Coherence between Macro and Micro economic Policy

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Committee Report on IPAP2.
Adopted 1

J
une 2010

1

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 an
d 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 constrain
ts 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;



I
mproving 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
invest
ment.


Committee Report on IPAP2.
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2

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 t
he 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 i
n 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 stakeho
lders 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 sec
tors 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 perspecti
ve 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.
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3



Regio
nal 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 n
on
-
tradable services
3
.


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 pro
ducts 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 i
mport 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 econ
omic 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 investmen
t 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 cr
eation 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 intervention
5
. IPAP2
recognised that manufacturing a
nd 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 stru
ctural challenges



2

Economic Sectors and Employment Cluster (2010)

3

Minister of Trade and Industry (2010a)

4

Economic Sectors and Employment Cluster (2010)

5

Tregenna (2010)

6

NUMSA
(2010)

Committee Report on IPAP2.
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4

faced by the South African economy. Still, other stakeholders
7

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 att
empts 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 knowledge
-
based 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 industrialisati
on 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 years
8
.
Thi
s 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 Bond
10

asserts that the impact of
the gl
obal 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 pursue
d by Government
11
.


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 be
gun 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 no
t 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)

8

Wessels (2010)

9

Wessels (2010)

10

Bond
(2010)

11

Bond
(2010)

Committee Report on IPAP2.
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Africa’s unemployment is therefore structural in nature and the over
all thrust
of IPAP2 is to deal with the structural impediments of employment creation.



4.1.3 Manufacturing


Manufacturin
g 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
inpu
ts, 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 structura
l problems (skills shortages)
accompanied by extremely high social costs
13
.


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 ca
pitalisation, 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 remain
ed 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 industries
14
.


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 F
igure 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 sectors
16
.






12

Byrnes (2006)

13

Maasdorp (2003)

14

National Treasury (2010a)

15

National Treasury (2010a) and SARB (2010b)

16

National Treasury (2010a)

Committee Report on IPAP2.
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Figure 1: Growth in the Manufacturing Sector in relation to the Purchasing
Managers Index
17

(PMI), 2004


2009
18



IPAP2 identifies manufacturing
as the biggest contributor of the production
sector
19

(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 capi
tal, 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 manu
facturing 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 growth
21
.


The global financial crisis has ha
d 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 labour
-
absorption 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

S
outh
A
frican
R
eserve
B
ank (SARB)

(2010
b
)

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.
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7

been identified as the engines of long
-
term sustainable growth and job
creation in develo
ping 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 i
mportance 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 support
23
. 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
jobs
24
.


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 su
pporting these specific sectors
25
. Recently, employment creation
in South Africa has been built around incentive schemes for the preservation
and creation of employment
26
, 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 developme
nt, 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 microec
onomic 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 o
f 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
typi
cally 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)

23

Woolfrey (2
010)

24

Woolfrey (2010)

25

Woolfrey (2010)

26

ArcelorMittal (2010)

Committee Report on IPAP2.
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8

IPAP2 expresses a dependence on macro
-
economic polic
ies 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 ins
trument 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 ins
ensitive to changes in the domestic interest
rate. This is contrary to USA, whose interest rates are highly sensitive.

Committee Report on IPAP2.
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9

Figure 2 below indicates the relationship between the real effective exchange
rate
27

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 cor
relation 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.





















Figure 2: Real effective exchange rate and annual growth rate of real GDP in
manufacturing, 1980


2009
28


In general, stakeholders supported the view of the alignment between macro
and micro economic policies. The Cong
ress 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 alter
native 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



27

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 ba
sket 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 (2010
a
)

R
eal
GDP

growth

in

manufacturing

Committee Report on IPAP2.
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10

stateme
nt by the Minister of Finance during his budget speech on 17
February 2010 wherein the view that the exchange rate regime and inflation
-
targeting would be retained was reinforced. Prof Bond argues that this would
imply the pursuit of high exchange rates, t
he 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. COS
ATU 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 pla
ced 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 develo
ping 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 o
ther 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 Trea
sury’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 com
petition. 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
succ
essfully. 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 addit
ion, 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
ackno
wledges 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.
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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 t
hat 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 curr
ently
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
resp
onse 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 instrume
nt for industrialisation. IPAP2
calls for the strategic leveraging of public procurement to achieve industrial
objectives
31
. The current implementation of procurement policy reflects the
absence of strategic industrial objectives that should benefit local i
ndustries
32
.
The importance of “leveraging procurement” for industrialisation would be
dependent on the shift from “ad hoc procurement practices” towards “fleet
type”
33

purchasing arrangements
34
. 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 power
-
station components”
35
.


IPAP2 calls for localisation targets for State
-
Owned Enterprises (SOE) and
government departments purs
uing 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 compa
nies

support increased
domestic

production

and supplier development.





30

Kganyago (2010)

31

Economic Sectors and Employment Cluster (2010)

32

E
conomic 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)

Committee Report on IPAP2.
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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
-
p
rocurement 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 p
rocurement 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 ha
ve 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 sectors
37
.


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
transform
ation 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 req
uire 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
imperativ
es. 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 Sou
th 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 dece
nt
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)

37

COSATU
(2010)

38

BUSA
(2010)

Committee Report on IPAP2.
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The Ethekwini Municipality in their submission informed the Committee that
their Standardisati
on 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
C
ommittee 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 t
ight 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
Tra
nsnet. The standardisation of the local fleet procurement processes would
ensure sustainability and contribute to the local industry’s development
39
.


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 curre
nt 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.
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The designation of “fleets” and other “cr
itical 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
regulation
s 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 th
e PPPFA with the BBBEE codes as the current
BBBEE legislation does not have industrialisation and creation of employment
as its primary objectives
40
. BBBEE legislation should be subordinated to the
imperatives of the industrial policy
41
. 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 developmen
tal 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 em
ployment 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 inten
ds 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 IPAP2
42
. 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 conditiona
lities for industrial financing should be in place in support of



40

COSATU (2010)

41

COSATU (2010)

42

Peinke (2010)

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any company
43
. 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 investme
nt in the production
sector
44
. 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
-
term
45
. 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 c
alled 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.


N
o 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 availab
le 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)

44

Tregenna
(2010)

45

Creamer (2010)

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competition, which imposes huge costs on downstream indus
tries 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
inno
vation and product improvement with dominant firms taking advantage of
their market positions, with little or no off
-
setting benefits to society
46
.
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 households
47
. This applied
especially to products such as carbon and stainless steel, chemical polymers,
fertilise
rs and aluminium, among others.


In his submission, Prof S Roberts
48

purports that decisions of critical,
monopolistic firms influence wider socio
-
economic outcomes in terms of
employment, investment, production, and incomes. These patterns of
competitivene
ss 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 emplo
yment
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)

47

Economic Sectors and Employment Cluster (2010)

48

Roberts (2010)

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Classification of import parity pricing as an excessive pricing which is
detrimental to the economy;



Easier im
position 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 practice
d 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 export
50
. 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 exporters
51
.


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
-
comp
etitive
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 achie
ved by the Competition
Commission and Competition Tribunal.



4.7

Development
al

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
gener
al 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)

50

Wessels (2010)

51

Food and Allied Workers Union (
FAWU) (201
0)

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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 assuranc
e,
accreditation and metrology (SQAM) institutions
53

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 relati
on 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 emphasize
s 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 implementati
on 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, N
UMSA 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
a
lternative 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)

53

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 Institut
e of South Africa.

54

Economic Sectors and Employment Cluster (2010)

55

BUSA (2010)

56

COSATU (2010)

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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 fabricat
ion, 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 non
-
ferrous 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, appli
cations
and services used across the entire economy such as infrastructure
programmes, construction, general engineering, mining, automotives and
packaging.


During the public hearings, t
he Committee focused on the steel industry,
given its widespread imp
act 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 Afric
an
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.
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Uneconomical p
roduction 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 produ
cts.



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 manufacturi
ng industries, which
are all steel related. It advocates that the alignment of macro
-

and micro
-
economic policies will promote investment in certain sectors and will have a
positive impact on steel sales to the construction sector.


Kumba Iron Ore Resourc
es 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 num
ber 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 r
egarding 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 sho
uld 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 h
ighlighted 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.
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21

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 with
in 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 i
n 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 i
ndications 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 sect
or 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 th
eir 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 status
57
. Information provided by the EGS Forum
indicates that the current share of the market i
s between R15 billion and R22
billion and a minimum of 228 000 people that are engaged in the sector. The
EGS Forum
58

argues that the sector has the potential to grow by 10 per cent
annually over the next five years and can provide alternative employment
op
portunities for other sectors that are stagnating.





57

Environmental Goods and Service Forum
(2010)

58

The EGS forum consists of stakeholders involved in a variety of environmental sub
-
sectors,
such as water, ai
r quality, waste, energy and climate change management, as well as
environmental research, policy and trade and investment.

Committee Report on IPAP2.
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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 downstream
59

industries
in the agro
-
processing sector
60
. 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 potent
ial for the sector
61
.


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 t
en 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 offer
ed premium quality products
that have a high nutritional value
62
.


The Fruit Canning Initiative, between Government and the industry, created a
platform for long
-
term growth and competitiveness of the industry. This long
-
term 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
pressures
63
. The creation of an enabling environment and industrial po
licy



59

Upstream industries refer to
links to agriculture across a wide variety

of farming models and
products, while d
ownstream 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 Secto
rs and Employment Cluster 2010
)

60

Agro
-
processing s
ector 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)

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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 community
64
.


The F
ood 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 t
o 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
Program
me to strengthen the automotive sector by focusing on key areas
which would provide the greater economies of scale in component sourcing
65
.


The medium and heavy commercial vehicle (MHCV) sector potential provides
the opportunity to resuscitate bus product
ion 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 emph
asised that the
industry
needed more downstream beneficiation, because it is more labour
intensive.





64

SAFVCA (2010)

65

Economic Sectors and Employment Cluster (2010)

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NAACAM informed the Committee that economies of scale increased on
vehicles and components. Many global suppliers have access to capacity
which they used t
o 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 veh
icles produced
locally were produced with local content
66
. 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 encou
ragement 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 hav
e 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 bee
n 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 lab
our
-
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 po
licy 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 sales
68
. 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
(C
TCP) 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 implementa
tion 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)

67

National Treasury
(2010c)

68

South Africa Clothing and Textile Workers Union (SACTWU) (2010)

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25

strategic approach to tariff reduction, clothing duties on 35 key products
increased to World Trad
e Organisation’s (WTO) bound rate levels, with the
reduction on duties on certain textiles not produced locally
69
.


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 expressed
70
. Failure to deal
with illegal imports and cus
toms fraud would undermine the initiatives
announced in IPAP2
71
. 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
(CO
2
) emissions
72
. The need to reduce fossil dependence and its carbon
footprint, as well as diversify its energy supply mix, given t
he 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 inves
tment 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 sector
73
. IPAP2 recognises the st
rong
linkages with other sectors and its significant labour
-
absorption potential.


The South African Petroleum Industry Association
74

(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 fu
ture fuel road map. A concern raised by SAPIA was that the 2007 Bio
-



69

SACTWU (2010)

70

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)

Committee Report on IPAP2.
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26

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 know
n 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 production
75
. 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
-
fu
el sectors can act as
key enablers that could change Africa’s energy map
76
. 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 se
curity 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 bio
-
fuel 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 innov
ation
77
.




75

SABA (2010)

76

SABA (2010)

77

Economic Sectors and Employment Cluster (2010)

Committee Report on IPAP2.
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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, ser
vices 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 aer
ospace 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 Louw
78

expressed a vie
w 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 focu
s, as the aerospace
industry is complex and consists of other areas such as general aviation,
traffic control, military aviation and other matters
79
. Although the employment
opportunities within the sector were of a highly technical nature, low level job
op
portunities were also created
80
.


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 non
-
al
igned
81
. Funding for the Sector Education and Training Authorities (SETAs),
particularly MERSETA
82
, 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 2007
83
. 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 pharmaceut
ical 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

79

Louw (2010)

80

Louw (2010)

81

Louw (2010)

82

MERSETA is the Education and Training Authority responsible for the manufacturing,
engineering and related servi
ces sectors. This includes the
metal and engineering, auto
manufacturing, motor retail and component manufacturing, tyre manufact
uring and plastics
industries
.

83

Economic Sectors and Employment Cluster (2010)

Committee Report on IPAP2.
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28

and imports
84
. 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 Manufacturers
85

(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
automate
d, but importers of pharmaceutical products contribute significantly
to employment through distribution networks
86
. NAPM raised a couple of
concerns around the following:



Procurement.



The dominance of certain companies within the sector.



The alignment of di
scretionary 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. Howe
ver, 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 potent
ial to be a major industry in that
it has predicted that the majority of medicine produced in future would be
biologic in nature
87
. 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 biol
ogical manufacturing industry could earn revenue that could be
reinvested into the bio
-
industry in South Africa
88
.


Bio
-
clones develop and produce biopharmaceutical or biological medicines
including the active pharmaceutical ingredients for renal failure a
nd 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 i
f 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 preferenti
al procurement
process.






84

Economic Sectors and Employment Cluster (2010)

85

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)

Committee Report on IPAP2.
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29

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, dece
nt 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 developm
ent.


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 doi
ng 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 acc
ess 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 pri
vate 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
pro
duced 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 f
or 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.
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30

6.6.

The Committee is of the view that a skil
ls 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
ass
ist 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 addresse
d.


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, particu
larly 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 relat
ion 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 f
rom 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, cooper
atives 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 en
able the
implementation of IPAP2.


Committee Report on IPAP2.
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31

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 cons
cientious 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


In
formed by its deliberations, the Committee recommends that the House
request that:


8.1.

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.

8.2.

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.

8.3.

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 rec
apitalisation to the Committee within
three months tabling of this report.

8.4.

The DTI, in consultation with the Department of Economic
Development, must present alternative models of financing for
industrialisation covering all development finance institutio
ns.

8.5.

The DTI submits a research report on the most optimal feed crop/s for
bio
-
fuel production and the implications thereof.

8.6.

The DTI submits a report on measures being considered to increase
the local content of vehicles assembled in South Africa.

8.7.

The DTI

submits a report on the envisag
ed role of provincial and local
government in the implementation of IPAP2.

8.8.

The role of state
-
owned enterprises in support of IPAP2 should be
investigated and the implementation thereof defined.



Committee Report on IPAP2.
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une 2010

32

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-
SA (2010)
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.



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Mittal (2010)

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Aspen Pharmacare Holding Ltd

(2010)
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.


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Industrial Policy Action Plan


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, 11
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.


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.



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Adopted 1

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)

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Adopted 1

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une 2010

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Committee Report on IPAP2.
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36

Annexure 1: List of Acronyms


ARV

Anti
-
retroviral

BBBEE

Broad
-
based Black Economic
Empowerment

BUSA

Business Unity South Africa

CEO

Chief Executive Officer

CO
2

Carbon dioxide

COSATU

Congress of South African Trade Unions

CSDP

Competitive Supplier Development Programme

CTCP

Clothing and Textiles Competitiveness Programme

CTPI

Clothing and Textiles Production Incentive

DTI

Department of Trade and Industry

EGS

Environment Goods and Services

FAWU

Food and Allied Workers Union

FEDUSA

The Federation of Unions of South Africa

FET

Further Education and Training

GDP

Gross
Domestic Product

IDC

Industrial Development Corporation

IPAP2

revised Industrial Policy Action Plan

IT

Information Technology

MERSETA

Manufacturing, Engineering and Related Services Education and
Training Authority

MHCV

medium and heavy commercial vehicle

NAACAM

National Association of Automotive Component and Allied
Manufacturers

NAAMSA

National Association of Automobile Manufacturers of South Africa

NAPM

National Association of Pharmaceutical Manufacturers

NIPF

National Industrial Policy Framework

NIPP

National Industrial Participation Programme

NUMSA

National Union of Metalworkers of South Africa

OEM

original equipment manufacturers

PMI

Purchasing Managers Index

PPPFA

Preferential Procurement Policy
Framework Act

REER

Real Effective Exchange Rate

SABA

Southern African Bio
energy

Association

SACTWU

South African Clothing and Textile Workers Union

SADC

Southern African Development Community

SAFVCA

South African Fruit and Vegetable Canning Association

SALGA

South African Local Government Association

SAPIA

South African Petroleum Industry Association

SARB

South African Reserve Bank

SARS

South African Revenue Service

SETA

Sector Education and
Training Authority

SMME

Small, Medium and Micro Enterprises

SOE

State
-
owned Enterprises

SQAM

Standards, Quality Assurance, Accreditation and Metrology

WTO

World Trade Organisation


Committee Report on IPAP2.
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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 equ
itable

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