Department of Trade and Industry Budget Vote 2007/8

Madam Speaker
Cabinet Ministers and Deputy Ministers
Members of the National Assembly
MECs and Heads of Departments (HODs)
Officials of the Department of Trade and Industry (dti) and Council of Trade and Industry Institutions (COTII)
Leaders of organised Business and Labour
Distinguished guests
Ladies and gentlemen

South Africa is experiencing an era of unprecedented growth. Our economy has grown for a record 90 consecutive months. We have seen our average Gross Domestic Product (GDP) growth accelerate from 2,7% per annum between 1994 and 2000 to 5% for 2006. We have also seen the number of people employed in our economy grow by over a million in the two years to September 2006. We should celebrate this step change in economic growth, but when we look deeper at the foundations of our economic growth we find that approximately 85% of our economic growth between 2004 and 2006 can be attributed to household consumption. Moreover, much of that consumer demand is being met by imported goods.

The traditional reliance of our economy on commodities continues to have a significant impact on our macro-economy and exposes the country to fluctuations in commodities' prices over which we have little control. In 2006, mining exports comprised over 30% of total exports and recorded 25% growth. While manufacturing exports comprised over 60% of total exports (with a growth rate of 18%) much of these exports are composed of upstream minerals and chemicals processing and so the dependence on minerals and minerals processing. Therefore the challenge is sustainable growth for the benefit of all; this is the challenge the dti needs to respond to. We are however confident that the policies and strategies that we have been developing are equal to the challenge. I will elaborate on the key elements later on in the speech.

Madam Speaker looking deeper into the structural foundations of the economy, it is clear that the dominance of commodity in the economy persists, exposing the economy to potential external shocks. A diversified economy is much more resilient and adaptive to external shocks and imbalance. It is for this reason that a key objective of our policy responses must be a more diversified economy with a strong value adding productive capacity; as such our economy will be a lot more able to sustain the growth to evolve us to achieve our objective of lowering poverty and unemployment by 2014. To achieve this objective, it is clear that the state has to intervene to boost the economy's productive capacity and competitiveness, focusing on key sectors and on labour absorption.

Encouragingly Madam Speaker, there is mounting evidence that there are important underlying changes unfolding in the real economy. The research done by the Bureau for Economic Research shows that our manufacturing sector is turning around onto an upward growth trajectory from the recent period of contraction. The evidence is that manufacturing capacity utilisation is at a historic high and giving way to strong fixed investment growth in several sectors and showing an upward trend in competitiveness and production volume during the past three years. The recent contraction we have experienced in manufacturing exports is bottoming out. What is interesting in this bottoming out is sector export expectations, so for instance, manufacturers associated with printing, rubber, beverages and chemicals amongst others, are very optimistic regarding exports. Whereas those exporting clothing, non-metal minerals, food and paper amongst others are less optimistic, but overall it was found that manufacturing fixed investment increased during 2006 and remains strong in 2007. Furthermore service sectors have been stellar performers. Building construction, civil engineering, electricity and gas and water supply all exhibited fixed investment growth of range of 20% per year between 2003-2005. The strong performance of these three sectors can be linked to the growth of government capital expenditure. Sectors such as motor vehicles, non-electrical machinery and processed foods exceeded 20% growth per year. Madam Speaker, however, the poor performance in a set of other sectors such as clothing, non-metal minerals, food and paper amongst others, paints a mixed overall picture for the real economy as a whole. The challenge for the dti is to respond in ways that reinforce the emerging turnaround of manufacturing whilst at the same time, assisting weak sectors to achieve the necessary structural adjustments. In this regard, I am pleased Madam Speaker to announce that the dti has completed a National Industrial Policy Framework and is finalising an action plan to give effect to the strategic programmes identified in the framework.

Central to the vision we have elaborated for industrial policy is a structural diversification of the economy with greater emphasis on value addition, knowledge assimilation and labour absorption. A strong industrial policy is essential in driving this structural diversification of the economy. However, industrial policy cannot succeed without coherent and simultaneous supporting policies. The most critical of these are, a competitive exchange rate, a skills development system which is aligned to our industrial policy priorities and traditional and modern infrastructure of the necessary quantum, quality and pricing necessary for our industrialisation needs, a supportive regulatory environment which encourages investment and employment creation amongst firms of all sizes. Industrial policy is the role of the whole of government which will leverage off the back of ongoing improvements in intra-governmental co-ordination.

In this connection, it is clear that most sectors display common challenges and needs, which require a systematic and well targeted response by the dti and the rest of government. Therefore Madam Speaker, our longer-term vision for the South African economy is a movement to a more labour-intensive and value-adding economy. This will require that we do the hard work to diversify our economy away from its current reliance on minerals and minerals processing. It requires, too, that we invest in the education and skills of our people to support labour-absorption into a knowledge economy. Moreover, it requires that we transform the institutional arrangements in our economy to enable greater participation of historically excluded people and marginalised regions.

It is for this reason that starting this year the Industrial Policy Action Plan, is at the core of the government's Programme of Action for the economic cluster. Whilst this work will cover as broad a spectrum of sectors as possible as announced by the President in the State of the Nation Address, in future, the intention is to focus on a set of priority sectors in each period on an ongoing basis. A critical element of the immediate work is to establish the criteria for sector priorities. It is however clear that these criteria will need to include the sectors potential to the Accelerated and Shared Growth targets and in particular the contribution to growth, investment and employment creation. To effectively advance the Industrial Policy programme would require that we revamp our working methods with government and in relation to industry, business and our social partners. Our strength will depend on the strength of our co-ordination and co-operation.

At this point Madam Speaker, it is perhaps necessary to address a few sectors and issues in relation to our work on Industrial Policy: With respect to the motor industry development programme I'd like to dispel the speculation in connection with our policy intentions. Madam Speaker, let there be no doubt of our commitment to providing this industry with a supportive environment for it to realise its maximum potential. To that effect we will shortly commence the proposed modifications to the Motor Industry Development Programme. Key result areas in the continued support of the industry will include production volumes and employment, local content and broad based economic empowerment.

Clothing and textiles, by contrast is an industry where deep structural transformation has yet to occur and this is at the root of the current crisis that confronts the industry. This is despite the facts that the sector enjoys above average tariff protection and the continued support measure in the form of the Duty Credit Certificate Scheme. In light of the negative commentary about our response, I'd like to give an account of our efforts in this sector. It is not very hard to see that the leading stakeholders in the sectors viz. manufacturing and labour retailers have not for a long time found a common platform to tackle the challenges of the industry. Achieving this common platform and consensus has been the dti's preoccupation over the last 18 months, leading to the completion of a comprehensive sector strategy. We are very close to including in the consensus all the major players in the retail sectors which will pave the way for effective co-ordination and the strong implementation of the Customised Sector Programme (CSP).

However it has been necessary in the interim to undertake important measures such as effective surveillance on important surges especially illegal imports, as well as introducing quotas on Chinese imports. Against this background it must be understood that the management of these quotas and any necessary adjustments that we have and may need to make is decidedly in context of the co-operation and consultation amongst the key stakeholders and is far from any "miss-shooting on our part." I am also pleased that the quotas are having the effect of fostering encouraging pockets of collaboration among stakeholders, demonstrating what we could achieve in stemming the crisis of the sector.

I'd like to thank all the stakeholders and especially the retailers who are co-operating with the measures. Having said all of this it must be on record that the import quotas have been introduced by no means as a panacea for the ills of the industry. I would now like to cover a range of areas of work of the department that going forward will receive focused attention and reinforcement in alignment with our overarching strategy.

Industrial Financing

In the area of industrial financing and incentives we have a comprehensive review of the suite of measures we have on hand to support industrial development. This has enabled us to affirm programmes that have been successful and effect necessary modifications. In this connection I'd like to single out the Small and Medium Enterprise Development Programme (SMEDP) as an important programme that has been very effective but has needed to be modified in line with the emphasis on better targeting enterprise support. This has necessitated the temporary suspension of the programme which the department regrets. The SMEDP has to date recorded approvals to 11 000 small enterprises to start or expand their operations

In the Critical Infrastructure Programme 22 infrastructure projects have been approved to date, and the ten already underway are to the value of R9,2 billion. These projects will provide the much needed infrastructure and logistical support which will enable investment estimated at R17,5 billion. Major projects include the Lion Ferrochrome Smelter in Mpumalanga (the world's largest ferrochrome expansion worth R1,6 billion) and the innovative Landfill gas project in Durban (which is the first of its kind in Southern Africa to commercially exploit the gas that is naturally generated by landfill sites and convert that gas into electricity).

The Industrial Development Zones (IDZ) programme continues to gain momentum. Twenty-one investors have already committed to locate within the designated Industrial Development Zones. In the Coega IDZ, the Alcan Aluminium Smelter will be the largest single Greenfield Project in the country since 1994, with an investment value in excess of R21 billion. The project is expected to crowd-in aluminium beneficiation projects and agreement has been reached by government and Alcan to supply aluminium to downstream industry at competitive prices. Other investments include the Indian Tata Steel Ferrochrome Smelter and a pulp mill involving Swedish partners, planned to locate in the Richards Bay IDZ to the combined value of R2,6 billion. At East London IDZ, twelve investors with investment worth R594 million have been secured. Four of these are already operating on site with a combined investment value of R300 million, mainly in the automotive sector.

There will be some major developments in the IDZ programme in 2007/8. In the Coega IDZ, over 10 000 jobs will be created during the construction phase and an additional 3 000 permanent jobs during the operational phase of these investments. Moreover, the Automotive Supplier Park at the East London Industrial Development Zone will be completed. It is clear that the IDZ programme is making good progress. In fact, the success to date is motivation enough to consider extending the programme, where the economic potential exists. We take note of the impressive work done on the Mafikeng IDZ programme. Future developments in that area will involve policy and legislative interventions to put the governance of the programme on a clearer footing. With regard to the Business Process Outsourcing (BPO), I am pleased that we are open for business with respect to potential candidates for our incentive programme. To date, twenty four potential BPO operators have been in discussions with us and we expect several of them to start submitting applications for the incentive programme. In light of this any speculation as to the failure of the programme is at best premature or at worst mischievous.

Madam speaker, in line with this integrated approach I made reference too, we recognise the need to address the regulatory environment to promote a more modern and competitive economy where consumers are adequately protected through a package of regulatory interventions. The area of regulation has seen many historic developments that will feed into improving the environment for enterprise and industrial development. In this regard, the Companies Bill has gained Cabinet approval and was published for public comment. The Bill is expected to be approved by Parliament during the latter half of this financial year following extensive public consultations and we anticipate that the company's commission will be operational by April 2009. The Consumer Protection Bill has been amended following a public consultation process and will be reintroduced into Cabinet during the coming financial year. Regulations under the National Credit Act have been finalised and published for implementation. Under the auspices of the National Credit Act, the National Credit Regulator was established on 1 June 2006 and the National Consumer Tribunal was established on 1 September 2006.

The outstanding provisions of the National Credit Act will become operational on the 1st of June 2007. May I use this opportunity to thank members of the House for their sterling contribution to the development of the Act, an Act which will undoubtedly change the lives of many of our people for the better. In order to promote an inclusive economy and competitive outcomes, amendments to the Competition Act designed to bring South African legislation in line with international best practice rather than a wholesale review, will be presented to Cabinet during the course of the year.

Madam Speaker it is common cause that the department has been fully seized with the challenge of broadening economic inclusion and promoting transformation in the economy through strategies and programmes such as the Broad Based Black Economic Empowerment (BEE), the Small Business Strategy as well as initiatives to support Micro�enterprises and Co-operatives. I am pleased that with regard to all of these, the department has been making significant progress. In February 2007, the Codes of Good Practice were gazetted. In the year ahead, the dti will establish institutional mechanisms for monitoring and evaluating the implementation progress of Broad Based Black Economic Empowerment (BBBEE) throughout the economy. These mechanisms will include the establishment of a BEE Advisory Council and the aligning of BEE Act with other pieces of legislation. This takes place within the current positive context of significantly increased participation by black women and an increasingly diverse ownership and management base in the mainstream of the economy.

In line with the promotion of inclusivity and in fulfilling its mandate as a promoter of long-term savings and investment opportunities to black people, I am pleased to announce that the National Empowerment Fund (NEF) will launch their first BEE retail product this year. This blue chip product will allow eligible broad based savings groups (such as stokvel associations) and individuals to subscribe for shares of a listed company currently held by the NEF on a once-off offer basis. The area of small business has seen impressive growth which we hope to reinforce through the strategy we are finalising. In the preceding year, small business has grown at 7%, for outstripping the growth of the economy generally.

During the 2006/07 financial year, the dti led a process which resulted in the finalisation of the Integrated Small Enterprise Development Strategy. During the 2006/07 financial year, the dti led a process which resulted in the finalisation of the Integrated Small Enterprise Development Strategy. Madam Speaker, in the year ahead we will be looking to the government to play a leading role in boosting demand for the products of small and micro enterprises (SMEs). In this regard, I am pleased to announce that the dti has completed recommendations for government procurement that targets SMEs as preferred service providers. Ten products have been identified for this purpose and they will be used to monitor government procurement spend on SME products.

We shall also strengthen the focus on measures to improve outreach and access to services such as the South African Micro Finance Apex Fund (SAMAF), Khula and the Small Enterprise Development Agency (SEDA). There will be a shift in the SEDA's strategic focus which will see it move from being a centrally controlled organisation to a decentralised, flexible and customer-oriented organisation. Madam Speaker, experience has led us to rethink the Khula finance model. We have found that the current model of wholesaling undermines the potential to address the R10 000 � R250 000 financing gap. Currently we work through private intermediaries who are more risk averse and whose interests are less centred on development. For the future, the dti is considering a shift to the "small business bank" or retail model, which has proved successful in other parts of the world and which will allow us to keep a closer handle on our developmental objectives.

Thus, the dti is implementing a comprehensive suite of interventions to resolve Second Economy challenges. Going forward the department will align our work on promoting economic inclusion with the more coherent framework for supporting the second economy, which government is in the course of elaborating. Our work in supporting growth, developing our industries and enterprises, needs to be complemented by our efforts at securing a supportive global economic environment in order to stimulate exports and investment. In this regard therefore we are fully seized with efforts to achieve a successful conclusion of the Doha Development Round of the World Trade Organisation (WTO) negotiations. Closer to home we will continue to pay attention to broadening the frontiers of regional integration, focusing on consolidating Southern African Customs Union (SACU) in alignment with the next steps in deepening regional integration through Southern African Development Community (SADC).

Conclusion

In conclusion, Madam Speaker, what I have outlined here today covers key aspects of the dti's response to developments in the real economy. By implementing the Industrial Policy Action Plan we aim to strengthen and embed the process of structural change that is currently underway. Fostering strategic partnerships will be key to success in this endeavour. That is why we consider our work in the Economic Cluster and National Economic Development and Labour Council (Nedlac) indispensable. The Cluster departments provide invaluable inputs into the Action Plan and our strategic engagements at NEDLAC are moving us closer to a collective response to our challenges and opportunities. We will also continue to strengthen our partnerships with business and labour by utilising and improving where necessary the mechanisms we have established for this purpose.

Madam Speaker, we are going to further strengthen our stakeholder engagements in the year ahead. In particular, our engagement at sector levels with organised business and labour will be a priority. The Industry Forum that we convene will be revised to include all the key sectors and will emphasised as a platform through which business and government can collectively identify and address implementation opportunities and constraints.

Implementation requires that the dti works well. We are strengthening our planning and performance management systems to ensure that our people and resources deliver decisively on our mandate. As to our financial performance I can share with you that in the past year the dti again received an unqualified audit from the Auditor-General. We have also reduced our vacancy rate to 15%, and made considerable progress in filling senior management posts. However, given the skills generated by the department we have found the vacancy rate to be something of a moving target! Innovative ways are nonetheless being found to ensure that the best skills are being brought into the department. These include establishing an industrial policy "think tank," including top international and local academics and experts. We have also established a Masters Degree bursary programme with leading university-based centres that will see us mentor and recruit forty top master's degree graduates every two years.

Madam speaker, in drawing to a conclusion, I would like to thank the Members of Parliament and especially our Portfolio and Select Committees, for their continued interest in the operations of the department and the crucial oversight role they play. I also wish to extend my gratitude to the Deputy Ministers, Elizabeth Thabethe and Rob Davies, the Director General, Tshediso Matona, the senior management and staff in the department and the leadership of the various COTII institutions for another year of devoted service to the dti cause. Honourable Members, I ask this House to support the efforts of the dti by approving its budget of R4,8 billion for this financial year.

Issued by: Department of Trade and Industry
29 May 2007