Industrial Policy Group of the Trade and Industry Portfolio Committee

PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY

TRADE and INDUSTRIAL
POLICY GROUP

Report to Parliament :

Public Hearings:

'Industrial Restructuring and Job Creation

in the Context of Tariff Reductions'

SACOB believes that the supply side measures were introduced to balance the negative effects of the restructuring process and to enhance competitiveness. Supply side measures are seen as encompassing a broader range of measures. SACOB has focused its assessment on the Tax Holiday and Small and Medium Manufacturing Development Programme. (SMMD)

The government proposed at Nedlac the withdrawal of GEIS and the introduction of several support measures. Business argued that in addition, operational priority should be given to encourage training and investment in new capacity. A key concern of SACOB was the capacity to administer the existing proposed schemes.

The government's GEAR strategy proposed an accelerated depreciation scheme, tax holidays for large scale investments and programmes to stimulate investment by SMME. SACOB believes that the GEAR employment targets did not take into account the time for policies to take effect and the mismatch between current labour legislation and GEAR pronouncements.

The Tax Holidays and the Small and Medium Manufacturing Development Programme approved 413 projects with a combined investment of R2 912 million and an estimated 17 713 jobs created. The presenter highlighted that the capital cost per job differs between the different sectors. It also requires more investment to create value added jobs.

SACOB believes that small enterprises should be encouraged to complement larger enterprises. This will increase diversity in the economy and less reliance on a few sectors. The presenter argued that the benefits offered by the tax holidays are insufficient to neutralise other broader economic issues as projects would not be in a tax paying position for the first few years.

The presenter stressed that the scheme will be a poor instrument for promoting investment if it is not properly targeted. Investment tax credits and accelerated capital allowances were proposed as more efficient policy instruments.

SACOB believes that the current programmes provide a mix for different sectors within the context of administrative capabilities. They propose that there be a reduction in the administrative compliance costs, and programmes be extended to 30 September 1998. The presentation urged that a future revised scheme needs to be more 'effective and user friendly'.

SACOB members expressed general dissatisfaction following the withdrawal of GEIS and closure of the South African Foreign Trade Organisation which resulted in the decline of export support. The Export Marketing and Investment Allowance (EMIA) is less than for other countries. Exporters are also affected negatively by currency fluctuations, compounded by transport costs. Capital equipment manufacturers are not included in the EMIA scheme, due to the limits of 2000kg per exhibition. The Chamber proposes that a study be conducted of WTO friendly support measures functioning in other countries.

It was felt that with the exception of the SMMDP, few of the other proposed small business support measures operate effectively. The Competitiveness Fund and the Bank Indemnity Scheme needed to operate more effectively.

Other comments on the effectiveness of the tax holiday schemes and the foreign investment grant are excessive 'red tape', long turnaround time of application from date of submission, and the lack of telephonic availability of DTI officials. Certain applications require technical consultants and the forms are generally not user friendly.

Other areas of concern for SACOB are, the exclusion of subjective criteria, FIG benefits apply to new plant and machinery only, industry classification are too wide and many sectors are excluded. Companies are re-deploying, in order to receive the benefits.

SACOB members are concerned about the restrictive human resource ratio requirement. The programmes only apply to 'green field' operations, precluding substantial expansion by existing companies. Income Tax requirements differ from other support programmes and harmonisation is required in appeal cases.

It was felt that the IDC loan administration is too time and resource consuming and the interest rates are not internationally competitive. The Technology and Human Resource for Industry Programme is seen as a success as compared to the Support Programme for Industrial Innovation. The R&D costs exceed the support provided. Many companies especially SMMEs only become aware of these programmes after the R&D has been done.

The Motor Industry Development Council feels that some of the constraints faced by the industry includes the geographical distance of the SA industry from the export market and the resultant cost implication. In addition, the general skill and productivity levels also need to be increased. The Industry is also faced with high cost of capital, and input cost compared to competitors. In addition to these factors the constraints are compounded by inadequate export volumes to have a significant impact.

The Council proposed the modification of existing schemes and the introduction of focused schemes for the motor industry. The motor council stressed the urgency to 'level the playing field' in the international environment and called for an 'expert committee' for evaluation and monitoring. It was generally recognised by the Council and SACOB members that some measures are in place, others need refinement, but a general 'completeness' is required.

The Business managers of Barlow stated that they have a limited knowledge of SA industrial policy because it is not properly publicised. They would like to be better informed of the policy and its relation to the general macro economic strategy. The presenter outlined the general objectives of industrial policy. These policies it was stated, should be effective, holistic, transparent and not engulfed in unnecessary administration. Policies should also be guided by updated statistics.

Business managers of Barlow are also concerned with the consistency of the different elements of macro economic policies including: labour, tax and monetary policies. The presenter cautioned that uncertainty in business confidence is due to the official ownership policy with respect to land, mineral, water and fisheries. Excessive environmental standards is also a factor making South African industry un-competitive. Barlow proposed that policy makers and politicians should work in harmony. The presenter stressed that the South African economy should clearly be defined as a developing country and should reduce the pace of tariff reductions and strictly enforce anti dumping measures. The presenter supported investment assistance if exports are increased. Industrial policy should also encompass multi shift operation and multi skilling.

In conclusion, the presentation highlighted that South Africa's industrial policy should have a strong focus on SMME development, and a clear vision of how SA industry should be structured.

The presenter highlighted that department's focus is on industrial restructuring, export and investment facilitation and job creation. It was stated that many of the current programmes and policies of the DTI are a departure from previous policy.

The presenter emphasised that previous policy did not create a dynamic and extensive manufactured goods sector and was also not able to significantly increase employment. In addition, it was emphasised that many of the programmes and policy instruments of this strategy is not compatible with the rules based trading environment of the current global economy.

By contrast the DTI vision is to create a competitive and high value export led manufacturing sector.

The presentation opened with an outline of the macro economic context. It provided a brief historical overview of economic development as well as an analysis of the major trends. The presenter stated that the economy has generally performed poorly in job creation and exhibited an overall sluggish performance in the late 1980s and early 1990s. The presenter added that the manufacturing sector is growing, and increasingly becoming more diversified. The sector is however dependent on the importation of intermediate and capital goods which has impacted negatively on many industries. It was highlighted that since 1993 the sector has grown strongly, although its performance has weakened slightly in 1997.

The presenter stated that industrial policy sees the manufacturing industry as important for growth and employment. It is also recognised that the industrial sector is far below its potential. The reasons for poor performance were identified as: poor productivity of capital and labour, low level of commitment by industry to human resource development, low levels of domestic competition, poor supply chain relationships, high input costs and limited exposure to export marketing.

The presentation continued in more detail to describe each of the five key policy areas which form part of the industrial policy. These include: investment support, trade facilitation, technology promotion and innovation support, strategic and informational leadership and contributing to human resources development. The presentation emphasised the importance of policy co-ordination.

The presenter stated that the clothing and textile industry employs approximately 300 000 people with an annual output of around R20 billion. The industry has since 1995 been restructuring to achieve increased competitiveness. The presenter cautioned that the industry has experienced 40 000 job losses in the clothing sector and 10 000 in the textile sector between 1995 and 1996. The sector has subsequently recovered with no improvements in employment. The presenter continued to outline the effectiveness of the following schemes:

The Duty Credit Certificate Scheme is an industry specific measure that has helped the clothing industry to increase its exports. However the lack of certainty over the future of the scheme is a cause of concern for the Clothing and Textile Federation.

The IDC Finance Scheme was intended for textile industries to upgrade their machinery. The scheme has since ceased.

An industry specific pilot training programme has been introduced three years after the tariff phase down commenced.

The Export Marketing and Investment Scheme contains several elements including an export council. Funding for other aspects of EMIA is helpful for entrepreneurs but tends to be hindered by strict bureaucratic procedures and delays in re-funds.

The Export Finance Guarantee Scheme is a useful scheme for clothing and textile industries but it only applies to established exporters and new exporters require support.

The Sector Partnership Fund has only recently acquired staff and the guidelines are vague and general objectives difficult to interpret.

The Technology and Human Resources for Industry Programme (THRIP), and Support Programme for Industrial Innovation (SPII), focuses on tertiary education with a limited application to the clothing and textile sector.

The Workplace challenge has not been applied to the industry. The accelerated depreciation is a significant measure made available to capital intensive industries. The Tax Holidays and SMMDP are not used by member companies and focuses on new investments. Exporters can reduce raw material input cost by using the Rebate Provision.

The presenter further recommended that permits issued by the SACU countries should require that goods be physically cleared at a port of entry. Secondly the presenters proposed establishing a regional body with the functions of investigating irregularities in member countries.

The presenter stated that the clothing and textile sectors are labour intensive, competing in increasingly competitive markets. He stressed that support measures provide little assistance to industries in becoming internationally competitive.

It was stated that the footwear and allied industries provide the country with the lowest rate for employment creation. The presenter stressed that constraints to profitable operations are due to increasing costs in the following areas:

The result has been a net loss of 20 000 jobs as compared to a potential growth if imports were contained to the 1992 levels. These employment reductions was seen to affect Kwa Zulu Natal the most.

reducing input prices by removing duties on materials and components where possible

The presenter recommended that supply side measures need more refinement and should be more accessible. Many sectors with similar characteristics receive Duty Credit Certificates. Their sector does not. The Duty Credit Certificates it is thought, would lead to reduced prices and increased volumes which in turn will lead to further employment creation.

Recent tariffs in other industries have been revised. They are calling for a phased approach. The current trends are leading towards declining employment and a small domestic shoes industry with large numbers of imported shoes.

Bidvest is a diversified manufacturing company listed on the Johannesburg stock exchange. The company has been awarded several licensing agreements to produce for international markets.

The company is of the opinion that South Africa is not nurturing manufacturing. There is a continued decline in manufacturing and export performance. It was stated that local costs are increasing and productivity decreasing. The presenter stated that the cost for training and development is now the responsibility of the enterprises. The cost of security is also of concern for the company. The company is not reinvesting in plant machinery, compared to competitors who are retooling with state of the art technology.

The depreciation of the Rand has also made technological improvements more expensive. In the past about 30% of investment allowances were used to enhance export potential. It was proposed that relocation of South African manufacturing is an option for manufacturers. The lifting of duties has had a negative effect as importers are more experienced and competitive than the local industry. The presenter recommended that we should not damage the manufacturing base and employment creation during the restructuring process.

He further recommended that there should be monitoring instruments for any violations of imports and duties and we should review export incentives on freight.

USABCO is a manufacturer of plastic house-ware products and employs approximately one thousand people. They have achieved limited export results in international markets. The industry contributes approximately 4% to our gross national product. Employment in the industry is currently estimated at approximately 32 000, a decline from previous years.

The industry has been virtually static for the last five years, with growth in imports. The industry is very diverse, characterised by monopolistic suppliers and many large and small manufacturers.

The challenges for the industry result from a small domestic market, low per capita consumption, geographical distance from major markets, and a relatively unskilled labour force. The local market is limited to low priced basic merchandise, thereby restricting product innovation.

It is appreciated by the presenter that if SA were competitive in the domestic market, then we would stand a better chance in the international market. It is recommended that we identify and appreciate the supply side measures being enjoyed by other nations. It was stated that our incentives focus on small and new enterprises as compared to the expansion of existing manufacturing. The schemes should include a reduction in company tax on export profits and aggressive investment allowances, deductions or grants.

The Departments requirement of guaranteed minimum export turnover, according to the presenter, lacks appreciation of the slow developmental nature of export growth. Subsidies such as interest subsidies, in addition to the above requirements are not significant to large manufacturers who have to compete with international companies. It was recommended that alternative and more aggressive incentives which allow firms to invest in the local or export market are required.

The company is currently increasingly being excluded from competing in the sub-Saharan markets. The import duties into the PTA trading zone are higher for their products. They are also outpriced in these markets by local and foreign manufacturers. The presenter proposed a protected sub-Saharan market.

The presentation highlighted that freight is a major cost, as we are geographically remote from the worlds markets. Adding to this is the high cost and inefficiency of our harbours.

The exhibition assistance was a small part of the cost of developing export markets and South African companies are too often absent from international trade shows.

The Cape Chamber of Commerce and Industry (CCCI) represents 3700 companies, of which nearly 70% employ less than ten people. According to the Chamber industrial policy under the previous government was severely biased against smaller companies. Under the leadership of the IDC and DTI, resources were directed to the capital intensive manufacturing of industrial raw materials. The facilities set up were inefficient, so domestic prices of raw materials were raised by government intervention to generate finances.

The Chamber feels that the current government's policy on SMEs introduces a new attitude towards the broader business community. The workplace challenge programme has involved COSATU and the CCCI in co-operating on societal issues. The Chamber, in consultation with a range of institutions e.g. National Productivity Institute has launched an initiative to assist small enterprises. The lowering of import tariffs and removing of other protection has helped lower the input costs of downstream industries for Chamber members.

The Chamber believes that a large number of supply side measures are hampered by red tape and are not user friendly. However, it is accepted that the disbursement of public money imposes stringent accountability requirements.

The Chamber supports the facilitating role of the department and the more active role of private institutions in the marketing and administration of supply side measures. A private South African venture capital industry can be created to replace some of the financial support functions of the IDC. These can be complemented by tax measures that favour investments in small companies and new ventures. Illegal imports and tariff evasion have become a major problem for the Chamber. Members are concerned of the likely impact of the Basic Conditions of Employment Act and the Employment Equity Bill.