Posted: March 30, 2010
Minister Rob Davies’ Address at the National Union of Metal Workers of South Africa (NUMSA) National Bargaining Conference
Members of the National Union of Metal Workers of South Africa,
Guests and delegates.
Thank you for extending an invitation to me to address your National Bargaining Conference. I have been asked to speak to issues of the recently launched Industrial Policy Action Plan (IPAP), responses to the IPAP and the relevance of these interventions and issues to the ‘Numsa sectors’.
Let me start by thanking NUMSA for making its submission to the Portfolio Committee’s Public Hearings on the IPAP and in general for the support expressed by NUMSA for the IPAP. Support which, I must add has never been uncritical.
In general terms, support for the new IPAP has come from trade unions, business organisations and industry bodies, civil society organisations, academics and the public at large. There is clearly a broad and sufficient consensus, in and outside of government on the nature and causes of the problems we face, including with respect to the de-industrialisation of the economy and the urgent need for structural change. There also appears to be broad agreement on the need to utilise a range and mix of industrial policy instruments outlined in the IPAP and the need to further develop and strengthen a ‘toolbox’ of instruments which can be used flexibly and creatively in the future, including with respect to a range of sectors. The threat posed by the potential for further deindustrialisation and the great difficulty and complexity involved in reversing the decline that has already taken place, is one which requires not only the greatest possible unity of effort and purpose but also sustained, purposeful and integrated work if we are to succeed.
Despite this agreement and notwithstanding differences on tactical detail in the IPAP, there remains a powerful lobby, led by sections of the liberal media and supported in some instances by organisations and companies with narrow and vested interests, which supports and vocalises a neo-liberal and de-regulatory set of solutions for the deep structural problems and chronic unemployment which bedevil our economy – even if these views are seldom couched in this terminology. Therefore the struggle to implement a new growth path, with a state led industrial policy action plan as one of its cornerstones, will remain contested terrain. Flowing from this contestation, there are significant policy and implementation hurdles which we cannot take for granted.
Some of these were identified by your union in its presentation to the Portfolio Committee Hearings. They include, in my view the following matters of significance.
When government launched the IPAP, on the back of widespread consultation and debate, we defined it as a ‘living document’ which would be strengthened and modified in an iterative process over the three year MTEF period. At the same time as taking on board all those constructive comments and suggestions which are relevant and feasible to incorporate in the unfolding plan, we have begun the urgent task of implementing the IPAP. The lessons of concrete implementation and practice will be the best guide to modifying and strengthening the IPAP over the 3 year period. In the course of doing so, ongoing consultation and engagement with governments social partners and sector and industry bodies must continue to underpin the process to ensure that as many views as possible are taken into consideration as we build the cooperation and partnerships necessary to implement the IPAP. Industrial policy is ultimately about government making and implementing policy choices, in the absence of which, we will continue on the same path – a path which has led to deindustrialisation, chronic unemployment and growing inequality.
In contrast to this approach, the most common argument used against the IPAP suggests that the requirements for extensive integration and coherence of tasks and responsibilities across departments, agencies and SOE’s, lie beyond the capacity of government, and implementation should be put out to some future date. Of course there is no magic wand to deal with the weaknesses of capacity that may exist in the state nor for the complex policy coherence and integrated action that is required. There is unquestionably a need to continue to build policy coherence and integration with respect to the IPAP because many of its core actions fall across different departments or under departments and agencies other than the dti. This is precisely why, apart from its adoption by the National Cabinet, the IPAP is a plan generated by the Economic Cluster of Ministers and not the dti in isolation. This is precisely the reason why the IPAP sets out very clearly which Department, agency and SOE is responsible for
carrying forward each action plan and intervention, as well as identifying the supporting agencies..
Furthermore, a careful process of monitoring, evaluation and modification must be carried out in such a way that it does not place the burden of responsibility exclusively at the doorstep of one department, but recognises the co-responsibilities across departments and agencies and makes all concerned, in and outside the state, responsible. It is important that multiple accountability is built into the process, including by Portfolio Committees other than trade and industry. The Economic Cluster of Ministers is required to report back to Cabinet and the Portfolio Committee in six months time. In addition, I welcome the proposal made by COSATU at the IPAP Public Hearings, to initiate a discussion at NEDLAC aimed at reaching agreement to put in place additional monitoring and evaluation processes within NEDLAC and outside of the formal structures of government.
Secondly, our critics have suggested that the IPAP is a wish list of objectives, some of which were contained in the previous IPAP and on which there has been slow progress. In response and without suggesting that there are no difficult problems that lie ahead, I would suggest that the devil is in the detail, but so are the solutions. Each cross-cutting or transversal intervention and each sector strategy has been placed in a framework which outlines the economic rationale, the constraints and opportunities and the key actions required, with the timelines for each. Clearly a great deal of hard work to ‘tie down’ all the actions has to be carried out – there is no alternative course of action. This applies equally to the transversal interventions and the sector strategies for which, given the heterogeneity of each sector, there is no one size fits all formula of actions. There is also a need to debunk the myth that other countries have carried out successful industrial strategies on the back of highly efficient public service capacities or that you can first build the capacity and at some distant point in the future, when someone decides that you have sufficient capacity, that the time is then right to initiate a comprehensive industrial policy.
Having said this, we all agree, sometimes for different reasons, that progress has been too slow in the past, including with respect to the transversal issues such as procurement, which has been on the table for some time. Clearly we cannot achieve everything overnight, but I do believe that Government must approach the IPAP according to a set of priorities which can be implemented in ‘bite size chunks’. Our over-arching priority is clear – the retention of decent jobs and the re-building of our industrial base to create new decent jobs. This is not an ‘add on’ – it is our point of departure. For example in the Automotives, Components and Medium and Heavy Commercial Vehicles sector, we estimate that the industry employs 131 000 people and the retail segment employs a further 200 000 persons. The IPAP sectors jobs creation estimates, indicate that a further 160 000 decent jobs can be created over a ten year period in the sector. This is closely followed by the Metal Fabrication, Capital Equipment and Transport Equipment Sector where we estimate we can create 145 000 jobs over the same period. This is why together with the Clothing, Textiles and Leather Sector, the Auto sector receives the bulk of the R1.2 billion per year over the MTEF 3 year period. Our toolbox of sector interventions which include tariff measures, capital and technology upgrading, incentives and skills development measures, will be used in the case of the auto sector, to build on the considerable success of the recent past and strengthen in practice the case for well designed, carefully implemented, state-led industrial policy interventions in labour intensive, and value add, manufacturing sectors.
Some critics, who ironically do not support much else in the IPAP, argue that there is insufficient budget support for the industrial policy. Apart from the fact that budgets balance competing demands in society and must balance social and economic imperatives, there appears to be no recognition that there are funds allocated to industrial incentives over and above the sector specific allocations or the off budget support which the IPAP seeks to leverage. Yes of course in the future we will press for a greater slice of the budget, but as we speak there is a sufficient allocation to make a significant contribution to industrial development.
The transversal issues which seek to leverage additional funds and generate momentum are critical to industrial policy and especially for the key manufacturing sectors. The first of these and a logical starting point for a ‘bite sized chunks’ approach is the urgent and critical need to secure concessional industrial finance for industrial development. The IPAP spells out the fact that the cost of our industrial financing is the highest amongst our trading partners, in addition to other barriers such as very high risk aversion from commercial banks and development finance institutions. The provision of concessional industrial finance with the obvious conditionalities that must accompany this, is a significant barrier across sectors. Experience in other parts of the world demonstrates unequivocally that this provision will unlock growth in existing and new sectors by releasing investment capital which hitherto in South Africa, has been prohibitively costly and deployed insignificantly. First amongst the conditionality’s to access the concessional industrial financing, is that it must be deployed for the expansion of existing capacity and for the development of new production capacity in labour intensive, value add manufacturing sectors. It would clearly be absurd to release funding for speculative activities outside of the productive sectors of the economy and there is no intention to do so.
The process of working out the best model for industrial financing and reaching agreement on the detail with the departments responsible for this function, namely the Economic Development Department and National Treasury, is well under-way. This will include a review of the funding model of the IDC and the best way to secure long term sources of such funding. This is a critical pillar of the IPAP – without concessional industrial financing, our task will be made very difficult. We must secure progress on this matter.
Secondly, there is a pressing need to secure progress on another transversal instrument, namely the leveraging of public procurement for the purposes of supporting existing and new producers of manufactured and tradable goods in our economy. As I have said, it must be recognised that progress on this issue, first raised in IPAP 1, has been slow, but we are committed to reaching agreement with other departments on this matter in the shortest possible time.
The required amendments to tender legislation and regulation cannot be seen, as some appear to be suggesting, as an open invitation to high pricing by South African companies. The ‘sanction’ of accepting a bid from an overseas supplier for reasons of pricing and quality has to remain in place in the ‘matching’ proposals. ‘Point matching’ by domestic producers allows for the next highest scoring domestic supplier to lower its price to the point that it would have scored sufficient points to win a tender, where the highest point scorer is a foreign bid and where all other criteria have been met. What should apply if a winning foreign fleet supplier would be required, as per the tender specification, is to sequentially increase local procurement and supplier development. This approach should also exclude ‘import fronting’ a phenomenon in which BEE companies win tenders, in the name of BEE even when the goods and services they supply are imported and therefore inevitably constitute a threat to local production capacity. The ever present danger of corruption in tender processes will be present – as it is now. But the obvious point to make is that tight amended legislation and regulations and strong oversight are the only guarantors to preventing corruption. By not utilising the instrument of procurement to support domestic production capacity is no guarantee against corruption at all.
These two transversal policy instruments, industrial financing and the leveraging of procurement are not only critical to the IPAP they also require policy coherence and new regulations and legislation to secure alignment, proper planning and unity of purpose across all the departments, SOE’s and tiers of government that are involved in state procurement. Secondly, the two instruments must work in alignment – if industrial finance is not available for the expansion of production in key sectors, then the procurement leveraging instrument will be weakened.
A good illustration of this problem is by way of two real life examples. The first is the procurement by a large South African metro of new busses for the BRT system. The busses were supplied by a Brazilian company which benefitted from concessional financing supplied by the state owned Brazilian Development Bank. No conditionality’s or offset requirement, to the best of our knowledge, was built into the arrangement. This takes place against a background of the fact that the capacity which existed in South Africa to manufacture busses has been allowed to deteriorate. The lessons are clear – busses amongst a significant number of other procurement items, must be designated as fleet procurement. Careful planning must allow a lead time in which potential South African producers are provided with an opportunity to scale up capacity to compete. Alternatively winning companies from abroad must be required, by at least the second stage of tender supply, to procure components from South Africa and to build production capacity here.
A second example demonstrates that this strategy is far from impossible. The submission by the Ethekwini Transport Fleet Procurement Programme to the Public Hearings on IPAP is reason to be optimistic about the powerful potential for utilising procurement to build domestic industrial capacity. By all accounts. Ethekweni has used its transport fleet procurement in the best interests of domestic production and supply capacity, without compromising on price, quality or other policy objectives. Over 70 percent of their procurement has been from South African suppliers in carefully managed procurement processes. It could serve as a useful case study on how a carefully designed and calibrated procurement process – in this instance for vehicles – can be used to maximum effect to leverage local production and strengthen domestic supply chains.
We are confident that this is not wishful thinking. In addition and importantly, there are two other transversal issues which should underpin the deployment of concessional industrial financing and strategic procurement. These are the strengthening of our developmental trade policies and competition policy. Industrial trade and competition policy should be complementary mutually reinforcing instruments where much has been achieved but where there is room for considerable improvement. For example, we must fight to ensure that tariffs on intermediate inputs into manufacturing are lowered, especially and most importantly in the IPAP sectors where there is significant opportunity for job creation and import replacement. This must go hand in hand with measures against smuggling and under-invoicing as well as strengthening our ability to use non tariff measures such as better control and implementation of standards which protects our productive capacity from low quality imports, and ensures that South African companies adopt and meet the quality standards necessary to compete in global markets.
With respect to competition, we must stress that there are 3 main areas of activity which are especially problematic. These are for;
The pricing of intermediate goods where monopolies exist – carbon and stainless steel, tinplate, chemical polymers, fertilisers and aluminium. These are examples of where excessive pricing is hurting our capacity to grow production sectors.
For processed goods and other products purchased largely by working families and poor households. These include bread, flour, mealie meal and milk. Here there is conduct to keep new entrants out, which negatively impacts on output and employment.
And the cost effectiveness of the public infrastructure programme. Everything must be done to ensure that the Competition Commission’s focus is on exercising both existing and recently established legislative powers on these areas.
Finally, we have divided our sectors into 3 clusters in order to better understand the priorities for each and the urgent bite sized actions which are necessary to support growth. With respect to the ‘NUMSA sectors’ – the metal fabrication, capital and transport equipment sector, falls into a cluster defined as new areas of focus. We have lost ground in the sector where there is a deteriorating trade balance. There are important opportunities including leveraging the public sector infrastructure programme as previously indicated, and export opportunities in relation to infrastructure and mining turnkey projects especially in the rest of Africa and Latin America. Apart from the procurement leveraging initiative, we have identified a Competitive Financing Programme, a National Tooling Initiative and a National Foundry Technology Network, amongst others, as central to the development of the sector.
The Automotive components and medium and heavy commercial vehicles sector falls into a Cluster 2 of sectors which require a state led programme to scale up production and capacity. We have identified 7 major interventions to do this, including a study, report and business plan to resurrect the Medium and Heavy Commercial Vehicle segment of the sector.
Our cluster 3 category, which also includes ‘Numsa sectors’ is categorised as sectors with the potential for long term growth including nuclear, advanced materials and aerospace. Here the procurement lever is very important as there are substantial fleet
procurement opportunities. This will require amending the NIPP and the CSDP, identifying the fleet procurement and localisation opportunities and locking in local procurement.
Comrade delegates I have attempted a brief outline of some of the principle issues and challenges which confront us going forward. There are many other and important issues which we must examine. These include how we further up scale IPAP and what is the toolbox of additional instruments that can be deployed to meet the challenges; how do we better promote technology transfer and advancement and promotion of domestic innovation, and how to address the cost and efficiency issues with regard to freight and port logistics.
There will be no easy victories going forward but I remain confident that we are on the right track. Industrial policy is about making informed and strategic choices for state led industrial development and growth. If we don’t make these hard choices we will simply continue on the same path – a path which is unsustainable and structurally unsound. Concerted industrial policies are required to alter our growth path and shape industrialisation for a more rapid ‘catch-up’ which promotes inclusion and employment. We must do this with a wide lens which requires coordination with other economic policies, policy cohesion and integration of functions and implementation programmes.
I look forward to an ongoing and critical engagement with NUMSA on the broad perspectives and direction of industrial policy in general and the IPAP in particular. Without the support of NUMSA in particular, COSATU and labour in general, this complex and strenuous task will be impossible. I thank you.