The Report of the Portfolio Committee on Trade and Industry on the
revised Industrial Policy Action Plan, dated 1 June 2010
The Portfolio Committee having held public hearings on the revised Industrial Policy
Action Plan reports as follows:
1. Introduction
The revised Industrial Policy Action Plan (IPAP2) is a radical shift to grow a
developmental economy by taking a deliberate decision to ensure that
investment targets production sectors of the economy to arrest the decline in
manufacturing and accelerate employment creation. IPAP2 clearly is an
attempt by Government to arrest industrial decline and place South Africa on
a new growth path. Within the context of a new growth path, IPAP2 focuses
on value-added sectors with the potential for high employment creation and
growth multipliers.
Through IPAP2, Government has identified the constraints in achieving a
scaled-up industrial policy platform, as manufacturing had a low level of
profitability and employment. Some of these identified constraints are:
 Exchange rate overvaluation and volatility;
 High cost and limited allocation of capital;
 Failure to adequately leverage public procurement;
 Monopolistic pricing of key inputs;
 Aged, unreliable and expensive rail and port systems;
 A low skills base to support industry; and
 Low productivity levels.
2. Policy Context
In his first Budget Speech, Mr P Gordhan, Minister of Finance, called for a
new growth path that addresses unemployment, attains sustainable growth
and reduces inequalities within society. This is an attempt to reach South
Africa’s developmental agenda to achieve sustainable growth through job
creation.
The envisaged growth path contains the following key actions:
 Creating youth employment;
 Developing labour-intensive industries;
 Maintaining public and private investment and increasing domestic
savings;
 Improving government performance and effectiveness with a focus on
education;
 Generating an inclusive economy;
 Striving to achieve low inflation and a stable exchange rate; and
 Increasing productivity and competitiveness and attracting foreign direct
investment.
Committee Report on IPAP2. Adopted 1 June 2010
1
IPAP2 is one component of a broader effort to integrate related policies and
strategies to place South Africa on a new growth path. The central theme of
the “new growth path” - still to be unveiled – purported by Minister Patel would
be to enhance the labour-absorbing capacity of the economy and to connect
knowledge and innovation to the challenge of jobs and growth 1. The global
financial crisis presents an opportunity for South Africa - in an attempt to
recover the job losses - to focus on creating job opportunities and a better
social outcome through a developmental economy.
3. Process
The Minister of Trade and Industry, Dr R Davies, tabled the IPAP2 on 18
February 2010 in Parliament. IPAP2 was the result of a collective approach
among Ministers in the Economic Cluster and included consultation with
business, labour, state entities, and academia.
Portfolio committees exercise oversight over their respective departments and
agencies in line with their Constitutional mandate as set out in Section 55(2)
of the Constitution (No. 108 of 1996) and section 27 (4) of the Public Finance
Management Act (No. 1 of 1999). Within the context of our constitutional
mandate, the Committee agreed to have public hearings and invited the
relevant stakeholders to comment on IPAP2. The rationale behind this
decision was for the Committee to critically engage with stakeholders on
IPAP2 and to develop a definitive position.
The Committee received oral and written submissions from the respective
labour unions on which IPAP2 directly impacts on, business, state-owned
enterprises, industry specific bodies relevant to the sectors identified in
IPAP2, and academia. The inputs received from stakeholders were generally
constructive with some falling outside the ambit of IPAP2 and some
representing their narrow interest. This process allowed the Committee to
have a wider perspective and to develop a balanced view on the future
economic development path of the economy. Below is a summary of the key
issues raised in the submissions.
4. Key issues raised in submissions
The key overarching issues raised during the public hearings were:
 Employment creation;
 Equity challenges;
 Coherence between micro and macroeconomic policies;
 Leveraging of public procurement;
 Industrial financing;
 Competition policy;
 Developmental trade policy;
 Manufacturing for domestic and export markets; and
1
Minister of Economic Development (2010)
Committee Report on IPAP2. Adopted 1 June 2010
2

Regional integration and global competitiveness.
4.1 IPAP2 and employment creation
A key element of the National Industrial Policy Framework (NIPF) is the
“promotion of a more labour-absorbing industrial strategy with the emphasis
on traceable labour-absorbing goods and services and economic linkages to
promote job creation”2. President J Zuma, in his June 2009 State of the
Nation Address, recognised that a revised industrial policy could be the
catalyst that would set the country on a new path of industrialisation. The
revised Industrial IPAP2 along with its building blocks – NIPF and IPAP1 –
reflects government’s objectives of stimulating long-term industrialisation and
industrial diversification beyond the current reliance on commodities and nontradable services3.
The rationale behind IPAP2 is the promotion/expansion of the production
sectors in the economy, particularly those with high employment and/or
economic growth potential that could promote the local manufacturing of
value-added products for both domestic and export markets. IPAP2 also
correctly identifies that the distortion of industry has been perpetuated by
“Monopolistic pricing of certain minerals and most semi-processed raw
materials such as steel and chemicals in the form of import parity pricing.”4
The conversion of South Africa’s mineral endowment into human
development would be aided by incentives to beneficiate locally.
In his Budget Speech on 17 February 2010, Minister P Gordhan stated that
addressing the structural economic balances and affecting the kind of
transformation that will lead to the absorption of the unemployed will require
the effective implementation of forward looking policies. In addition, the
Government will have to make choices with respect to investment priorities,
industrial policy options, spending priorities, technology alternatives and trade
strategies.
He further purported that industrial policy is about choices that should alter the
growth path and shape industrialisation to ensure employment creation and
inclusion. He recognised the importance of a comprehensive industrial plan
as the catalyst for growth and emphasised the need for the structural
adjustment of the economy which requires state intervention5. IPAP2
recognised that manufacturing and other production sectors are the engine for
long-term sustainable growth and job creation. The National Union of Metal
Workers of South Africa (NUMSA)6 welcomed the Government’s break from
its neo-liberal economic orthodoxy in that it confronts the structural challenges
2
Economic Sectors and Employment Cluster (2010)
Minister of Trade and Industry (2010a)
4 Economic Sectors and Employment Cluster (2010)
5 Tregenna (2010)
6 NUMSA (2010)
3
Committee Report on IPAP2. Adopted 1 June 2010
3
faced by the South African economy. Still, other stakeholders7 in their
submissions to the Committee argued that no country has developed without
a focused and well resourced industrial policy.
The Committee welcomed IPAP2 in that it attempts to address unacceptably
high levels of inequality that prevail in our society, and that it can be a catalyst
for the redistribution of wealth, comprehensive training, skills transfer and the
creation of economic opportunities, including the creation of sustainable jobs
and the maintenance of existing jobs. In this regard, the promotion and
development of the manufacturing sector and encouragement of knowledgebased technologies will contribute to the elimination of poverty, the creation of
decent job opportunities and the reduction of unemployment. Furthermore, the
Committee stressed that sufficient funds are required to support IPAP2, but
with the current budgetary constraints, the reallocation of funds should have
an optimal impact on industrialisation and job creation.
4.1.1 Structural imbalance of the economy
The major cause of unemployment is a structural distortion of the economy,
which favours capital intensive industries due to the industrial and monetary
policies of the apartheid years8. This distortion was maintained through
“monopolistic pricing of certain minerals and semi-processed raw materials
such as steel and chemicals in the form of import pricing”9.
In his submission to the Committee, Prof P Bond10 asserts that the impact of
the global financial crisis highlighted the existing, inherited contradictions of
the neo-liberal macro- and microeconomic policies pursued. This distorted the
“growth” witnessed in South Africa and therefore requires a correction in the
growth path to be pursued by Government11.
The Minister is his statement to the National Assembly acknowledged that the
advances of the past 15 years did not bring about structural changes that
would absorbed the marginally unemployed people into new productive,
income-earning activities. He has begun to identify the inherited distortions in
that IPAP2 recognises that South Africa’s recent growth was consumption
driven and not underpinned by production sectors of the economy. A
significant decline between 1994 and 2008 within the production sectors –
agriculture, mining, manufacturing, electricity, water and construction –
compared to the consumption driven sectors was recorded. In his submission,
Prof P Bond argues that the high sustained growth experienced before the
current financial crisis had not necessarily had a positive impact on job
creation. At the peak of our average annual growth at 5.1 per cent between
2005 and 2007, unemployment had not fallen below 22.8 per cent. South
7
COSATU (2010) and Tregenna (2010)
Wessels (2010)
9 Wessels (2010)
10 Bond (2010)
11 Bond (2010)
8
Committee Report on IPAP2. Adopted 1 June 2010
4
Africa’s unemployment is therefore structural in nature and the overall thrust
of IPAP2 is to deal with the structural impediments of employment creation.
4.1.3 Manufacturing
Manufacturing has become the most productive sector in the South African
economy. The policy decisions of the pre-1994 Government recognised the
importance of the manufacturing sector as it encouraged local manufacturing
through the establishment of state-owned enterprises (SOEs) to produce key
inputs, such as electricity (ESKOM) and steel (ISCOR)12. Notwithstanding the
success of the manufacturing sector during the 1950s and 60s, deep-seated
trends of deindustrialisation were evident by the 1970s. The race-based
economic policy was causing structural problems (skills shortages)
accompanied by extremely high social costs13.
With expansion of the manufacturing sector, both in the public and private
sector, it became increasingly capital intensive, despite the abundance of
labour. As a result of this capitalisation, as well as the economic downturn of
the 1980s, South Africa saw a decline especially in the clothing and textile,
footwear, industrial chemicals, and non-ferrous base-metal industries.
Employment within manufacturing during the 1990s remained sluggish due to
high inflation and interest rates which suppressed demand, while trade
liberalisation increased access to global markets as well as competition.
Industries that failed to make the adjustment showed a decline in their
productivity, while others showed increased productivity and capital
investment, as well as higher employment in certain industries14.
Production in value-added products declined by 12.2 per cent in 2009, but the
PMI reflects an improvement towards the end of the year (see Figure 1
below)15. This could be ascribed to an increase in inventory levels in the
automotive sector, but production remains stagnant in the clothing and textile
and furniture sectors16.
12
Byrnes (2006)
Maasdorp (2003)
14 National Treasury (2010a)
15 National Treasury (2010a) and SARB (2010b)
16 National Treasury (2010a)
13
Committee Report on IPAP2. Adopted 1 June 2010
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Figure 1: Growth in the Manufacturing Sector in relation to the Purchasing
Managers Index17 (PMI), 2004 – 200918
IPAP2 identifies manufacturing as the biggest contributor of the production
sector19 (54.3 per cent of all production sectors in 2008). Performance in this
sector has been varied with a steady decline in its productivity and
competitiveness. This can be ascribed to the high cost of capital, weak skills
base, unreliable and expensive port and rail system, the monopolistic
provision and pricing of key inputs into manufacturing and the failure to use
public procurement effectively.20 IPAP2 recognised the divergent performance
within the manufacturing sector, with the potential employment creating
industries remaining stagnant. Given the trends in the different sectors, the
manufacturing sector remains important for employment creation and
economic growth21.
The global financial crisis has had a severe impact on our industrial capacity
with a significant decline recorded within the manufacturing sector. The
greatest decline in employment was in the retail and manufacturing sectors.
This revealed the structural weakness of the economy, as well as the labourabsorption potential of this sector. Manufacturing, especially within the
automotive and clothing and textile sectors, and other production sectors have
17
PMI refers to a weighted index considering business activity, new sales orders,
employment, supplier deliveries and inventories for surveyed businesses (Bureau of
Economic Research).
18 South African Reserve Bank (SARB) (2010b)
19 The production sectors consist of agriculture, forestry and fishing; mining and quarrying;
manufacturing; electricity, gas and electricity and construction.
20 Minister of Trade and Industry (2010a) Speech
21 Nel et al (2006)
Committee Report on IPAP2. Adopted 1 June 2010
6
been identified as the engines of long-term sustainable growth and job
creation in developing countries.22
IPAP2 emphasised the prominence of the production and consumption
sectors of the economy, with the explicit belief that industrial focus should be
on the “production” sector as the vehicle for growth and employment creation.
Despite the importance of developing a knowledge economy, the Information
Technology (IT) services received no mention in IPAP2. A concern is that
potential productive industries are omitted because they are not labour
intensive, and whether job creation should be the sole criteria for Industrial
Policy support23. The disproportional allocation of industrial funding to the
automotive and clothing, textile, footwear and leather sector implies that
Government’s focus is on maintaining existing jobs rather than creating jobs24.
The financial support given to these sectors indicates their overreliance on
Government support for their survival. Support for these industries is at the
expense of other viable industries, and Government has not yet indicated the
full cost of supporting these specific sectors25. Recently, employment creation
in South Africa has been built around incentive schemes for the preservation
and creation of employment26, which may not be sustainable if the benefitting
sectors do not become competitive.
The Committee agrees with IPAP2’s emphasis on the manufacturing sector
being the catalyst for economic growth and job creation. In this regard,
Foreign Direct Investment should be encouraged but with an emphasis on the
promotion of the industrial development, in both new and existing industries,
specifically in economically depressed areas to achieve these goals.
4.2 Coherence between macro and micro economic policies
IPAP2 stressed the need for alignment and stronger coherence between
macro- and microeconomic policies to effectively achieve the objectives of job
creation and poverty eradication. Macroeconomic policies refer to fiscal policy,
which deals with government expenditure and revenue collection, and
monetary policy, which deals with the supply of money, the availability of
money and interest rates or the cost of money. On the other hand,
microeconomic polices refer to policies that improve economic efficiency and
equity, usually through judicial and regulatory mechanisms. This type of policy
typically focuses on individual sectors of the economy, such as industries,
businesses and households but may also institute economy-wide reforms
through policies such as tax policy and competition policy.
22
Woolfrey (2010)
Woolfrey (2010)
24 Woolfrey (2010)
25 Woolfrey (2010)
26 ArcelorMittal (2010)
23
Committee Report on IPAP2. Adopted 1 June 2010
7
IPAP2 expresses a dependence on macro-economic policies which are
favourable relative to South Africa’s key trading partners in the following
aspects, namely:
 A competitive and stable exchange rate regime; and
 A competitive real interest rate regime.
In turn, it argues that microeconomic policies can contribute to the stability of
macroeconomic variables, such as inflation, mainly by increasing competition
within industries and improving efficiencies between industries; thus lowering
prices.
In terms of South Africa’s monetary policy, where the South African Reserve
Bank focuses on targeting inflation by adjusting interest rates and practising a
floating exchange rate regime, Box 1 below illustrates the effect that changes
in the interest rate through the exchange rate channel will broadly have on the
external economy (i.e. on imports and exports).
Box 1: The Exchange Rate Channel
In a flexible (floating) exchange rate regime, the effect of a change in the interest
rates on the exchange rate and net exports is as follows:
↓Ms → ↑I → ↑FA → ↑R → ↓X → ↓(X-M) → ↓Y
Where:
Ms = Money supply
I = Interest rate
FA = Foreign assets
R = Exchange rate
X = Exports
(X-M) = Net exports
Y = National Income (GDP)
↑ = Increase
↓ = Decrease
A change in the repo rate affects commercial banks’ interest rates as well as
exchange rates, money supply and credit affordability. Through the various
transmission mechanisms, changes in the repo rate will eventually influence
decisions on spending by individual consumers and Government and investment
by private institutions. The end result of a change in the repo rate is a change in
the supply and demand for goods and services which put pressure on the prices
of these goods and services (inflationary pressure if average prices are rising).
The repo rate is being used as an instrument to control inflation and in this
process the goods and services market (depicted by aggregate demand and
supply) are influenced.
It must be noted that in the South African context, this channel may not be that
strong, as the Rand is relatively insensitive to changes in the domestic interest
rate. This is contrary to USA, whose interest rates are highly sensitive.
Committee Report on IPAP2. Adopted 1 June 2010
8
Figure 2 below indicates the relationship between the real effective exchange
rate27 and the real Gross Domestic Product (GDP) growth in manufacturing.
The growth in manufacturing seems to be positively correlated to the real
effective exchange rate (REER) between 1980 and 1989. However, from
1989 to 2000, there seems to be an inverse correlation between the two.
From 2000 onwards, the positive correlation appears again. The SARB also
indicated that real GDP growth in manufacturing seems to be more sensitive
to changes in local and international income and expenditure.
Real GDP growth in manufacturing
Figure 2: Real effective exchange rate and annual growth rate of real GDP in
manufacturing, 1980 – 200928
In general, stakeholders supported the view of the alignment between macro
and micro economic policies. The Congress of South African Trade Unions
(COSATU) asserted its support in that macroeconomic policy should promote
IPAP2 and welcomed the move away from macro-economic policy that
“claims to promote stability” at the expense of real economic growth. NUMSA
calls on the Minister of Economic Development to settle the debate and give
clear direction on macroeconomic policy that would be required to realise the
objectives of IPAP2.
An alternative view postulated by Prof P Bond is that the unsound
macroeconomic management of the economy would not induce an increase in
the productive activity of the real economy. He further argues that there would
be no reversal in the implementation of macroeconomic policy given the
The real exchange rate calculates whether a country’s competitiveness has actually
changed by comparing the prices of a basket of the first country’s goods against the prices of
the same basket of goods in the other country against the two countries’ exchange rate. An
effective exchange rate refers to a basket of currencies. (SARB 2010a)
28 SARB (2010a)
27
Committee Report on IPAP2. Adopted 1 June 2010
9
statement by the Minister of Finance during his budget speech on 17
February 2010 wherein the view that the exchange rate regime and inflationtargeting would be retained was reinforced. Prof Bond argues that this would
imply the pursuit of high exchange rates, the maintenance of a volatile
currency and high interest rates.
With respect to ensuring a stable and competitive currency, COSATU
expressed a view calling for the devaluation of the currency to a more
competitive level in support of industrial policy. COSATU further argues that
developing countries pursuing industrial policy had targeted their respective
exchange rates. Mr S Jennings, Chief Executive Officer (CEO) of the PG
Group, informed the Committee that the current strong value of the currency
has placed the export sector; particularly the automotive component sector
was at risk, with further retrenchments planned.
However, Dr E Wessels is of the view that a strong currency is not necessary
to “reduce the cost of imported capital goods” within developing countries. He
further argues that the inflationary consequence of depreciation has been
exaggerated because the overall impact on the economy is determined by the
REER, which is measured by the ratio of non-tradable prices to tradable
prices. On the other hand, Prof F Tregenna highlighted the constraints to the
implementation of IPAP2 as the lack of a clear macroeconomic policy, the
strength of the exchange rate, exchange rate volatility, high interest rates and
low domestic demand.
The National Treasury’s view of the real exchange rate is that it must
depreciate in the long term. This implies that there must be a moderation in
the nominal exchange rate coupled with lower inflation and much stronger
productivity in sectors exposed to international competition. Therefore, the
National Treasury still advocates for the reduction of dissaving and the
inflation targeting framework. Although a depreciated exchange rate is helpful
to support competitiveness, it cannot ensure that exports will be promoted
successfully. It therefore stressed that complementary policies, such as good
quality education, infrastructure development, effective enforcement of
competition and well designed regulatory frameworks, are required to raise
economy-wide productivity. In addition, product and factor market rigidities
must be removed to facilitate demand and production adjustments to relative
price changes, which is the realm of microeconomic reforms.29
In terms of the volatility of the exchange rate, the National Treasury
acknowledges that this a concern, particularly for small and medium sized
exporters when needing to invest in production capacity and for importers
when planning the costs of capital or consumption goods. It therefore
suggests that more targeted intervention at these levels should be made to
assist firms with the overall costs of hedging. The gradual accumulation of
additional foreign reserves by the South African Reserve Bank, as well as the
facilitation of the development of hedging instruments would assist in
smoothing excessive rand volatility over suitable timeframes. The National
29
Kganyago (2010)
Committee Report on IPAP2. Adopted 1 June 2010
10
Treasury discourages the adoption of a fixed exchange rate due to difficulty to
implement and the range of economic costs that will be incurred as a result.
This would also imply that South Africa would no longer have monetary
sovereignty, as its monetary policy stance would mirror that of the adopted
currency. Furthermore, the exchange rate would no longer act as a shock
absorber for changes in the terms of trade, as Greece is currently
experiencing.30
The Committee is of the view that the issues of the volatility of the exchange
rate, the interest rate, and its impact on the manufacturing sector should be
addressed at the highest level of government. It welcomed the Minister’s
response that “there is a sustained and serious engagement on this issue at
the highest level”. The success of IPAP2 will in the Committee’s opinion
depend to a great extent on the development of the micro-economy and the
deepening of the cohesion between the macro-economic and micro-economic
policies.
4.3 Leveraging Public Procurement
Procurement is a critical component of IPAP2. Both business and organised
labour have called for the overhaul of the Preferential Procurement Policy
Framework Act (PPPFA) (No. 5 of 2000) and have further added that
procurement should be used as an instrument for industrialisation. IPAP2
calls for the strategic leveraging of public procurement to achieve industrial
objectives31. The current implementation of procurement policy reflects the
absence of strategic industrial objectives that should benefit local industries32.
The importance of “leveraging procurement” for industrialisation would be
dependent on the shift from “ad hoc procurement practices” towards “fleet
type”33 purchasing arrangements34. The intention of leveraging procurement
would not be to support uncompetitive local industry but “to facilitate local
production of ongoing repeat procurement “fleets”, from locomotive to powerstation components”35.
IPAP2 calls for localisation targets for State-Owned Enterprises (SOE) and
government departments pursuing ongoing purchases of capital goods and
infrastructure service. Various strategic procurement groups would be
identified for the development of a long-term government procurement plan
with the emphasis on ensuring that tenders awarded to foreign companies
support increased domestic production and supplier development.
30
Kganyago (2010)
Economic Sectors and Employment Cluster (2010)
32 Economic Sectors and Employment Cluster (2010)
33 The term “fleet type” refers to products that are procured by the public sector on an ongoing
basis.
34 Creamer (2010)
35 Creamer (2010)
31
Committee Report on IPAP2. Adopted 1 June 2010
11
The alignment of the Competitive Supplier Development Programme (CSDP)
with the National Industrial Participation Programme (NIPP) would support the
movement towards a long-term fleet-procurement process. This according to
the Minister of Trade and Industry, Dr R Davies, would improve opportunities
for local industries to supply a greater proportion of the inputs needed for the
transport, power, and water infrastructure programmes.
At present, procurement promotes a “crony capitalist tendency which is
increasingly losing credibility in view of the wealth accumulation by the “new
black elite”36. Prof S Roberts argues that “instead of addressing this problem
head on by ‘in-sourcing’ vital inputs, IPAP2 accepts the premise of massive
outsourcing, and merely attempts to gain cheaper inputs and more domestic
production. He questions Government’s decision to make coal-fired electricity,
nuclear electricity and defence aerospace central to the procurement strategy.
He argues that these industries should be phased out for reasons associated
with anti-corruption challenges, climate change, and environmental health and
safety issues.
COSATU acknowledges that Government’s procurement policy could have a
significant impact in transforming the economy and creating decent jobs. An
important element of local procurement linked to a strategy of industrial
diversification, is the use of the public infrastructure programme to promote
the development of our domestic capital and intermediate goods sectors37.
Business Unity South Africa (BUSA)38 welcomes the detailed proposals on
leveraging procurement. However, the challenge remains the alignment
between the Department of Trade and Industry (DTI) and the National
Treasury. Key to the success is achieving the correct balance between the
transformation and the promotion of local industries through procurement
opportunities. In response to a question regarding the apparent lack of
alignment between DTI and National Treasury, BUSA is of the view that many
of the proposals contained in IPAP2 would require legislative amendments or
a change in approach with regard to tender requirements. For instance,
awarding of tenders should take cognizance of the industrial policy
requirements for the promotion of local industries notwithstanding the legal
imperatives. National Treasury is concerned that some of the proposals may
prove to be unconstitutional, however business differs from this viewpoint,
therefore there is a call for closer interaction to resolve these uncertainties.
The Federation of Unions of South Africa (FEDUSA) supports the proposal to
leverage procurement, as it would ensure that local companies secure a
greater share of contracts. This potential would assist in local companies
becoming more productive and thereby increasing the supply of decent
employment opportunities. FEDUSA however cautions against shifting
towards support for industries in the primary sector at the expense of the
service sector.
36
Roberts (2010)
COSATU (2010)
38 BUSA (2010)
37
Committee Report on IPAP2. Adopted 1 June 2010
12
The Ethekwini Municipality in their submission informed the Committee that
their Standardisation Policy dictates that all vehicles purchased should be
manufactured in South Africa. Ninety-eight per cent of the municipalities’ fleet
was produced in South Africa which highlights the potential of the contribution
procurement in building and expanding the local industrial base and its
capacity.
The Committee welcomed the input from the Ethekwini Municipality with
regard to the utilisation of its procurement process, as this contributes to the
building of the domestic industrial capacity and strengthens the domestic
supply chain. Through the municipality’s transport fleet procurement system, it
contributed to the training of artisans, the lowering of vehicle and spare parts
prices, and the training of drivers to reduce repairs from misuse. However, the
Committee is concerned that municipalities do not see the cost savings
potential of a joint procurement process, which would be cost effective and
achieve economies of scale.
Mr J Mackenzie, representing the City of Cape Town Municipality, indicated
that most of the materials utilised in its Integrated Rapid Transit project, such
as steel, aluminium, and glass, was produced and assembled locally.
Although some components within the manufacturing process were imported,
as the City was required to meet the tight demands for the 2010 World Cup,
60 per cent of the content of manufactured goods was produced locally.
In response to IPAP2, Transnet is migrating to programmatic fleet
procurement practices that would provide significant value opportunities for
Transnet. The standardisation of the local fleet procurement processes would
ensure sustainability and contribute to the local industry’s development39.
One of the main foci of IPAP2 was leveraging public procurement. The
Committee was of the opinion that in addition to this, private sector
procurement should be encouraged through strategies that promote buying
South African products. Such strategies should be linked to possible import
substitution initiatives.
4.3.1 Amending Procurement Legislation
IPAP2 promises greater coordination and standardisation across government
and its SOEs in the area of procurement with the aim of creating local
industrialisation opportunities around South Africa’s R846 billion public
investment programmes. Changes to the current PPPFA would be required to
achieve the following objectives:
 Alignment of discretionary points with broad-based black economic
empowerment (BBBEE) codes and local procurement.
 The elimination of import fronting.
39
Transnet (2010)
Committee Report on IPAP2. Adopted 1 June 2010
13


The designation of “fleets” and other “critical industries” for domestic
production.
The allowance of price matching by domestic producers.
IPAP2 requires preferential procurement regulations and legislation to be
overhauled through a two-stage process. First, amendment of the PPPFA’s
regulations should be fast-tracked, and secondly the broader amendment of
the PPPFA.
COSATU in their submission is of the view that the review of the PPPFA and
the amendment of regulations should happen simultaneously. Amending the
regulations involves aligning the PPPFA with the BBBEE codes as the current
BBBEE legislation does not have industrialisation and creation of employment
as its primary objectives40. BBBEE legislation should be subordinated to the
imperatives of the industrial policy41. A concern for COSATU is that IPAP2 is
silent on the promotion of collective ownership in the form of co-operatives.
4.4 Industrial Financing
The lack of private capital investment within the production sectors of the
economy, particularly those that may have a developmental return for the
economy, is highlighted in IPAP2. The acknowledgement that the cost of
capital is high relative to our trading partners requires an approach that would
allow Government to be the catalyst to unblock financial impediments to
growth and employment creation. IPAP2 clearly identifies the role for
development finance institutions in that it should mainly invest in the
production sectors of the economy, where there will also be developmental
returns. The Minister concluded that Government intends to develop
proposals to enhance access to concessional industrial financing for
investment in IPAP2 priorities and other production sectors on terms
comparable to those of our major trading partners.
Many stakeholders have highlighted the importance of concessional industrial
financing through the Industrial Development Corporation (IDC) and the IDC
should be seen as an industrial financing body for IPAP242. BUSA is however
not convinced that the IDC would be able to play that role as a key challenge
to the success of IPAP2 is that the current approach of the IDC is similar to
that of private banks. In other words, its management of risk makes it very
difficult, if not impossible, for emerging entrepreneurs to obtain financing from
the IDC. During the IDC’s interaction with the Committee, it highlighted that
the management of risk remains important.
COSATU argues that Development Finance Institutions should promote a
developmental agenda and not be as risk averse as commercial banks.
Strong conditionalities for industrial financing should be in place in support of
40
COSATU (2010)
COSATU (2010)
42 Peinke (2010)
41
Committee Report on IPAP2. Adopted 1 June 2010
14
any company43. The provision of finance at below market rates for key
activities and the acceptance that there would be failure and resource
wastage are pivotal for the success of the investment in the production
sector44. Given limited access to concessional financing on international
markets and no forthcoming fiscal injections into the IDC, one can conclude
that the lending terms would not be dissimilar to those available commercially
in the short-term45. This highlights a potentially serious impediment for the
successful implementation of IPAP2. In its recent budget report, the
Committee called for a significant recapitalisation of the IDC in order to
support IPAP2. The Committee had further called for the reviewing of IDC’s
legislative framework to align it to achieve the objectives of a developmental
state.
The access to and cost of capital remains a major concern for the Committee.
The IDC, in conjunction with other national, provincial and municipal
development finance institutions, should be funding IPAP2. In addition,
Government should consider the recapitalisation of the IDC.
Concerns around the financing of IPAP2 have been raised by various
stakeholders. The Committee is of the view that private sector investment in
the production sectors of our economy would be necessary for the success of
IPAP2. Furthermore, the Committee is of the opinion that South Africa should
consider seeking further alternative funding to implement IPAP2.
No clear consensus could be reached on the use of pension funds as a
source of financing for IPAP2. However, there was some agreement that if the
use of pension funds was endorsed, a cap would need to be placed on the
total percentage of pension funds that could be accessed for this purpose as
well as strict criteria outlining the type of projects or programmes that could be
financed in this manner. The Committee suggested that further research on
the impact of loans and the implication of the use of pension funds were
required before these sources were utilised.
The Committee raised some of the challenges experienced by small, medium
and micro enterprises (SMMEs) and cooperatives in accessing capital. The
perception was that capital was not readily available to previously
disadvantaged and vulnerable groups at an affordable cost. The Committee
was of the view that capital should be available to SMMEs and cooperatives
taking equity considerations into account.
4.6 Competition Policy
IPAP2 recognises the continued challenges with respect to the monopolistic
provision of strategic goods and services, from both private and public
entities. South Africa is currently experiencing low levels of effective
43
COSATU (2010)
Tregenna (2010)
45 Creamer (2010)
44
Committee Report on IPAP2. Adopted 1 June 2010
15
competition, which imposes huge costs on downstream industries and
increases the cost of production.
Competition policy attempts to address both private anti-competitive
behaviour and government practices and instruments that influence
competition in the market. The absence of effective competition stifles
innovation and product improvement with dominant firms taking advantage of
their market positions, with little or no off-setting benefits to society46.
Generally, profit margins are achieved not by innovation and improved
productive capacity but rather from the historical position bequeathed to such
firms.
IPAP2 focuses on the role of competition authorities, working alongside other
regulatory bodies, in monitoring for anti-competitive behaviour by the private
sector. Lastly, anti-competitive practices would be targeted, particularly where
these concern immediate inputs to downstream labour-absorbing production
as well as consumer goods to low-income households47. This applied
especially to products such as carbon and stainless steel, chemical polymers,
fertilisers and aluminium, among others.
In his submission, Prof S Roberts48 purports that decisions of critical,
monopolistic firms influence wider socio-economic outcomes in terms of
employment, investment, production, and incomes. These patterns of
competitiveness reflect past policy decisions, which entrenched the positions
and power of large firms within the South African economy.
He further argued that exports are skewed towards resource and energy
based commodities, which make a limited contribution to employment
creation. Competition and industrial policy should be complementary and
mutually reinforcing to build competitive capabilities through:
 Understanding market dynamics;
 Dealing with the conduct of large firms with negative industrial
development consequences; and
 Supporting new entries, through development finance.
COSATU welcomes the focus on competition policy as anti-competitive
behaviour acts as a constraint to economic development. The enforcement of
outcomes of investigations by the Competition Authorities to eradicate
decades long anticompetitive may not have the desired impact as it does not
have the necessary capacity to discipline larger firms, and are very time and
resource intensive. COSATU is of the view that to address these structural
inefficiencies monopolistic firms should be dismantled.
In ensuring the achievement of more competitive outcomes and to address
the issue of monopolies, Prof S Roberts proposed amendments to the
Competition Act:
46
Brooks (2005)
Economic Sectors and Employment Cluster (2010)
48 Roberts (2010)
47
Committee Report on IPAP2. Adopted 1 June 2010
16
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




Classification of import parity pricing as an excessive pricing which is
detrimental to the economy;
Easier imposition of divestiture orders on abuse of dominance and
restrictive practices;
Empowerment of the Competition Authorities to impose administrative
penalties equal to the period of the anticompetitive conduct and not to be
limited to an annual turnover of companies;
Additional competition enforcement capacity, to include acting on
facilitating conduct for cartels; increased deterrence; ways in which
entrants are excluded;
Market enquiry provisions which provide more powers to investigate
industries where there are anti-competitive outcomes, and recommend the
necessary measures; and
Complex monopolies – to address ‘conscious parallel conduct’.
According to Dr Wessels, competition policy should be utilised to “prohibit the
systematic discrimination practiced by companies that export at lower prices
than the prices they charge South African consumers”49. Import tariffs should
be removed on semi-processed inputs to labour-intensive industries that do
not export50. The absence of competition, or collusive pricing, by companies in
the value-chain and input suppliers, in particular, had constraining effects on
value-addition efforts and competitiveness of exporters51.
The equity principle seeks to balance the efficiency with the support for a
developmental economy. This picks up the challenges of small and medium
enterprise development, and the promotion of ownership. The high
concentration of capital, complex monopolies and conglomerates in South
Africa has skewed the economy and left it more vulnerable to anti-competitive
behaviour. Given this environment the Committee believes that the
Competition Act should be strengthened and capacity increased to give
greater power to the implementing agency. The Committee recognises the
valuable work that has already been achieved by the Competition
Commission and Competition Tribunal.
4.7
Developmental Trade Policy
IPAP2 refers to developmental trade policy as an instrument of industrial
policy, primarily through the implementation of tariffs. In this regard, there is
general support for the reduction of tariffs on intermediate inputs into
manufacturing and other production sectors, albeit on a case-by-case basis.
However, the selective use of tariffs should also take into consideration the
potential for significant creation and/or retention of decent jobs and for
significant import replacement; the difference between bound and applied
49
Wessels (2010)
Wessels (2010)
51 Food and Allied Workers Union (FAWU) (2010)
50
Committee Report on IPAP2. Adopted 1 June 2010
17
rates; and the formalisation and strengthening of conditionalities related to
tariff increases.52
In addition, IPAP2 refers to the more effective enforcement of South Africa’s
trade laws against various forms of customs fraud and illegal imports that
threaten domestic productive capacity and employment. Furthermore, there is
a need to re-orientate South Africa’s standards, quality assurance,
accreditation and metrology (SQAM) institutions53 to ensure access to export
markets, given the increasing pressure to overcome non-tariff barriers to
trade, and to protect the domestic market from unsafe and poor quality
imports.54 [use of SQAM in relation to other areas on the ground
BUSA welcomes the explicit reference to the SQAM institutions. However, it
cautions that these institutions would require sufficient capacity to meet the
additional demands placed on it by IPAP2. BUSA is also actively supporting
Government’s initiatives to customs fraud.55
COSATU also acknowledges the importance of SQAM institutions and calls
for these to be “linked to Government’s efforts to encourage import
replacement and displacement”. In addition, COSATU emphasizes that
Government must embark on detailed impact analyses and sectoral
engagements before making new trade offers, especially given the economic
conditions due to the global economic crisis.56
NUMSA highlights the need for timely and effective implementation of trade
policy, especially in terms of tariff reform applications. It mentions that many
companies have closed downs and jobs have been lost due to delays in the
International Trade Administration Commission’s processing of applications.
Furthermore, NUMSA calls for Government to actively engage in trade policy
that aims to selectively reverse the liberalization process that poses a threat
to the development of a coherent domestic productive base. It also calls for
increased surveillance and monitoring of borders by the South African
Revenue Service and the South African Police Service, as well as enforce
trade agreements with the Southern African Development Community (SADC)
to eliminate the scope for imports to flood the South African economy through
alternative channels and to avoid dumping.
The Committee stressed that there must be a developmental approach to
tariffs, where tariffs are applied strategically to assist the development of local
industry where necessary. In this vein, the amount of time taken to respond to
tariff reform applications was of concern. The Committee is adamant that
52
Economic Sectors and Employment Cluster (2010)
The SQAM institutions are the South African Bureau of Standards, the National Regulator
for Compulsory Specifications, the South African National Accreditation System and the
National Metrology Institute of South Africa.
54 Economic Sectors and Employment Cluster (2010)
55 BUSA (2010)
56 COSATU (2010)
53
Committee Report on IPAP2. Adopted 1 June 2010
18
these timeframes must be decreased to actively support industry and not
undermine their sustainability.
5. Sectoral Issues
IPAP2 identifies three clusters and 13 sectors, which it intends to support
directly. These 13 sectors were clustered as qualitatively new areas of focus,
existing IPAP sectors that will be scaled up and broadened or sectors with
potential for development of long-term advanced capabilities. Each of these
sectors is allocated a number of key action programmes, milestones and lead
and support departments and/or entities.
The sectors that were focused on during the public hearing the following:
 Metal fabrication, capital and transport equipment, especially steel;
 Green and energy saving issues;
 Agro-processing;
 Automotives, components and medium and heavy vehicles;
 Plastics, pharmaceutical and chemicals, especially pharmaceuticals;
 Clothing, textiles, leather and footwear;
 Biofuels; and
 Advanced manufacturing.
5.1
Metal fabrication, capital and transport equipment, especially
steel
Officially, the Metal fabrication, capital and transport equipment cluster of
sectors consists of metal products excluding machinery; machinery and
equipment; other transport equipment; and electrical machinery and
apparatus. However, IPAP2 included basic iron and steel and basic nonferrous metals, as these sub-sectors underpin the supply of key intermediate
inputs to the broader cluster. The cluster plays a critical role in driving the
manufacturing sector’s competitiveness, as it produces products, applications
and services used across the entire economy such as infrastructure
programmes, construction, general engineering, mining, automotives and
packaging.
During the public hearings, the Committee focused on the steel industry,
given its widespread impact as a key intermediate input. The steel industry
noted that it is fairly diverse in terms of the products manufactured but also in
terms of each sector’s ability to compete globally.
In ArcelorMittal’s view, the challenges experienced by South African
downstream industries are not primarily due to its export parity pricing
practices. It attributes these challenges to a number of deficiencies that it
identified as disadvantaging these industries, namely:
 Non-competitive cost structures.
Committee Report on IPAP2. Adopted 1 June 2010
19
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



Uneconomical production units due to the absence of economies of scale.
Old facilities which are inferior to current new technologies.
Unfair competition in international markets, as governments in the
exporting markets provides subsidies and incentives for steel products.
Unregulated imported sub-standard products that compete with quality
local products.
Other non-trade barriers such as rail and port deficiencies.
Furthermore, it assured the Committee of the primary steel industry’s
willingness to support and assist Government to build the economy to achieve
a better life for all. It welcomed the IPAP’s support of further investment in
industry’s productive capacity and the identification of a number of priority
sectors, including the vehicle and component manufacturing industries, which
are all steel related. It advocates that the alignment of macro- and microeconomic policies will promote investment in certain sectors and will have a
positive impact on steel sales to the construction sector.
Kumba Iron Ore Resources highlighted that it complements IPAP2, as it forms
part of a critical value chain that provides inputs to value-added sectors that
can have high employment and growth multipliers. It highlighted that South
Africa will require the following for IPAP2 to be successful:
 Job creation and skills development.
 Sustainable broad-based black economic empowerment.
 Sufficient and competitively priced energy.
 Reliable, efficient and affordable transport systems, including rail and
ports.
 Competitive steel sector.
 Greater transparency of key inputs into productive processes.
Kumba outlined the role it had been playing to contribute to these
requirements, as well as the challenges it has been experiencing in this
regard. In addition, Kumba has been involved in a number of research and
development partnerships to improve mineral beneficiation within its
operations, as well as for downstream industries.
Furthermore, Kumba briefly described the history and context of its current
commercial dispute with ArcelorMittal regarding the cost of the iron ore it
supplies to ArcelorMittal. Kumba argues that even if ArcelorMittal had paid
export parity prices for its iron ore, it would still have made substantial profits
from its steel sales. In Kumba’s opinion, ArcelorMittal should have raised its
prices to match the sharp increase in the basket of international steel prices
since February 2010 that it tracks but have instead added the R600 Sishen
surcharge as of 1 May 2010.
In his response, the Minister of Trade and Industry highlighted the matter of
recent steel price increases implemented by ArcelorMittal due to their dispute
with Kumba Resources. He noted that the matter had been referred to the
Department by the Competition Commission, which was investigating
ArcelorMittal’s recent decision to raise steel prices despite the fact that the
Committee Report on IPAP2. Adopted 1 June 2010
20
cost of its iron ore purchases had not been increased. He assured the
Committee that the Department would vigorously pursue options to create the
conditions for capacity and competition within key inputs into the economy.
The Committee notes that the dispute between ArcelorMittal and Khumba
Resources around the relationship between the lapsed opportunity in
obtaining mineral rights, iron-ore and the consequent high steel price is
currently in arbitration. Further that the Competition Authority is also
investigating the possible presence of any anti-competitive behaviour with
respect to the price hike.
5.2
Green and energy saving industries
With the release of IPAP2, Government has given indications that the current
supply of energy is not sustainable and that alternative energy sources to
sustain the economy should be invested in. IPAP2 outlines the direction in
which our industrial capacities are pushed. The DTI notes that the security of
energy supply posed a major threat to our industrial base, but recognises the
potential to develop new green energy efficient industries and related
services.
The Minister of Science and Technology, Ms N Pandor, indicated that
Government’s economic sector and employment cluster would finalise a
“green economy” plan for submission to the Cabinet in July 2010. The
employment creation potential has been identified in the transport, energy,
building, manufacturing, agricultural and forestry sectors.
In their submission, the Environmental Goods and Service (EGS) Forum,
represented by Mr P du Plooy, advocated for the creation of conditions for
developing the latent potential for investment, jobs and competitiveness in the
local green sector. It calls for the development of green industries with both
employment creation potential and a significant environmental pay-off. In this
regard, the development of new energy sources would potentially contribute
to the protection of our natural resources.
IPAP2 recognises the scope of the green industry to drive economic
development and provide employment creation opportunities, if the green
industry enjoys a preferred status57. Information provided by the EGS Forum
indicates that the current share of the market is between R15 billion and R22
billion and a minimum of 228 000 people that are engaged in the sector. The
EGS Forum58 argues that the sector has the potential to grow by 10 per cent
annually over the next five years and can provide alternative employment
opportunities for other sectors that are stagnating.
57
Environmental Goods and Service Forum (2010)
The EGS forum consists of stakeholders involved in a variety of environmental sub-sectors,
such as water, air quality, waste, energy and climate change management, as well as
environmental research, policy and trade and investment.
58
Committee Report on IPAP2. Adopted 1 June 2010
21
The Committee acknowledges South Africa’s high carbon footprint, primarily
to its use of coal in the production of electricity. It welcomes the government’s
promotion of a green economy and green jobs and encourages government to
review its policies impacting on the country’s carbon footprint. During the
Fifteenth Conference of the parties meeting held in Copenhagen, December
2009, South Africa has re-affirmed its commitment to supporting the reduction
of carbon emissions. However, the high cost of implementing mitigation and
adaptation measures would, in the Committee’s opinion require technology
transfers and financial resources from the developed world.
5.3
Agro-processing
IPAP2 identifies the strong linkages between up- and downstream59 industries
in the agro-processing sector60. The food processing sector is the largest
manufacturing sector with the potential to increase employment opportunities
beyond the million direct and indirect jobs that already exist, if the primary
agricultural sector is included. IPAP2 highlighted that the economic impact of
the proposed key action programmes would be the retention of 216 000 jobs
and the creation of another 66 180 jobs over the ten years.
Agri-SA expressed a view that IPAP2 focused only on horticulture,
aquaculture, organic products and niche products. Grain and field groups are
listed as uncompetitive and of low value. However, the products listed as
uncompetitive and of low value present the greatest potential for the sector61.
Both IPAP2 and the SAFVCA (South African Fruit and Vegetable Canning
Association) recognise the competitive advantage in a number of fruit and
beverage sub-sectors which, if fully exploited, would place South Africa
amongst the top ten export producers in high-value agricultural products. In
terms of SAFVCA’s competitive advantage, it had a reliable supply and quality
of fruit and vegetables, strong manufacturing capabilities, experienced
exporters with proven track records, and offered premium quality products
that have a high nutritional value62.
The Fruit Canning Initiative, between Government and the industry, created a
platform for long-term growth and competitiveness of the industry. This longterm growth is under threat due to the temporary macroeconomic challenges
such as the global financial crisis, an export unfriendly exchange rate,
competition with subsidised agricultural products and adverse input cost
pressures63. The creation of an enabling environment and industrial policy
59
Upstream industries refer to links to agriculture across a wide variety of farming models and
products, while downstream industries refer to products that are marketed across both
wholesale and retail chains, as well as through a diverse array of restaurants, pubs, shebeens
and fast-food franchises. (Economic Sectors and Employment Cluster 2010)
60 Agro-processing sector is defined in statistical terms as the food processing and beverage
manufacturing sub-sectors only.
61 Agri-SA (2010)
62 SAFVCA (2010)
63 SAFVCA (2010)
Committee Report on IPAP2. Adopted 1 June 2010
22
intervention would be required to stimulate job creation and support rural
development. In the absence of support for the industry, there would be
factory closures, deindustrialisation, job losses and an adverse impact on the
rural community64.
The Food and Allied Workers Union (FAWU) is of the view that IPAP2 makes
limited reference to the up-scaling of agro-processing and only refers to niche
markets. FAWU calls for a move toward more value-added processing to
“luxury” foods for the export market.
Agro-processing offers excellent foreign direct investment opportunities, which
must be supported and encouraged. Agro-industries are also a mechanism for
the sustained empowerment and revival of rural development.
Government should support the upgrading of the quality of produce through
adoption and enforcement of quality standards. Assistance should be given to
enable products to move along the value chain, especially in respect to
increased canning of agricultural products.
Land reform is essential to ensure that agricultural productive capacity is fully
utilised, and a review of the principle of the “willing buyer – willing seller” is
required.
5.4
Automotives, components and medium and heavy vehicles
IPAP2 identifies the automotive sector as critical to the economy given its
multiplier effect. The automotive sector has shown significant production
growth but a significant trade deficit still exists. This presents major
opportunities to leverage the Automotive Production and Development
Programme to strengthen the automotive sector by focusing on key areas
which would provide the greater economies of scale in component sourcing65.
The medium and heavy commercial vehicle (MHCV) sector potential provides
the opportunity to resuscitate bus production in South Africa and other
MHCV’s. IPAP2 focuses on expanding a high value-added production in the
South African component and vehicle manufacturing industries.
The National Association of Automobile Manufacturers of South Africa
(NAAMSA) welcomed IPAP2 in that it supports investment in the productive
capacity of the economy, deepening and broadening localisation in the
domestic automotive industry. The National Association of Automotive
Component and Allied Manufacturers (NAACAM) also emphasised that the
industry needed more downstream beneficiation, because it is more labour
intensive.
64
65
SAFVCA (2010)
Economic Sectors and Employment Cluster (2010)
Committee Report on IPAP2. Adopted 1 June 2010
23
NAACAM informed the Committee that economies of scale increased on
vehicles and components. Many global suppliers have access to capacity
which they used to control the market. The current macroeconomic
environment negatively impacts on the motor sector as it encourages imports
and limit exports. Concerns for the industry was that employment in this
sector had decreased, as less than 30 to 35 per cent of vehicles produced
locally were produced with local content66. Legislation is required that would
compel manufacturers to stipulate their local content ratio. This would assist
the industry in becoming an employment creator. More government incentives
and encouragement is needed to promote and support a higher local content
in automotive manufacturing.
NAAMSA is concerned about the impact of the dispute between Kumba Iron
Ore and ArcelorMittal South Africa. This, together with Eskom’s price
increases, would have a significant impact on the local component prices. The
availability of steel and its price implications is a concern for several vehicle
and component manufacturers arising from the dispute. NAAMSA further
argues that the combined impact is undermining the competitiveness of the
local component and vehicle production sector in international markets.
5.5 Clothing, textiles, footwear and leather
The sectors within manufacturing, especially the clothing, textiles, footwear
and leather industries have been under severe pressure for sometime. The
sector’s contribution to employment has declined significantly, especially for
unskilled and semi-skilled labour, as many factories have had to close down
as a result of productivity losses. Due to the sector’s labour-absorption
capacity and its current challenges to remain competitive, it required
government intervention. The Minister of Finance allocated an additional
R3.6 billion over the next three years to the Department of Trade and Industry
for industrial policy interventions related to IPAP2. The clothing and textile
sector will be receiving R1.75 billion of this allocation or 48.6 per cent 67.
The clothing, textiles, footwear and leather industry is the most labour
intensive sector within manufacturing with R38 billion in annual sales68. In its
submission, the South African Clothing and Textile Workers Union (SACTWU)
welcomes government support through the Clothing and Textiles Production
Incentive (CTPI) and Clothing and Textiles Competitiveness Programme
(CTCP) as it would assist in stemming the decline in the sector. The
objectives of the CTPI and CTCP are to prevent further closures, minimise job
losses and to increase the competitiveness of the industry.
SACTWU informed the Committee that the implementation of IPAP2
programmes have commenced in the industry with 36 potential companies in
the pipeline due to the Competitiveness programme. In line with a more
66
NAACAM (2010)
National Treasury (2010c)
68 South Africa Clothing and Textile Workers Union (SACTWU) (2010)
67
Committee Report on IPAP2. Adopted 1 June 2010
24
strategic approach to tariff reduction, clothing duties on 35 key products
increased to World Trade Organisation’s (WTO) bound rate levels, with the
reduction on duties on certain textiles not produced locally69.
SACTWU welcomes the commitment in IPAP2 to combat illegal imports which
include the following:
 Under-invoicing;
 Smuggling;
 Rerouting via third countries;
 Misuse of rebates and credits; and
 Corrupt payments to officials.
Concerns around the readiness of the South African Revenue Services
(SARS) in dealing with custom fraud have been expressed70. Failure to deal
with illegal imports and customs fraud would undermine the initiatives
announced in IPAP271. SACTWU acknowledges the focus on fleet
procurement but argues that other products especially within the clothing
sector should be emphasised.
5.6
Bio-fuels industry
Currently, the majority of South Africa’s primary energy requirement is
sourced from fossil fuels making it an economy with intense carbon dioxide
(CO2) emissions72. The need to reduce fossil dependence and its carbon
footprint, as well as diversify its energy supply mix, given the current supply
constraints, is of importance to Government.
IPAP2 acknowledges South Africa’s limited participation within the bio-fuel
sector, both locally and internationally. It recognises the regulatory barriers
locally and the constraints on investment given the current global economic
environment. A study commissioned by the then Department of Minerals and
Energy in 2006 concluded that South Africa had significant potential to
develop a commercially viable bio-fuel sector73. IPAP2 recognises the strong
linkages with other sectors and its significant labour-absorption potential.
The South African Petroleum Industry Association74 (SAPIA) supports the
establishment of a world class, economically viable, environmentally
sustainable bio-fuels industry. It calls for an integrated approach which should
include a renewable energy strategy, energy security and bio-fuels as part of
the future fuel road map. A concern raised by SAPIA was that the 2007 Bio-
69
SACTWU (2010)
SACTWU (2010)
71 Baard (2010)
72 Holman (2010)
73 Economic Sectors and Employment Cluster (2010)
74 SAPIA memberships (BP Southern Africa, Chevron South Africa, Engen Petroleum,
PetroSA, SASOL Limited, Shell South Africa, Total South Africa)
70
Committee Report on IPAP2. Adopted 1 June 2010
25
fuels Strategy fails to address the practical and economic issues of integrating
bio-fuels into the fuels supply chain.
The Southern African Bio-energy Association (SABA) - formerly known as the
Southern African Bio-fuels Association – welcomes the inclusion of bio-fuels
within IPAP2. A close link exists between renewable energy and agriculture.
The scope for crops for bio-fuel production is limited, as South Africa is a
semi-arid country, with the fertile areas used for food production. Furthermore,
food security versus land reform is a contentious issue. However, if the
regional cropland potential of the Southern African Development Community
(SADC) was considered, this would facilitate food production75. Therefore,
SABA strongly advocates for a regional approach for the development of a
bio-fuel industry as the cropland potential is larger than Brazil. SABA is
advocating the use of sugarcane tops and trash for the production of bio-fuels.
SABA informed the Committee that if the conventional harvesting methods
and technology are utilised, bio-fuel production from this source would
generate 5 000 megawatts of power, equivalent to one Medupi power station.
Currently, the operating cost for developing bio-fuels is high but great
employment opportunities exist within the industry. Initial indications suggest
that developing the bio-fuel sector would be costly but it could become as cost
effective as Brazil overtime. The agricultural and bio-fuel sectors can act as
key enablers that could change Africa’s energy map76. If the bio-fuels sector
developed at a regional level, it could add 5 per cent to SADC’s gross
domestic product (GDP), which would create jobs in the region. Agricultural
investment in SADC would increase food security as well as energy security.
Food security must be the pre-condition for the development and support of
the Bio-fuels industry in South Africa. The Committee is of the view that a
strategy must be in place to manage the oversupply of agricultural products,
such as maize, so that food security in Africa is also considered before this is
used as a source for bio-fuels production.
In terms of crop production for the bio-fuels industry, the Committee insists
that food security must be prioritised over bio-fuel production. Strategies need
to be developed and implemented to ensure that the over-supply of crops are
first used to promote food security in Africa before being considered for biofuel production.
5.7
Advanced manufacturing
The aerospace and defence sector has been identified by the Government in
IPAP2 as one of the sectors with potential for development of long-term
advanced capabilities. Government views this sector as a catalyst for new
development and innovation77.
75
SABA (2010)
SABA (2010)
77 Economic Sectors and Employment Cluster (2010)
76
Committee Report on IPAP2. Adopted 1 June 2010
26
IPAP2 views the aerospace and defence sector as a “critical and pervasive
generator of new technologies” and that it would be instrumental for future
innovation. This contributes to the engagement across the substantial part of
manufacturing, services and primary sectors of the economy to advance the
industrialisation process and movement towards a knowledge economy.
IPAP2 acknowledges the achievement of global recognition and confidence
from global original equipment manufacturers (OEM’s) in aerospace that
South Africa has capabilities to extend components and parts manufacturing,
as well as to enter the high-value global supply chains on advanced materials
such as titanium, avionics and electronics.
In his submission, Mr R Louw78 expressed a view that IPAP2 did not
sufficiently recognise the inherent complexity of aerospace and advanced
manufacturing. He further argues that the fragmentation of efforts within the
country also introduced risks and that the sophistication of existing South
African capabilities was also underrated. In addition, there was a lack of
recognition in IPAP2 of the importance of continental African and global
partnerships for the advancement of the local industry.
Government initiatives within the sector has a narrow focus, as the aerospace
industry is complex and consists of other areas such as general aviation,
traffic control, military aviation and other matters79. Although the employment
opportunities within the sector were of a highly technical nature, low level job
opportunities were also created80.
Another concern raised by Mr Louw was the absence of a coherent integrated
skills development strategy. Further Education and Training Colleges (FET),
universities and Universities of Technology were underfunded and nonaligned81. Funding for the Sector Education and Training Authorities (SETAs),
particularly MERSETA82, should be increased to address the alleged shortage
of trained candidates and to meet the skill requirements.
5.8 Pharmaceutical sector
Employment in the pharmaceutical sector has declined by more than 40 per
cent between 1999 and 200783. South Africa is the world’s largest market for
anti-retrovirals (ARVs) with the highest risk to security of supply. IPAP2
identifies the production of the active pharmaceutical ingredients of key ARVs
as a key opportunity, which can potentially reduce the current account deficit
78
Rudolf Louw is a director of the National Aerospace Centre of Excellence
Louw (2010)
80 Louw (2010)
81 Louw (2010)
82 MERSETA is the Education and Training Authority responsible for the manufacturing,
engineering and related services sectors. This includes the metal and engineering, auto
manufacturing, motor retail and component manufacturing, tyre manufacturing and plastics
industries.
83 Economic Sectors and Employment Cluster (2010)
79
Committee Report on IPAP2. Adopted 1 June 2010
27
and imports84. IPAP2 also identifies the potential for significant creation and/or
retention of jobs, and security of pharmaceutical supplies within this sector.
The National Association of Pharmaceutical Manufacturers85 (NAPM) argues
that no significant improvement in the trade balance would occur as the trade
balance for pharmaceuticals has remained constant since 1994. Job creation
potential is not mainly in the pharmaceutical producing sector, as it is highly
automated, but importers of pharmaceutical products contribute significantly
to employment through distribution networks86. NAPM raised a couple of
concerns around the following:
 Procurement.
 The dominance of certain companies within the sector.
 The alignment of discretionary points with BBBEE Codes of local
procurement as it would limit competition and inflate prices.
In its submission, Aspen Pharmaceutical Holdings informed the Committee
that it currently supply 70 per cent of anti-retrovirals (ARV) locally. However, it
had a major concern that the public sector imported 53 per cent of all its
tenders. This has the potential to cause de-industrialisation, and loss of
productive capacity and jobs within the sector.
The biopharmaceutical industry has the potential to be a major industry in that
it has predicted that the majority of medicine produced in future would be
biologic in nature87. Currently, the biotechnology sector in South Africa is
small and is importing all biological therapeutics as final products. The
biopharmaceutical is fairly labour and knowledge intensive and if the industry
is supported it could retain most of their highly skilled employees. Significant
growth prospects exist within the biopharmaceutical industry and with support
the local biological manufacturing industry could earn revenue that could be
reinvested into the bio-industry in South Africa88.
Bio-clones develop and produce biopharmaceutical or biological medicines
including the active pharmaceutical ingredients for renal failure and cancer
biological medications. It informed the Committee that its current strategy is to
invest profits into skills development thereby creating employment
opportunities. The biopharmaceutical industry has the potential to become a
major market player if it receives the necessary financial support and within
the next five years it could be able to commercialise the products
manufactured. It also called for intervention and support from the Department
of Health and National Treasury through the preferential procurement
process.
84
Economic Sectors and Employment Cluster (2010)
NAPM is the oldest and longest standing trade Association for the Pharmaceutical Industry
which represents small, medium and larges and listed companies (NAPM 2010)
86 NAPM (2010)
87 Biovac (2010)
88 Biovac (2010)
85
Committee Report on IPAP2. Adopted 1 June 2010
28
6.
Conclusion
The public and private sector and civil society including organised labour all
agreed on the urgent need for an Industrial Policy. This consensus was visible
around a number of core issues: employment creation, decent work, the
revival of the manufacturing sector, value of green agro industries. The written
and verbal submissions emphasized the importance of the re-industrialisation
of South Africa in setting us on a new growth path.
However a number of horizontal and vertical challenges have been identified
among them: access and cost of capital, security of energy supply, transport
and logistical infrastructure including ports and communications as well as the
critical need for co-ordination between departments, spheres of government
and state-owned enterprises.
Other conclusions:
6.1.
The Committee will encourage and promote a regional dimension for
IPAP2, as it can contribute to regional integration. South Africa’s trade
policy informed by our industrial policy should also promote regional
integration, cooperation and economic development.
6.2.
The Committee is of the view that the transport systems (roads, rail,
ports, etc.) and logistical infrastructure must be improved in support of
optimum industrial development and global competitiveness. This
would assist in reducing the cost of doing business.
6.3.
The Committee also acknowledges that telecommunication
infrastructure, including broadband, should be developed throughout
South Africa, as it impacts on market access and the cost of doing
business. Furthermore, wider availability of and access to information
and communications technologies will also positively impact on
education and skills development to assist in narrowing inequities in
society by improving the employability of future generations.
6.4.
The Committee would like to encourage private sector procurement of
locally produced products.
6.5.
The shortage of the critical skills required to make a success of IPAP2
requires a coordinated approach between industry and higher
educational structures to ensure that the appropriate skills are
produced for a developmental economy. It is essential that skills are
identified at different levels to ensure the competitiveness of industry.
The lack of coordination among the institutions of higher learning, as
well as with industry, remains a challenge for producing the right skills
for our economic development. The Committee acknowledges that real
economic empowerment is attained through the transfer of knowledge,
development of skills and retraining of workers.
Committee Report on IPAP2. Adopted 1 June 2010
29
6.6.
The Committee is of the view that a skills audit should be
commissioned which would lead to the establishment of a national
skills register. It acknowledges the challenge to ensure that those
individuals practising critical skills without formal qualifications are
registered, particularly those in the informal sector. This should be
linked to the competency (Recognition of Prior Learning) regulations.
The cost of registration may be an impediment to individuals to formally
register themselves and should be taken into consideration. This would
assist industry in identifying sector specific skills shortages and
institutions of higher learning to design and develop curricula to
address this shortage appropriately. Currently, a mismatch between
skills demand and supply exists that needs to be addressed.
6.7.
Continued support for infant and new industries should be given taking
the WTO rules into account while developing their efficiency and
competitiveness.
6.8.
The developmental strategies and objectives of municipalities should
be aligned to IPAP2, particularly in terms of leveraging procurement
and for the provision of bulk services to industry, and that South African
Local Government Association (SALGA) should play an active
coordinating role in this regard.
6.9.
The role of SMME’s and entrepreneurs in relation to employment
creation should be actively explored. The Committee believes that the
role of cooperatives and small and emerging enterprises should be
emphasised within IPAP2; the Committee should encourage that not
only established businesses benefit from the incentives programmes
by utilising the BBBEE process. Fair distribution of financial and other
resources is required as this can promote and encourage SMMEs.
IPAP2 seeks to strengthen the industrial base. Once industry has been
strengthened, cooperatives can benefit as part of the supply chain of a
well structured industry.
6.10. To ensure the success of IPAP2, the Committee is proposing a
national indaba to promote the objectives of IPAP2 so as to secure
increased participation and encourage investment in the production
sector of our economy. The DTI should have a broad public awareness
programme/drive for IPAP2.
6.11. There is a need to strengthen and integrate the coordination among the
agencies responsible for monitoring the implementation of IPAP2 key
action programmes at national, provincial and municipal level. This will
be essential to ensure IPAP2’s successful implementation.
6.12. Where necessary and appropriate, legislative amendments (including
regulations) as well as policies should be aligned to enable the
implementation of IPAP2.
Committee Report on IPAP2. Adopted 1 June 2010
30
7.
Acknowledgements
The Committee acknowledges the contributions made by academic and
research institutions, organised business and labour, State Owned Entities,
industry specific associations and the DTI into IPAP2. The Committee also
wishes to thank its Committee support staff in particular the Committee
Secretary, Mr A Hermans, the Content Advisor, Ms M Herling, Committee
Assistant Ms A Kleyn and the Researcher, Mr L Mahlangu, for their
professional support and conscientious commitment to their work. The
Chairperson thanks all Members of the Committee for their active participation
during the process of engagement and deliberations and their constructive
recommendations made in this report.
8.
Recommendations
Informed by its deliberations, the Committee recommends that the House
request that:
8.1.
8.2.
8.3.
8.4.
8.5.
8.6.
8.7.
8.8.
The DTI submits bi-annual progress reports in February and August of
each year to the Committee on the:
a. Implementation of the IPAP2’s key action programmes, and
measures proposed to address blockages identified during
implementation.
b. New incentives and grants that would encourage and support
industrialisation and sustainable job creation.
c. Monthly strategic monitoring of all IPAP2 projects should be put in
place by implementing government departments to act as an early
warning system to identify any risks facing these projects.
The DTI tables a report to the Committee on the review of the current
tariff regime and how it could optimally support the domestic
manufacturing and job retention strategies.
The DTI, in consultation with the Department of Economic
Development and the IDC, submits a progress report on the review of
the IDC’s mandate and on its recapitalisation to the Committee within
three months tabling of this report.
The DTI, in consultation with the Department of Economic
Development, must present alternative models of financing for
industrialisation covering all development finance institutions.
The DTI submits a research report on the most optimal feed crop/s for
bio-fuel production and the implications thereof.
The DTI submits a report on measures being considered to increase
the local content of vehicles assembled in South Africa.
The DTI submits a report on the envisaged role of provincial and local
government in the implementation of IPAP2.
The role of state-owned enterprises in support of IPAP2 should be
investigated and the implementation thereof defined.
Committee Report on IPAP2. Adopted 1 June 2010
31
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Committee Report on IPAP2. Adopted 1 June 2010
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Annexure 1: List of Acronyms
ARV
BBBEE
BUSA
CEO
CO2
COSATU
CSDP
CTCP
CTPI
DTI
EGS
FAWU
FEDUSA
FET
GDP
IDC
IPAP2
IT
MERSETA
MHCV
NAACAM
NAAMSA
NAPM
NIPF
NIPP
NUMSA
OEM
PMI
PPPFA
REER
SABA
SACTWU
SADC
SAFVCA
SALGA
SAPIA
SARB
SARS
SETA
SMME
SOE
SQAM
WTO
Anti-retroviral
Broad-based Black Economic Empowerment
Business Unity South Africa
Chief Executive Officer
Carbon dioxide
Congress of South African Trade Unions
Competitive Supplier Development Programme
Clothing and Textiles Competitiveness Programme
Clothing and Textiles Production Incentive
Department of Trade and Industry
Environment Goods and Services
Food and Allied Workers Union
The Federation of Unions of South Africa
Further Education and Training
Gross Domestic Product
Industrial Development Corporation
revised Industrial Policy Action Plan
Information Technology
Manufacturing, Engineering and Related Services Education and
Training Authority
medium and heavy commercial vehicle
National Association of Automotive Component and Allied
Manufacturers
National Association of Automobile Manufacturers of South Africa
National Association of Pharmaceutical Manufacturers
National Industrial Policy Framework
National Industrial Participation Programme
National Union of Metalworkers of South Africa
original equipment manufacturers
Purchasing Managers Index
Preferential Procurement Policy Framework Act
Real Effective Exchange Rate
Southern African Bioenergy Association
South African Clothing and Textile Workers Union
Southern African Development Community
South African Fruit and Vegetable Canning Association
South African Local Government Association
South African Petroleum Industry Association
South African Reserve Bank
South African Revenue Service
Sector Education and Training Authority
Small, Medium and Micro Enterprises
State-owned Enterprises
Standards, Quality Assurance, Accreditation and Metrology
World Trade Organisation
Committee Report on IPAP2. Adopted 1 June 2010
36
Annexure 2: Purpose of the Competition Act
The overall purpose of the Competition Act is to promote and maintain
competition, in order
‘(a) to promote the efficiency, adaptability and development of the economy;
(b) to provide consumers with competitive prices and product choices;
(c) to promote employment and advance the social and economic welfare of
South Africans;
(d) to expand opportunities for South African participation in world markets
and recognise the role of foreign competition in the Republic;
(e) to ensure that small and medium-sized enterprises have an equitable
opportunity to participate in the economy; and
(f) to promote a greater spread of ownership, in particular to increase the
ownership stakes of historically disadvantaged persons.’
Source: Government of South Africa: Competition Act, no 89 of 1998
Committee Report on IPAP2. Adopted 1 June 2010
37