because someone in Khayelitsha is better-suited to serve someone in London, and answer to their problems, than someone in India.

On the AIS approvals: DTI is back on track; the last meeting was held in the last two weeks, and the decision-making committee had been appointed, so the AIS approvals process was going according to what it should be.

On the 12I allowances: The issue is not about the approvals for 12I but about certain transactions which were complex. Some of the complexities were shared by Members in the meeting. One of these complexities was where jobs are created in one project, but jobs are shed in another project. Those kinds of projects have to be taken off the normal line of work, so that these projects are dealt with specifically, and Members do not accuse DTI of supporting companies which are shedding jobs. It was for those complex transactions that decisions had to be made, and special commitments secured from those companies, to ensure that the value of those companies includes securing jobs for the people who were projected to lose jobs. The complex transactions were the ones where there were delays.

On the Automotive Industry Transformation Fund and how it will work: It will be run by the auto sector, and would work similarly to the equity equivalent. Some monitoring would be done by DTI, but that activity would not be part of its incentive programme going forward.

On dealing with fronting: Fronting is becoming a big issue. It is a big drag on DTI’s processing of applications, because of untruths told about ownership, and around who will get the revenues at the end of transactions. DTI has to employ a lot more resources into its processing activities. Fronting is an issue that DTI is increasingly seeing; not just general misrepresentation, where companies promise the world and deliver very little, and then insist that they are due for payment. DTI has increasingly seen that it has to defend its decisions in court to defend the public purse when people have lied. DTI will not be able to process applications where there has been lying about ownership, production process, and who the company employs. There were some cases where, despite the expectation that a company will employ people eligible for employment in terms of South African legislation, DTI did an inspection, and found people who were not eligible for employment. DTI was then put in a situation where it had to defend the integrity of the programme. DTI is working with its Development Finance Institutions (DFIs) both nationally and provincially, and the National Empowerment Fund (NEF). The number of projects that the NEF has funded is not as many as DTI would have liked; this is for various reasons that the NEF has to deal with. The commitment that DTI can make is that in the next report, one of the areas that it will reflect on is its collaboration with DFIs, and some of the things that DTI has put in place to ensure that some requirements are much more standardised across all the funders in government. Such standardised requirements will deal with the question raised on the unfriendly nature of DTI’s application process, and how it intends to improve that.

DTI did not bring the 2019/20 Quarter 1 and 2 reports because it comes to Parliament only with audited documents. What was presented to the Committee was what the Auditor General had vetted as true. DTI would come back in the following year with the 2019/20 Incentive Report that was vetted by the Auditor General (AG). In four months’ time, DTI was going to finalise the audit process with the Auditor General for the 2019/20. Its preference when it comes to the detail of the Incentive Report is to present what has been audited by the AG. However DTI does provide quarterly updates to Parliament on its work.

On the targets set: DTI did not present those because it did not want to brag; it did quite well. It set a target of R15 billion but this grew to R31.3 billion so it doubled its target. The investments grew in a way that did not initially seem possible when DTI did its projections.

On disbursements: DTI is on target with disbursements, because it cannot overpay beyond its budget. On the number of companies supported: DTI is in range. With the key performance indicators (KPIs), in terms of what DTI approved, disbursed, projected investment, and actual investment, it wanted to show how it had done relative to the targets set.

On local procurement: This is a priority across all incentives. DTI’s measure of local procurement is simple – as long as something is manufactured in South Africa, DTI will regard it as a local product.

On countercyclical investments: The question asked why DTI investment was following where the industrial structure is instead of creating new nodes of industrial development. DTI is trying to address this with the industrial parks and the SEZs. In those underrepresented areas, DTI is trying to create environments where enterprises can grow, mature and receive support. The map in the presentation reflects areas where DTI has received requests for support. DTI does not do project packaging; an entrepreneur comes to DTI with a packaged project, and it works with the entrepreneur on the basis of that packaged project. DTI is hoping that an outcome of the industrial parks and SEZ programmes will be that it will start going into those underrepresented areas a lot more.

On why investments outside of Gauteng seem to be less costly for the number of jobs created than those in Gauteng, is it a reflection on whether it is more expensive to invest in certain areas? The answer is both yes and no: Yes, in the sense that when one invests in a rural place, DTI still has to assist with a road to access the main road. Those things come with additional costs that would otherwise not be there when you are investing in Gauteng. No, in the sense that based on the type of project, if one is in the agro-processing space in Limpopo, one is likely to create more jobs than if one were in a high-tech environment in Gauteng. It is not just a matter of the expense of the investment; it is the nature of the activity that the company will do.

On investment multipliers: DTI does look at multipliers. The auto industry multiplier was highlighted in the presentation to give Members a sense of why DTI keeps saying that the auto sector is important. There are multipliers for other sectors, such as agro-processing, clothing and textiles, etc. Multipliers are the basis upon which DTI will land on a sector to call it a job-intensive sector, which it needs to support. DTI agreed with the GBS sector to retain 500 000 jobs; these jobs will be in financial services, IT services, care and legal services, where a person in South Africa could be drawing up a contract between contracting parties in London and the USA for example. According to people elsewhere, not only does South Africa have one of the better crops of graduates in the world, but they have a traditional affinity to some of these markets that allows South Africa to do those types of activities a lot better than if the activities were done elsewhere. South Africa’s selling point for GBS is the quality of its skills. This is in contrast to the discussion that talks about how bad the quality of people is among those coming out of the local skills development system. If one talks to South Africa’s outsourcers, especially those doing complex jobs, the first thing that they say is about the total talent found in South Africa, which is quite scarce elsewhere.

On the participation of women: DTI was involved with its colleagues in the Presidency on the question of how to increase women’s participation in industry and in how DTI provides support. An area of concern is not that women are not having similar opportunities, but on how DTI structures its funding. It is more difficult for a woman to get funding from a bank than for a man. It is a reality; DTI has seen it. When DTI says that it must have a cost-sharing grant, the weight of that rule lies more heavily on a woman than it would for a man who is able to raise funds from multiple sources. This is just based on the fact that it is a woman; it has nothing to do with what the project is about. DTI is looking into this, and when the Minister presents his plan for 2021, there will be a reflection on how DTI is going to deal with this issue, following the study that showed that there is a gap in the financing of women-led projects.

On SEZs being closer to people: DTI’s approach has been slightly different; it is saying that it needs to create a pathway to an SEZ, based on current economic activity in an area. DTI is looking at how to grow the current industrial parks into SEZs. DTI wants to see those industrial parks being part of that value chain going forward.

On why the Northern Cape is receiving a small amount of funds: DTI is not receiving project applications from the Northern Cape on a similar scale to those from other provinces. In the Eastern Cape, the economic mainstay is the auto sector. The question could be asked: What is Uitenhage without VW? What would East London be without Mercedes Benz? Or Durban without Toyota? Those examples help to show why some of the sectors are important; the areas help to conglomerate and build up economic activity. Because there is a VW manufacturer, there are component manufacturers, and subcomponent manufacturers, and so the value chain goes on.

On B-BEEE: A question was asked if this was numbers or percentages. The graphic showed a percentage split of the entire pot of the companies that DTI supported.

On how DTI oversees businesses it supports: This is an important question because of a tough economy and because of misrepresentation raised earlier; there is misrepresentation that DTI is now picking up in its system from companies. What DTI has done, and needs to do more of, is to improve its inspection capabilities. DTI does currently have inspectors, and there must be an inspection before a payment is made, especially where investment incentives are concerned. With inspections, DTI is making sure that it is paying for real things that are on the shop floor. DTI has a monitoring and evaluation unit, whose job is to do post-investment monitoring and evaluation.

On export support: In Rand terms, the support seems to be small, but again the question arises what is it that DTI is trying to resolve in the export sector. Here, one would be a company that needs to improve its competitiveness, and one will not see the support in the form of export support, but in the form of manufacturing. Export support is only about exposing those companies to international markets. Due to the type of activity that DTI is supporting, it therefore has a budget of a particular scale.

When Aspen was approved, and if the approval was informed by any other consideration, Ms Mabitje-Thompson replied that she could come to the meeting with no fear of any contradiction that DTI made that approval based on the merits of the case. At the point when that approval was made, DTI had no interest in any other issue that could have been happening around Aspen; it was interested in the project at hand.

On innovation and its effect on job loss: It is a difficult issue, where buying machines sometimes means replacing people. But in some instances, when one invests in areas such as the Support Programme for Industrial Innovation (SPII) DTI is creating its own innovation internally as it is then putting down seeds for future commercialisation, which will then create jobs. There are areas where DTI cannot stop innovation leading to job shedding. But what it has sought to do is to try and get an agreement with the company on other areas where they will supplement the jobs that they may be losing in one area.

On support for the ocean economy: This is an exciting area that DTI will be increasingly getting involved in. DTI has started with aquaculture support programmes, but there are a number of master plans that have been developed. Based on what those master plans say, DTI will develop incentives where financial support is a constraint to growth for a company.

On cannabis: DTI is looking forward to supporting cannabis, because it is seeing its competitor countries do very well. But in South Africa there are other issues such as money, legislation on growers and how to take cannabis products to market. Once the legislation is resolved, DTI has confidence that entrepreneurs in South Africa will come up with cannabis-based projects. DTI has seen projects in the health sector. Others are looking at how hemp can be used for textiles, in light materials, and other types of industrial activities which are generally not here in South Africa. Around the world, other economies are coming into these industries. The reason that DTI is excited about such products is that South Africa’s competitor countries are already putting a lot of money into such industries. For local manufacturers to have a chance, South Africa will have to do similarly well, or better. DTI is watching that space.

On industrial parks: DTI is not letting go of industrial parks – the DDG responsible for the SEZ and Industrial Park Support will present to the Committee. DTI is looking at supporting 26 parks going forward.

On the unfriendliness of application forms: DTI is growing as it is going. What is difficult is that at some point, one ends up making rules for the bad actors, because it is the bad actors that are one’s worst enemy. The good actors caught up in those rules. DTI has to inspect an application before it supports a company; it has learned that people lie on their application form. DTI has to go to the Department of Labour and verify that people have employed who they say they have employed, because companies have lied to DTI. All of those rules are the rules that make the application process cumbersome for applicants to access support.

Further questions
Mr Cuthbert said that he used the example of India and Mauritius on the basis of being Anglophone countries and the fact that it is predominantly Anglophone nations that use the kinds of call centres. He thought that the tangent that the DDG went on about slave wages was slightly misplaced. Even though the Chairperson said that the question about Aspen must not be answered, the Committee did receive a response from DTI on them not taking into account the political alignment of companies it may grant tax incentives or transfers to.

Ms Yako said that the DDG’s explanations were a bit higher-grade for her; she had not received the answers she would have liked to receive to her questions. She was not satisfied.

The Chairperson asked Ms Yako to repeat the questions.

Ms Yako said she had asked about Aspen losing jobs; why SEZs are where they are – DTI could not answer ‘because the SEZs were centred around ports and industrial parks’. It did not make sense to her. Is there an alternative way that DTI could get SEZs closer to the people, instead of the people going to the SEZs? DTI responded that the Northern Cape was not getting much money because it was not coming to DTI with applications. What is DTI doing about increasing the capacity of the Northern Cape to grow economically? Is that not the role of DTI?

Ms Mantashe said that she did not hear the DDG’s response on extending incentives to the ocean economy.

The Chairperson commented that incentives are one of the tools available to support the competitiveness of the industrial base, as South Africa begins growing the manufacturing sector through the development and expansion of the upstream and downstream industries. He wanted to raise that point as it spoke to what the Committee was supposed to engage on. It would be important that through beneficiation of South Africa’s natural resources, it would ensure the growth of opportunities and jobs. It was critical that South Africa produces more value-added products and services, and is not just a net exporter of raw materials. It was important to not just be a net importer of finished goods. When it comes to beneficiation in the mining sector, it is actually a challenge. One needs to look at facilitating the growth of the economy, and the creation of decent jobs. Those are issues which the Committee cannot skip.

Mr Mulder had two questions that need to be clarified. How is the support to the companies overseen – is it audited to be sustainable, to have a larger market share? Secondly, what was the amount of money invested in export-related sectors, since it was a rather attractive sector?

The DDG responded to the question about SEZs being closer to the people. The reason that DTI was saying industrial parks that are already closer to people must be the pathway to SEZs, is because that means ‘use the industrial park, and build it up to the point where it is a SEZ’. That is DTI’s approach to bringing SEZs closer to the people. DTI cannot move Coega and put it elsewhere. DTI is tweaking its thinking as it is implementing this product, which is what the industrial policy is – one learns as one goes. One will not have a perfect solution from day one. DTI is saying that the industrial parks have to be a focal point of the work that it does; it is growing SEZs to ensure that the parks become SEZs. If DTI grew industrial parks, then that would contribute towards SEZs being closer to people.

On the ocean economy: When DTI develops incentives, it does so on the basis that money is not the only thing enterprises require to be competitive and sustainable. DTI will be guided by a number of documents, and a number of areas of work that have already taken place. DTI is looking at master plans that will be coming out, and this is in addition to aquaculture, which DTI is already doing. In this case, aquaculture means a programme where marine species are grown or farmed, and those species can be sold in a sustainable way that helps to create jobs. DTI is looking into opportunities beyond just aquaculture, such as algae, and other products from the ocean environment which could be supported. What is important is whether the reason this sector industry is not growing is money. If one pours in money just because there is an opportunity, without doing an assessment, then those enterprises tend to die. For enterprises for which there is a market, and there are challenges of working capital needed to support an order, then that is where DTI knows that it has to intervene. By providing seed capital that helps a person put together their raw materials, to get the products to market, DTI assists that company to be sustainable. That is why DTI waits until a master plan is developed, and then it has a unit will go and inspect the scale of the challenges in the sector. If finance is not a major impediment, then DTI will not give an incentive. But if finance is a major impediment, then DTI will look at developing an incentive in a way that does not create dependency, but instead creates a pathway to sustainability for the businesses.

On beneficiation: Companies come to DTI with a credible business case for a particular sector. DTI had funds set aside for gold beneficiation; it has now expanded to diamonds, and all other minerals. Out of those, some of the projects are now starting to yield results. With platinum, for example, there is a company that is looking to develop fuel cells based on platinum. This is the kind of beneficiation that DTI would report on as projects that DTI has supported. With that support comes the requirement of job creation, which links the incentive to job creation. If jobs are shed for whatever reason, then according to the DTI’s initial agreement with a company, it will then have to withdraw support.

On overseeing companies: DTI oversees the work that it does and it ensures that the reports it provides to Members are accurate, and that the work that it does is felt in the economy. It includes a physical inspection process, where a person has to go and inspect that what is on paper is actually on the ground. It adds to that a monitoring and evaluation function that goes post-investment, to check if the jobs promised are still there, if the exports promised are now materialising, and any other commitments made by an entrepreneur. Market share and GDP become almost like aggregate indicators that DTI does not go into that much. DTI just says, as Company A, you said to us, this will increase your production capability from a hundred to a thousand, has your product capability changed? DTI asks that if the company has not met that target, then how will it get there? The company would tell DTI how much of the product will be sold locally, and how much will be sold internationally. Then DTI checks those things, because those are the numbers DTI can attach to the company as part of that commitment. Part of the evaluation process looks at the entirety of a scheme, and whether this scheme is deliverable according to its objective. DTI does rapid assessments, across a number of the schemes, it does evaluations across some of the schemes. This will tell DTI if it needs to change rules, amend items or methods to improve administration.

On export support: DTI will generally support companies by way of creating their flyers, enabling the companies to participate in a marketing event, etc. That would have a different costs basis than the cost of buying a machine, for example. When one looks at export support on the books, it looks like it is not much, but the support is now tailored to the activities that DTI would like to support. For example, air freight for people to take their samples across the world, and facilitating people to establish contacts across the world. These are low-cost activities, but are important for the companies. When looking at DTI support, it may look like the support is just about buying machines, but support is tailored to the nature of the activity supported.

On the Rand: When it changes, it fluctuates so much. It takes time for people to adjust to currency fluctuations for export purposes. Exporters are quite happy about the level of the currency at the moment; it is the nature of the fluctuation and the frequency of that fluctuation, that becomes a problem for planning.

Ms Shareen Osman, Chief Director: Project Development, replied about accessibility. One of the things that DTI would be exploring going forward is to try and see how it can use other media to allow people to access its incentives. For example, everyone has a cellphone. Sometimes, a person might not be able to go to the DTI website, but everybody definitely has a cellphone. DTI is looking at a scenario where if it does put out a guideline on the DTI website, it will ensure that there is a guideline that can be accessed on a cellphone, or through another medium that would be easier for its applicants. DTI knows that sometimes the jargon that it puts in its forms might be difficult for people to understand, but it has a unit that interfaces with clients to explain, as simply as possible, what the guidelines or the application form means. Clients would then have a better understanding, and the application process would be made simpler.

Ms Susan Mangole, IFD Chief Operations Officer, replied about the Northern Cape that DTI is involved in the 26 industrial parks that are still coming. One of the proposed parks is in the Northern Cape. DTI is partnering with provincial DFIs and provincial economic development agencies to create awareness of DTI incentives.

Inspection includes the verification auditors, and the consulting engineer, especially where the investigation is big and it is a complex production. DTI sends the consulting engineer to ensure that those machines are in production.

Ms Nonkululeko Shinga, Chief Director: Innovation and Technology, commented on innovation and technology, and reiterated Ms Mabitje-Thompson’s remark that when one creates jobs, one will lose jobs elsewhere. DTI is trying to create that balance, and one of the things DTI is focusing on now is grassroots innovations taking place mostly in rural and township areas. Through that project, DTI has been visiting provinces, especially those in peripheral areas. Last year, DTI visited Limpopo, Eastern Cape, and Mpumalanga. It has been able to find new innovations. DTI found that some businesses that exist in those areas might not necessarily benefit from the existing incentives, hence it sees a very low number of applications. But because these businesses are small and are still growing, they have been able to benefit from the grassroots innovations. DTI already has a scheme which is targeting those small businesses.

Ms Shinga replied that there have been two workshops already addressing the cannabis industry. There are challenges around regulation, but there is interest, and DTI is working with its agro-processing unit, to ensure that it puts incentives and support mechanisms in place.

The Chairperson remarked about cannabis that the Committee understood that there was more than one Department portfolio involved. It might be helpful to get a sense of how the portfolios will coordinate, and which will be involved, because that is important. As a Committee, it was thinking that there might be a possibility of a joint meeting on this and a presentation would help the Committee to get a good sense of the progress on cannabis.

Ms Shinga noted that for the past two cannabis workshops, the departments that participated were the Departments of Science and Innovation, Agriculture, Environmental Affairs, Health and DTI. Currently, there is scouting of how big the industry is and what types of products exist. A coordinating committee has already been set up.

The Chairperson thought that since DTI was talking about an interdepartmental team, then perhaps the Committee could ask the Secretariat to follow through to see what engagement could be had as Portfolio Committees. He mentioned getting a sense of a joint committee discussion with that task team that would be quite crucial.

The DDG thanked the Committee for their comments and observations. These would be taken into account when DTI developed the 2019/20 Incentive Report so that some of the information that Members would like to see would be included in the report.

The Chairperson thanked the DTI and commented that the Committee had requested and needed to look not only at the 2018/19 Annual Incentive Report, but also the performance up to September 2019 (Q1 and 2). There may be items that the Committee needs to follow up beyond March 2019.

Committee programme
A programme was circulated to Members which had the proposed changes on it in yellow. The Chairperson said that there would be a meeting 26 February that would be a briefing with the Minister but it would be NMISA & SANAS 2019/20 Quarter 3 performance instead. On 3 March the Committee would have the briefing by the Minister on the SONA and the budget, and a DTI briefing on the Quarter 3 performance. The meeting that the Committee had postponed on 19 February would be on 4 March: Impact of the Indigenous Knowledge Act on Intellectual Property Laws Amendment Act. On 10 March was a briefing by the NRCS. On 11 March, the Committee has the proposed briefing with the DTI and National Treasury on measures to ensure compliance and verification of local content requirements. On 11 March, there would be a meeting on I-TECH International Training and Education Center for Health. On 17 March, there would be a 2020/21 Annual Performance Plan briefing by DTI. On 18 March, there would be a briefing by the Minister on the development of the steel and ferrochrome industry, as well as Massmart.

The point that came through in discussion was multiple sectors have similar challenges in creating jobs and stability and it might be necessary for the Minister to give more information on these challenges.

Mr Cuthbert was glad to see that there were the additions that the Members asked for, and he appreciated the fact that when the Members made requests, meetings were made available. He proposed that the Committee adopt the programme.

Ms Mantashe said she wanted the Committee to consider adding the topic of the sugar industry crisis. The Committee could not keep quiet about the crisis and not attend to it, because it will have a negative impact on sugarcane farmers. She proposed that the Committee made time for the closure of one of Tongaat Hulett's sugar mills. The Committee needed to get closer to the sugar industry space. Ms Mantashe seconded Mr Cuthbert’s motion.

Mr Mulder commented that the Committee should not forget the specific request for the challenges of the cement industry for future meetings.

The Chairperson said that the topic that Ms Mantashe raised does fit in the agenda of the multi-sectoral meeting on 18 March on challenges of sustainability. If the Committee could get a sense of the sugar industry profile, then that could work as something to be raised in the multi-sector meeting. Tomorrow, the Committee programme would be adopted. There was the oversight visit, and the Chairperson was working with the Secretary to see if the Committee could look at that. He hoped to ensure weekly adoption of minutes to avoid the Committee ending up with a large pile of minutes. Members would be sent a copy before the meeting and on the day, Members could endorse minutes or make corrections.

Chairperson Closing Remarks
It might be helpful if the Committee follows through on some of the issues with the NCOP committee. The Committee had not had any structured link with the NCOP committees and he thought that quite important, because there are very important issues that are actually coming through. He suggested linking with the NCOP because Parliament has two Houses. The Committee should be able to have a programme that incorporates the sectoral parts, because DTI was an economic cluster member, which should be able to assist the Committee to have interaction with its colleagues across different spaces.
 
The meeting was adjourned.