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'

The reduction of import duties and the elimination of GEIS has led to job losses as many products have been replaced by imports. The Association believes that we need to first increase our skills base before we lower tariffs.

It was stated that participation in the Non-ferrous Cluster Programme has not yielded any significant results. Current supply side measures reveal a lack of understanding of the time and resources that it takes to build new markets for exports.

The accelerated depreciation and draw back on duty, where local manufacturers claim on duty paid for imported components to be re-exported, has had a positive impact.

It is believed that most value is added by labour keeping plant equipment operating on a 3 shift basis. Due to the shortage of skills in certain grades, salary differentiation is vast. It is believed that government should play a more active role in training people e.g. by tax incentives.

Due to the increased cost of machinery, more productive use of equipment needs to be made. The shortage of skills and the high mobility of labour, impacts on the cost of production.

It was stressed that every import takes away a South African job and increases our cost as our volumes of production are decreased. The Association recommended that the tariff categories should be enforced and clearly defined to stop fraudulent imports. Companies who break the law should be publicly identified.

It was stated that the total chemical industry in 1996 contributed R66 billion to the economy excluding the contributions from the down stream industries which are more labour intensive. The submission focused primarily on the manufacture of basic chemicals or processed chemicals. The subsector comprises 12% of manufacturing production and 19% of exports in that sector. The chemical manufacturing industry can be regarded as a net exporter of products and is focused on exports. The competitiveness of many downstream industries is dependent on the existence of a competitive upstream chemical industry.

It was recommended that due to the small size of the South African market, we should exercise higher tariff protection than other industrialised countries. This compensates for small market size. The industry is looking for stability in tariff policy as any sudden movements affect investment decisions. A clear tariff policy and time frames were proposed.

The presenter highlighted that the opportunity to receive depreciation allowances over three years rather than five years is a major stimulus to fixed investment. The reduction in corporate tax rate together with the introduction of secondary tax is said to be a stimulus to industrial investment.

It was stated that due to the capital intensity of the chemical industry, the tax holiday's have a partial impact. The industry only qualifies for a few incentives. The tax holiday scheme is worth less than the accelerated depreciation. The schemes are more effective for down stream industries. The SA tax holiday scheme is not comparatively attractive and the cut off date needs to be extended. There are long waiting periods and administration problems.

The association has investigated the establishment of an export council and proposes that the matching grant for the council be extended over a longer period of time.

The Association believes that the Industrial Development Zones need to be carefully evaluated. A high proportion of the THRIP projects in the chemical and allied sector are being undertaken in the industrial chemical sector.

It was stated that the chemical industry has made effective use of some of the schemes and will continue to do so but the current incentive schemes have not promoted the level of industrial investment and growth required to create sustainable jobs.

Cosatu argued a case for an employment promoting industrial policy. Cosatu urged the Committee to host a series of hearings on specific industrial sectors. South Africa's present industrial growth path is neither boosting industrial investment nor creating jobs. Between 1989 and 1996, it was estimated that about 392 000 formal sector jobs were lost.

Cosatu noted that between 1996 and 1997, production output increased by 3.6% and exports increased by 16.9%, but the overall level of employment in manufacturing declined by 2.6% though some sectors have seen employment growth.

The presenter stated that a state driven industrial policy should not be focused on investment promotion through concessions. Industrial policies must be implemented with a re-enforcing combination of incentives and penalties. Cosatu supported an effective regulatory environment to achieve industrialisation and development that will overcome the inequality and stagnation of our apartheid past.

Cosatu questioned the prevailing logic that increased competitiveness will lead to exports, which in turn will lead to expanded production for the expanded market, which in turn will lead to increased job creation. The presenter proposed that in order to make the shift towards increased labour intensity, it would be necessary to make industrial policy more employment sensitive with a new focus on import substitution aimed at increasing employment levels. These objectives it was said can be achieved through a negotiated approach where industry forums negotiate restructuring plans.

It was proposed that rather than merely exposing industry to the harsh international environment, an approach is needed that nurtures domestic industry through selective use of protective measures and industrial strategies to build up domestic capacity. The presenter recommended that tariffs should not be reduced at a rate faster than that required by the World Trade Organisation. Tariff reduction should be preceded by appropriate industrial policies. Tariffs may be decreased to improve competitiveness but others may be increased to protect jobs and to promote industrial development.

It was said that SA must enter the world with an understanding that both opportunities and constraints will occur. We need to discuss the role of the state in economic development and industrial policy. Cosatu cautioned that we should be aware of the danger of the Multilateral Agreement on Investments which will limit the ability of governments to regulate foreign investors and corporations.

the Department of Trade and Industry should respond in writing to the views raised by participants in these hearings.

the Committee should oversee a detailed appraisal by the department of the employment impact of all aspects of industrial policy.

the Committee should consider ways it could facilitate the debate on the role of the state in economic and industrial development.

the Committee can assist in developing greater awareness of the constraints imposed by Multilateral Agreements on Investments and the US Growth and Opportunity Act.

During 1997, over 30 000 workers were retrenched and a further 10 000 dismissed in the gold mining industry. The presenter stated that while the decline in the gold price is a factor, in many instances, the gold price has not been a factor at all. The employers are using the gold price as an excuse to lay off workers as they mechanise the industry.

The NUM is re-activating its call for a social plan for the mining industry, where provision is made long before the time of any negative aspects of restructuring. In order to implement the Social Plan, the NUM seeks a moratorium on retrenchments and greater government intervention with a national commission on downscaling. The union proposed the counselling and retraining of retrenched workers.

It was stated that supply side measures are not assisting the industry. The programmes are focused around 'sun rise' companies. Tariffs are being phased down but enterprises are not being able to access the supply side measures. Some of the programmes require matching contributions which is difficult for SMEs. Creating another work shift is not going to solve the problems as the goods produced need a market which is already shrinking. The larger companies are accessing the programmes. The union proposed that supply side measures are reviewed every six months by industry, workers and government representatives.

It was stated that several thousand jobs are being lost in the vegetable, poultry and canning sectors. With tariff reduction, industries ability to respond has been limited. The presenter cautioned against vast social impacts on communities. The union has started a Food Security campaign. The union noted that industries are experiencing rapid tariff decreases, job losses, ineffective supply side measures and the cluster studies have been short on implementation. The international agreements are having a negative effect on local industry. FAWU cautioned that many of the industries are not restructuring and are closing down. The workplace challenge support is sporadic and the funds are under-utilised and not publicised.

The Chamber of Milling membership comprises 98% of all flour milled and the National Association of Maize Millers represent just over 80% of all maize milled in South Africa.

The Wheat and Milling Cluster was identified by the Department of trade and industry as a role model for the agro processing industry. The cluster realised that the industry has to gear itself to become more outwardly focused and competitive. Working groups were established with an emphasis on export enhancement.

It was stated that the milling industry traditionally exported 150 000 tons of milled products to the Southern African region who are net importers of wheat and related products. Since the signing of the SADC Trade Protocol, member countries have increased their import duties for maize and wheat products. Countries that enforce quantitative controls, did not allow their goods entry or refused import permits. The presenter noted that the industry has lost 80 000 tons of exports during the last eight months. The drop in volumes impact on job creation. The presenter highlighted that to date nothing has been achieved to rectify these decisions of foreign governments. The milling industries experience is that the supply side measures are nullified by the inability to secure and negotiate market access for South African industry.

The principal relationship between NAACAM and the DTI relates to the Motor Industry Development Programme (MIDP) and their main interaction is with the automotive section. The MIDP is responsible for the monitoring of the motor industry. It was stated that the data gathering and analysis capability of the DTI does not match industry expectations. Information is needed by the industry on the production costs and volumes of the car assemblers each quarter. The section requires increased resources and capacity building. The presenter noted that the private sector can assist in this regard and that government must not launch or modify programmes without a clear understanding of the effect.

It was stated that the supply side measures available to the motor industry are inappropriate and user unfriendly. The presenter recommended that the environment must be conducive to the survival of large manufacturing industries through competitive interest rates, transport, working capital and overseas market access. A solution would be for industry to be part of the process from the concept stage to the implementation stage. It was noted that industries are becoming less competitive.

The confectionery industry contributes over R3 billion per annum to the economy and formal direct employment exceeds 10 000 people. Foreign capital investment exceeds R1 billion. It is an open industry with low barriers of entry and an essential part of the trading sector.

It was stated that the industry has contributed to large scale training with competitive salaries. It has seen growth of profit in the retail and wholesale sector for the last few years. The industry represents further value added as it increases beneficiation of agricultural products.

The presenter noted that import duties of 27.5% and 20% apply to sweets and chocolates. These duties only provide for protection against commodity price differences and subsidisation. The industry is highly competitive and currently exposed to world competition. The presenter stressed that foreign subsidisation of milk and sugar commodities represent a significant threat to the industry. The industry suggests retaining the present tariffs for all sugar and chocolate confectionery. The current approach of the DTI is supported however an increased focus on the sugar and dairy industry is required.

The presenter noted that there are several considerations for South African exporters to the European Union. The EU market is mature with established products. Internal competition is high and capacity utilisation is low. Import duties are relatively low however significant non tariff measures makes imports very difficult.

It was further stated that imports from the EU affect South African production as sugar and milk are rebated to support current price levels. The available capacity and technology is more established and effective. The distortions caused by the EU practices limits domestic development. Increased competitiveness may result in job losses.

The industry noted that incentive schemes are relatively vague and applications may be limited to people who take the time and effort to apply and is focused on smaller industries. Processing times for rebate applications are too long. Increased government investment in restructuring was proposed.

The NIC recognises that progress in industrial policy has been made, but in some areas it has been slow and largely uncoordinated. Unemployment is worsening and entrepreneurs do not receive effective support.

The Chamber recommended the establishing of a political representative or cabinet minister dedicated to promoting the sectors well being and a small firms commissioner as small firms continue to be disadvantaged by legal barriers to entry. Access to justice would be improved if the scope and geographical spread of the small claims courts were also increased.

It was stated that the support services for small enterprises can be improved by contracting out to the private sector on performance contracts and competitive tendering procedures. The Chamber noted that the countries tax laws have become complicated and beyond the comprehension of many people and simplification for small firm owners was recommended. The Chamber also proposed the simplification and communication of procurement opportunities to small enterprises.

It was proposed that bargaining council agreements should not be extended to those who were not party to them except on a voluntary basis. It was stated that the government should encourage foreign donors to give their support to the relevant NGOs of their choice rather than channel their funds through state structures.

The Industry recorded a total revenue of R34.9 billion in 1996 with an annual growth rate of 4.8% per year. Serious concerns were expressed about the industries ability to serve the countries needs in the medium to long term.

Un-competitiveness was seen as a negative feature of the industry coupled with declining exports and foreign investment. Government incentives for supporting the industry was not seen as effective. Several local companies are relocating their operations to other countries. It was stated that current spending on research and development is comparatively low.

The presenter stated that South Africa is lacking sufficient skilled people, effective science and technology education policy and a financing programme for high risk development. Government priority for the industry is seen as too low. With the exception of the SPII scheme, mainly demand side support was available which has enabled the local industry to develop. The presenter stated that supply side measures take a long time to become effective. Due to the importance of time, an aggressive programme to market and implement the available schemes is necessary. Few companies have accessed the supply side measures.

The Support Programme for Industrial Innovation (SPII) was seen as overly conservative and the administration to apply for the grants, substantial. The scheme does not cater for the larger technology development projects. The Technology and Human Resources for Industrial Programme (THRIP) was seen as an effective programme in generating high level manpower. The presenter noted that the Industrial Participation Programme (IPP) offers substantial support for the local industry. The Partnership for Industrial Innovation (PII) will be launched shortly. The Export Credit Guarantees is useful for exporters.

A Federation study identified weaknesses in the area of marketing, research and development, product supply, training and general government support. These were seen as factors inhibiting performance. Subsequent to the report, Federation working groups have proposed appropriate remedial action. A weak electronics industry will lead to a shift towards trading and services.

The department has established a range of programmes to address competitive problems. Some programmes are new, while others have been successfully used by enterprises. Some of these programmes are targeted at specific problems with built in mid term reviews to assess impact. The department is encouraged to note that the fundamentals of the supply side programmes are generally supported. An export oriented industrial policy also includes an element of production for the domestic market.

The department noted with concern the employment losses in manufacturing. However it emphasised that a relationship between tariff reduction and employment loss is not proven in all cases. During a period of tariff increases, considerable employment loss has also been registered. The impact of tariff reduction on employment varies across different sectors. In some sectors employment increased and in others employment decreased. The supply side measures have contributed to a significant number of sustainable jobs being created. A lack of information on the supply side measures has been identified. Communication is the responsibility of the department and the private enterprises alike. It has also been argued that the supply side programmes are not substantive enough and changes were proposed. The department does not agree with this approach as foreign and domestic investors expect policy continuity. Any changes will be effected during the mid term review. The increasing of incentives does not necessarily lead to a competitive industrial sector. The Departments approach is centred around the enhancement of South African industries competitiveness and is not in competition with other countries supply side measures.

The programmes have contributed towards an increase in investment over a wide range of sectors and have contributed positively towards technology enhancement in industry, human resource development, export marketing and SME development.

A key element of the departments strategy is trade policy. Tariff reductions are not done on an ad hoc basis. Tariff movements are dependent on the situation in individual sectors. A pragmatic approach has been adopted. It has also being suggested that the department reduced import tariffs without having in place effective support packages. This is not true, as the department provided detailed analysis of tariff reductions in different sectors in relation to the timing of supply side measures. The comments on the Motor Industry Development Programme will be taken into account during the coming mid term review. The department notes with concern the time taken for tariff application to be processed and the mis-classification of imported goods, avoiding duties. The extensive rationalisation and reduction of the tariff structure has created some anomalies, which are being addressed. Tariffs in the chemical industry were re-instated after a delayed application. The department has interacted with the Department of Customs and Excise regarding the classification of imported goods avoiding duties. The department is also in discussion with the department of Customs and Excise regarding tighter border controls and several assurances and initiatives have been undertaken. The conclusion on trade agreements with SADC will not be undermined by border control issues as operating management systems and rules of origin are part of the negotiations.

It has also been suggested that labour legislation is too rigid and is not facilitating industrial growth. But in recent years low levels of industrial conflicts and arbitrations have been recorded. A key component of present strategy is the development of skills in the workplace. The department stressed that skills development is the responsibility both of government and the private sector.

The department is aware that there is weakness in the area of venture capital and that the private financial sector has not been proactive enough. These issues are currently being addressed.

A key concern of the department remains the static vision of many manufacturers. Our manufactures are not responding to the changing environment both domestically and internationally. Enterprises need to start doing serious long term planning. The domestic and international environment provides both opportunities and constraints, which require a more alert and sensitive manufacturing sector.

The department programmes are effectively managed and accountability is accepted. A basic amount of information is required from applicants. The information measures the sustainability of the assistance and the impact on the sector. The department has set benchmarks in response times to applications. The relevant departments generally meet the targets set though some backlogs do exist.

The general criticism of poor management is unjustified. The difficulty of contacting the programme officers has been remedied as a new telephone system is being installed and programme officers have undergone staff training to improve service standards.

The department has established a directorate to deal specifically with the problem of dumping.

The EU negotiations conducted by the department has involved consultations with several stakeholders at NEDLAC. The South African offer was made public and several written responses received.

The Tax Holiday Scheme has long term benefits for South African industries as it encourages firms to reinvest in the enterprise. The programme is a short term measure targeted towards particular industries and has several benefits for South African enterprises.

In conclusion the presenter is confident that industries support the departments fundamental approach to industrial policy. The concerns at the hearings have focused around the broad accessibility of the programmes rather than the design. The Department confirms that programme bottle necks are receiving attention and are becoming more effective.