Budget Vote Debate, National Assembly By Dr Rob Davies, Minister of Trade and Industry

Honourable Members
Deputy Ministers
Chairperson and members of the Portfolio Committee
Distinguished guests
Ladies and Gentlemen

When the dti presented its budget vote last year, the world economy was in the midst of the worst economic crisis since the Great Depression of the 1930’s. We advised then that what was commonly referred to as a global financial crisis, was fast becoming a deep real economy and jobs crisis. Our concern at the time was not misplaced, and as my colleague the Minister of Economic Development, Ebrahim Patel, reported to this House in his Budget Vote debate a few weeks ago, hundreds of thousands of jobs were lost in our economy during the past year.

One of the major lessons the global recession taught us was that the South African economy, despite the consistent growth it experienced before the recession, was not as resilient to exogenous shocks as a number of other key developing countries. Although we saw signs of recovery during the last two quarters of 2009 with a GDP growth rate of 0.9% in the third quarter and 3.2% by the fourth quarter; the recovery is only just beginning and remains fragile and uneven. Real risks remain for the South African economy in a context where there is still no guarantee against double-dip recession in the world economy.

The main risks to the South African economy can be identified as arising from the structural constraint evident even in the period of growth before the recession of unsustainable growth based on credit extension and consumption without concomitant growth, in production sectors. In such a context, it is imperative that we re-double efforts to address the structural imbalances that continue to constrain our economy from reaching its undoubted potential. Addressing these structural shortcomings demands from us decisive action to place our economy on a new growth path, a path capable of delivering to our people decent work and sustainable livelihoods on a larger scale than hitherto achieved.

the dti has a clear mandate to create an enabling environment for these structural changes to take place. As a department, we must therefore actively engage in the task of structural reform; a task which is multi-faceted in character and requires that we act in concert with the cluster of economic and employment departments in government, and in partnership with both business and organised labour. Bringing about the structural changes necessary is a complex task. It requires policy cohesion, coordination with other economic policies and integration of functions and implementation programmes. The programmes of our department must interface with the range of social and economic development strategies across all spheres of government.

Honourable Members, the extent of the impact of the global economic crisis and its aftermath, on industrial capacity in South Africa, is a matter for concern. The secondary sector declined by 21.8% and 22.1% in the fourth quarter of 2008 and first quarter of 2009 respectively, with the decline in manufacturing being most severe ranging from 9.4% to 21.8% in the fourth quarter. More specifically, export oriented manufacturing industries such as motor vehicles, parts and accessories and durable goods in general, showed the greatest decline, exposing further the structural weaknesses which limit our ability to absorb exogenous shocks.

This crisis also had a massive impact on employment in the primary and secondary sectors where there was a loss of 870 000 jobs year-on-year (Q4:2008 and Q4:2009). The fact that the wholesale and retail trade and manufacturing industries experienced the greatest declines in employment, registering employment losses of 291 000 and 220 000 jobs respectively, serves only to underscore the importance of these sectors as a source of work for our people. As indicated earlier, SA’s recent growth was driven to too great an extent by unsustainable growth in consumption, fuelled by credit extension. Between 1994 and 2008 consumption driven sectors grew by 7.7% annually, compared with the production-driven sectors of the economy which grew by only 2.9% annually. Job creation in the retail sector, underpinned by unsustainable credit extension rather than growth in the production side of the economy, is inherently precarious.

Moreover, even when our average annual growth peaked at 5.1% between 2005 and 2007, unemployment did not fall below 22.8%. This highlights the need for us to make structural changes capable of making a sizeable dent into what is in fact a structural unemployment crisis that is confronting us.

Mr Speaker, in light of the global economic crisis and the danger it presented to the real economy, we were called upon to decisively respond and I believe as a country, we achieved reasonable success through the Framework Response to the International Economic Crisis.

The R2,4 billion “worker layoff training scheme” was established as an alternative to retrenchment, to allow workers who would otherwise have been laid off, to prepare themselves to take up employment opportunities as the recession ebbed. In addition, the IDC set aside R6,2 billion to assist firms distressed as a consequence of the crisis, in key targeted sectors including automotives; metals fabrication, capital and transport equipment; and clothing and textiles. Under the Framework Response, a number of manufacturing incentives were also fast-tracked, whilst the National Credit Act undoubtedly played and will continue to play a role in defending consumers against the worst excesses of risky lending practices, consumers elsewhere in the world were subjected to with attendant disastrous consequences.

However, our fundamental task, as I have been arguing, involves much more than responding to the challenges posed by the cyclical downturn. It requires that we as the dti, as part of government as a whole, impact systematically and significantly placing us on a new growth path, one which creates decent work on a larger scale than before.. As a country, South Africa has no alternative to the course of action we propose. In this regard, we need to recognise that manufacturing and other production driven sectors of the economy are the engines of long-term sustainable growth and job creation in developing countries such as our own. I wish to contend that there is an abundant body of evidence from academic research (and one could cite writers such as Ha Joon Chang or Erik Reinart) to establish the point that there has never been a case anywhere, or at any time in economic history, of an economy setting out on a growth path characterized by increasing, as distinct from diminishing, returns to scale without active policies to nurture and defend nascent infant industries in targeted sectors. Industrial Policy and IPAP2 in particular, will therefore be a critical pillar of government’s strategy for economic growth and the creation of decent work.

Honourable Members, 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 failed to sufficiently reduce systematic unemployment, poverty and inequality.

IPAP2, as it has become known, builds on the National Industrial Policy Framework (NIPF) and the 2007/8 IPAP. It represents a significant step forward in scaling up our efforts to promote long term industrialisation and industrial diversification beyond our current reliance on traditional commodities and non-tradable services. It will contribute to the structural changes needed by expanding production in value-added sectors with high employment and growth multipliers. The Action Plan accordingly places emphasis on more labour absorbing production and services sectors, on increased participation of historically disadvantaged people and regions in our economy and aims to facilitate, in the medium term, South Africa’s contribution to industrial development in the African region. If we succeed, as we must, we will become more competitive in domestic and export markets.

The Industrial Policy Action Plan is a product of the work of the Economic Sectors and Employment Cluster of Ministers and Departments. Industrial policy and the IPAP2 in particular, while a cornerstone of a New Growth Path, forms part of a larger set of inter-related policies and strategies which are being integrated through work led by the Department of Economic Development and Minister Patel. These include:

the need for mutually reinforcing alignment between macro and micro economic polices,
the implementation of policies to raise the levels of production and create decent work in agriculture, mining and construction,
the implementation of the Ten Year Innovation Plan towards a Knowledge Based Economy,
a concerted focus on rural development and skills development,
and the development of energy and water strategies.
Very significantly, the performance agreement I signed with the President on Friday 30 April, also requires us to work with other Ministers in the Clusters to produce a clear, detailed, costed and multi-pronged strategy to reduce youth unemployment. This is a very important priority focus, which Honourable Members can take it, we will be devoting particular attention to as we move forward.

IPAP 2 has been subjected to extensive public hearings by the Portfolio Committee on Trade and Industry, and I want to congratulate the Chairperson and members of the Portfolio Committee for creating an opportunity for engagement and comment by most of the relevant stakeholders. I look forward to engaging with your report in detail in due course, but for now I wish to note that the majority by far have expressed broad support for what we have outlined in IPAP2. Of course, there have been points of criticism. Mostly these have been constructive. As we have said, IPAP is a living document which we intend to amend each year. Certainly we will incorporate all the relevant comments as far as possible.

Perhaps the most persistent comment from those who have doubted that we should set out on this journey is the claim that given the potential complexity of implementation, IPAP2 is a task beyond the capacity of government and this department. This view misses one critical point. IPAP2 is a plan generated by the economic cluster of Ministers and not the dti in isolation. The IPAP2 document in fact, sets out very clearly which department, agency and SOE is responsible for carrying forward each action plan and intervention. The new Monitoring and Evaluation system in government moreover, provides us with an additional mechanism to hold each other accountable for delivery on what we have agreed to do. Certainly, building capacity and strengthening coordination are necessary to advance our objectives, but we need to see this as tasks that will be undertaken as we implement IPAP2, not as something that miraculously has to exist in advance of any implementation.

In this regard, the dti is now firmly in implementation mode. The first quarter in the implementation schedule is now well underway and we have already begun holding regular internal implementation meetings. The performance agreement we have signed with the President also holds relevant Economic Cluster Ministers collectively responsible for implementation of defined output targets that include advancing IPAP implementation.

As Honourable Members know, IPAP 2 has four horizontal or transversal themes around which a number of interventions are built, namely; industrial financing, procurement, competition policy and developmental trade policies. It has thirteen vertical sector strategies clustered into sectors whose potential require new and sustained support; those established sectors which require the scaling up of interventions and those that demonstrate great potential over the medium to longer term. IPAP 2 sets out the economic rationale, the key constraints and opportunities, the key action plans (KAP’s), the lead and supporting departments and agencies and quarterly milestones for all of these interventions across departments, state owned enterprises (SOE’s) and public agencies. It requires greater levels of policy coherence and programme integration across departments and agencies if it is to succeed.

It is premised on the principle that like all policies its true value will be found in the outcomes of practice and therefore on the principle of ‘learning by doing.’ It will be the subject of continuous monitoring and evaluation by government, ongoing oversight and interrogation by the National Assembly and be taken forward and implemented in strengthened consultation, engagement and implementation by government and its social partners, labour and business Mr Speaker, trade policy is a key instrument that must be utilized in a manner that supports our industrial policy objectives. Our new trade policy has been circulated for public comment and the Portfolio Committee on Trade and Industry has held hearings in this regard. The policy document outlines how trade policy and strategy in South Africa can make a contribution to the objectives of upgrading and diversifying the economic base in order to increase the production and export of value added products that generate employment. This policy framework is set out in the context of the development of the overall growth path for South Africa, that seeks to accelerate economic growth and development, and generate decent jobs in the economy.

One of the immediate, but also strategic, challenges facing us is to intensify our efforts to deepen developmental regional integration in Southern Africa as well as extend integration across Africa. We have recently returned from the commemoration of the centenary of the Southern African Customs Union (SACU) in Windhoek, where the Heads of State and Government of the five member countries, committed themselves to meet in a Summit before the end of July. We as South Africa, have long argued, that SACU is at a cross roads. It can move to collectively transform itself from an organisation held together by a common external tariff and revenue sharing formula, into a vehicle for deeper developmental integration. This will require reaching at least some common understanding of the trajectory of regional industrial development, and the direction and content of trade negotiations. If we cannot move in this direction, SACU will find itself driven by circumstances into a looser arrangement more like a Free Trade Area than a Customs Union. The Vision and Mission signed by the Heads of State in Windhoek indicates that all members agree on pursuing the first option. But much more concrete work needs to be done if we are to successfully translate these broad declaratory positions, into concrete programmes.

This is an issue which I would suggest Honourable Members may want to monitor closely as we proceed.

As far as SADC is concerned, we need to acknowledge that the RISDP target of achieving a Customs Union by 2010, has been missed. Our view is that we need for the moment, to focus on the many complex tasks to consolidate the FTA which we launched in 2008 and complement this work with advances in real economy and infrastructure development programmes. Another important priority for us is to broaden African integration through advancing the agreed process to negotiate a Trilateral SADC-EAC-COMESA “grand” FTA. Once established, this would bring into existence an FTA literally from Cape to Cairo with 700 million people.

In addition to pursuing these objectives, we will maintain the momentum of our strong bilateral cooperation agenda in Africa. This means that we will embark on initiatives supporting infrastructure development, trade, investment projects and, where requested, technical assistance for institutional and policy building. In so doing we require and will encourage, stronger involvement and coordination with South African businesses in economic development orientated activities. What I have described are not simply noble intentions or wish lists. The SDI programme for instance, has resulted in significant progress and economic activity across Southern Africa.

Parliament has been requested to ratify the bilateral investment treaty we have concluded with Zimbabwe. By providing enhanced legal protection for South African investors, this treaty will encourage new South African investment into Zimbabwe to underpin the latter’s economic reform and development programme, while ensuring that South African investors benefit from economic opportunities now emerging in Zimbabwe.

Honorable members, the government’s trade strategy has long recognised the importance of the emerging economies of the South. The resilience of these economies both during the recession and during the current tentative return to growth, has brought into sharp relief, the structural changes taking place in the global economy. What has been confirmed during this crisis is the general continued strengthening and importance of newly emerging economies of what is called “The Global South. Strengthening our trade and investment relations with these new poles of economic growth is imperative. What we seek though from countries with whom we enjoy excellent relations, is new economic relationships that will differ in major respects from the traditional relationships of the past. These new relationships, we hope, will be built on the principles of partnership, complementarity, mutual benefit and cooperation. Our intention simply put, is to ensure that the building of such new trading relations enables and allows us, to diversify value-adding production in our economy and to create decent work. We therefore want to identify complementarities in trade and investment relations with key countries of the Global South (Brazil, India, and China among them) to support national industrial development and consolidate trade and investment relations.

Strategies are meaningless if not accompanied by an implementation plan. In this regard, our implementation efforts are beginning to bear fruit. SACU signed a preferential trade agreement with MERCOSUR last year, the first with another developing region. We hope that Parliament will soon ratify this agreement.

The SACU / India PTA negotiations are continuing and we are confident that these will be concluded in the near future.

Since the dawn of democracy, China has become our fastest growing trading partner. This is indicative of the strong and constructive relationship we have enjoyed since democracy. We are therefore optimistic that our engagement to develop a Partnership for Growth and Development to promote value added South African exports to China, and increase inward investment in projects for beneficiation, will yield positive results.

At the same time, we seek to advance relations with our long standing trading partners in the developed world. The Trade Development and Cooperation Agreement (TDCA) with the EU is ten years into implementation, and has contributed positively to bilateral economic relations. South Africa’s trade relations with the USA are shaped by the non-reciprocal trade benefits offered under the Africa Growth and Opportunity Act (AGOA). In this context, we will seek to extend and deepen the benefits of AGOA and work to ensure that the engagement with the US supports regional integration in Southern Africa. In addition, SACU concluded a cooperative trade facilitation arrangement in 2009, the Trade, Investment Development and Cooperation Agreement (TIDCA) that will build on the benefits of AGOA.

On the multi-lateral front, the prospects in the near future for an outcome of the WTO Doha Round of negotiations that meets the developmental objectives outlined in the 2001 Doha Mandate, appears increasingly remote. Given that elections are taking place in many of the key member countries this year, we see little chance that the Round will be concluded in 2010. In the meantime, we will continue to work to strengthen the developing country alliances that have effectively changed the negotiating dynamic in the World Trade Organisation. This dynamic has placed developing countries, for the first time in the history of the global trade system, at the centre of the negotiations. We will also, in the course of this year, pay greater attention to the trade aspects of the ongoing negotiations on climate change.

Honourable Members, exports and foreign direct investment are an important contributor to manufacturing and job creation in South Africa. We noted earlier the overall impact of the global economic crisis on manufacturing output in South Africa. Our response to this crisis is not only directed at current challenges, but also continues to seek out what’s best for long term growth in sustainable manufacturing and exports, particularly in high labour absorbing and value adding sectors.

Exports must support our industrial policy approach in several ways. Firstly, we must ensure that exports to established markets stabilize. Secondly, that exports to Asia, Africa, South America and the Middle East increase. Thirdly, as we continually learn and adapt to changing circumstances, we will in the short-term pay particular attention to exporting to countries such as Brazil, Russia, Zimbabwe, the DRC, India and China, value-added products in support of our product diversification strategy.

Similarly, promoting investment, domestic and foreign, that supports our IPAP2 priorities, will be prioritised. Targeted potential sources of FDI will include China, India, Russia, Brazil, Japan, the USA and Middle East. We anticipate that the work programme will translate over the next three years into an investment pipeline of R115 billion of projects. In turn, these projects will be serviced through a one stop facilitation centre, offering a single integrated project team approach.

The FIFA World Cup presents a valuable opportunity to interact with potential new investors. The department has teamed up with Fortune 500 Time Warner Incorporated, who will host the Global Forum in Cape Town from the 26th to the 28th of June 2010. Essentially the Global Forum convenes global business leaders and puts the spotlight on the region in which it is held. This year the Global Forum will be enhanced by the inclusion of the TIME 100 edition of the world’s most influential people. This event will not only make use of the World Cup to attract influential participants, but will also serve as a platform to showcase the successful preparations made by South Africa for the World Cup. Building on this opportunity, the dti will be actively engaging with business decisions-makers visiting the 2010 World Cup, to expose them to the opportunities that the country offers.

Mr Speaker, during the past year, there has been several interventions by the Competition authorities in a range of sectors in our economy. Indeed, their bite is now definitely worse than their bark! The era of unfettered price-fixing and other anti-competitive behaviour, is over. This is but one example of the efforts of the dti during the last ten years especially, which has resulted in a changed regulatory landscape in the real economy. Responsibility for the competition authorities has now passed to EDD, but the dti will continue to work closely with them and I have no doubt that under EDD they will move from strength to strength.

Going forward, we will now continually learn from implementation and will focus on those areas of regulation that require amendments to better support enterprise and industrial development. Such initiatives in this budget year include completing outstanding matters related to regulations such as in the case of the Companies Act and establishing the Companies Commission as well as the Consumer Commission.

The sustainable development and growth of Small, Micro and Medium Enterprises (SMMEs) remains a key priority for government. The support provided by the dti in this area includes entrepreneurship development, financial and non-financial support programmes. We are determined to better support Cooperatives and will table a number of new proposals, based on highly productive engagements with Nedlac partners, in the near future.

Honourable Members, in the last financial year, close to 200 000 people enquired about one or other of Seda’s services. We were able to provide direct services to approximately 20 000 clients. The gap between those seeking assistance and those assisted is large and the reasons are varied. But I do believe that the interest in Seda’s services is indicative of the changes we have brought about, and the maturing of our services in this critical area.

As more and more of previously marginalised citizens enter the formal economy, the ten product procurement policy framework will, through ensuring government procurement, greatly increase the size and accessibility of the market for products by small business. We intend to pursue the rollout of the ten product procurement framework during this financial year.

To further bolster support for SMME’s, the Small Enterprise Development Agency (Seda), based on the one stop shop framework, has been engaging with relevant provincial and municipal structures to discuss co-location as well as co-funding the delivery of some of the products and services within Seda branches. Certainly, more consultation is needed with provincial structures that provide products and support services to SMME’s. However the foundation has been laid to dramatically change the way SMME’s will be assisted in future. SMME’s will be able to utilize the SMME payment hot line that was successfully launched in September 2009 to provide feedback on whether these interventions have had a positive impact on SMME’s. Specifically in respect of the hot-line, total calls answered amounted to approximately 20 000 and the value of payments facilitated was R31 million rand.

The continued monitoring of the business environment and undertaking regulatory reviews to ensure sustainable SMME development will also be a key focus of the department’s initiatives. The National Small Business Advisory Council will assist the department in this regard. the dti will also continue to work with stakeholders to ensure co-ordination of SMME’s support services. Addressing the challenges faced by black and women entrepreneurs, is another key area of focus for the dti in broadening economic inclusion and promoting transformation in the economy. In this regard, the department will ensure the integration and alignment of the Broad Based Black Economic Empowerment (B-BBEE) policy with the industrial policy framework.

B-BBEE needs to be implemented in an effective and sustainable manner in order to unlock meaningful participation in the South African economy by the majority of its citizens. The alignment of B-BBEE to other policies geared towards the same objective is thus important for economic empowerment. As part of this process, the draft Preferential Procurement Regulations has been published in partnership with National Treasury. The regulations seek to align the Preferential Procurement Policy Framework Act (PPPFA) with the B-BBEE Act. The department will further strengthen the B-BBEE legislation by creating a punitive dispensation to prevent circumvention of B-BBEE while on the other hand, developing incentives to promote compliance with B-BBEE policy.

The launch of the B-BBEE Advisory Council, on 3 December 2009, signifies an important milestone in fulfilling the transformation agenda. One of the key functions of the Council will be to monitor the implementation of B-BBEE by all organs of state, public entities, government departments, sector charter councils, and the general public at large. Other tasks of the Advisory Council include;

Policy refinement and amendment of legislation to address identified gaps
Finalising the alignment of PPPFA to B-BBEE Codes of Good Practice
Increasing BEE verification capacity and refinement of the accreditation process and,
Supporting the work programme of the BEE Advisory Council to advise on key interventions and monitor implementation of the policy
Honourable members, we will increasingly integrate gender equity measures into our
programmes. In this regard, a Strategy on Gender and Women Economic Empowerment will soon be finalised. The Strategy will highlight integrated solutions for women in various areas including directly tackling the barriers hindering their participation in the economy. It remains clear that women continue to struggle with regards to starting, growing and sustaining their businesses. In addition, the South African Women Entrepreneurs Network (SAWEN) will be strengthened as an institution that will advance women economic empowerment.

With regard to reducing youth unemployment, the dti will work with the National Youth
Development Agency and submit the Youth Enterprise Development strategy to Cabinet for approval this financial year.

Finally, in order to successfully execute, monitor and evaluate the work that has been outlined, the dti will need to have the requisite human resource capacity and processes. Key vacancies have already been filled. The recruitment and selection processes have been sharpened through competency assessment measures. Capacity will further be enhanced through implementation of the human resources development (HRD) strategy, retention strategy and the revised performance management system. The department will also enhance its financial management systems and ICT infrastructure as part of its goal of improving service delivery. A new service delivery plan has been developed and we will revamp the website and related services.

the dti will continue to play a fundamental role in the coordination of the Economic Sectors and Employment Clusters to contribute towards employment creation and growth. This will include the facilitation of implementation of programmes that are linked to IPAP2 which do not fall within the mandate of the dti. The department will also continue its engagement and partnerships with government, business and labour stakeholders through NEDLAC recognising that they have an important role to play in it fulfilling its mandate.

In closing, I wish to thank Deputy Minister MaNtuli and Deputy Minister Tobias-Pokolo, the DG, DDG’s, all officials, the Ministry office team, the board chairs and members of boards, CEOs and the Honourable Members of the portfolio committee.
I commend this budget to the House.

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