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THE NATIONAL INDUSTRIAL POLICY FRAMEWORK AND THE INDUSTRIAL POLICY ACTION PLAN Trade and Industry Portfolio C

THE NATIONAL INDUSTRIAL POLICY FRAMEWORK AND THE INDUSTRIAL POLICY ACTION PLAN Trade and Industry Portfolio Committee 5 September 2007. South Africa’s economic performance.

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THE NATIONAL INDUSTRIAL POLICY FRAMEWORK AND THE INDUSTRIAL POLICY ACTION PLAN Trade and Industry Portfolio C

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  1. THE NATIONAL INDUSTRIAL POLICY FRAMEWORK AND THE INDUSTRIAL POLICY ACTION PLANTrade and Industry Portfolio Committee 5 September 2007

  2. South Africa’s economic performance • South Africa has achieved stable economic growth since 1994, with an acceleration to 5 per cent in 2005 and 2006 • We have a relatively diversified and complex industrial base that needs ongoing consolidation and renewal • Three of the four manufacturing and tradable services sectors which government has actively supported since 1994 have become leading sectors • Automotives (MIDP) • Resource-processing industries, e.g. steel, chemicals, aluminium (37E and SIP tax allowances, Kumba restructuring) • Tourism (e.g. South Africa Tourism) • Notwithstanding these important industrial policy successes, the manufacturing and tradable services sectors have not reached their full level of development • There is also unexplored high-value potential in agriculture and mining

  3. SA’s industrialisation challenge: manufacturing Percentage employment shares, 1970-2006 Tradables: Agriculture, Mining, Manufacturing Public non-tradables: Electricity / Water, Government Private non-tradables: Construction, Trade / Catering / Accommodation, Transport / Communication, Finance Source: Quantec RSA Standardised Industry Database

  4. South Africa’s industrialisation challenge • South Africa’s key industrialisation challenge is to grow and diversify manufacturing and tradable services • South Africa’s industrialisation process faces a number of constraints • Level and volatility of the exchange rate • Market size and logistics costs • Cost and reliability of infrastructure (esp. freight / commuter transport) • Monopolistic pricing of key inputs • Skills development and training • Intense global competition • Low investment in manufacturing, which has resulted in poor capital productivity and outdated machinery and equipment • Inadequate state support for investment, upgrading, innovation and technology • This has resulted in low manufacturing profitability which in turn lead to low investment, low output, and poor export and employment performance particularly in low-and-medium skill industries

  5. National Industrial Policy Framework: Vision • Diversification beyond traditional reliance on minerals and mineral-processing  increased value-added per capita • Long term intensification of South Africa’s industrialisation and movement towards a knowledge economy • More labour-absorbing industrialisation path • Broader-based growth  greater participation of historically excluded people and marginalised regions • Support economic development and integration on the African continent

  6. The need for Industrial Policy • Historical evidence is that rapid industrialisation and diversification does not occur automatically. Developing countries that have industrialised fastest are the one’s that have have implemented robust industrial policies • Rather than restricting their development path to their comparative natural-resource advantage, they have intervened selectively to build competitive advantages in a range of industries • They have done this through active industrial policies which link state support to economic performance • This was integrated with other key policies such as macroeconomic, skills and technology policies • Therefore, both international evidence and our own experience indicates that industrial development does not happen but requires purposive interventions • In South Africa three domains of industrialisation have not occurred automatically

  7. Instruments of industrial policy Three domains of industrialisation have not emerged automatically

  8. Principles • Ongoing self-discovery processes with the private sector will be strengthened to identify opportunities and the binding growth and employment constraints to their achievement • Fewer high impact sectoral Key Action Plans (KAPs) with stronger conditionality and appropriate levels of support • Drawing appropriately from three domains • New as opposed to existing activities • Stronger reciprocity, monitoring, enforcement • Linkages with other sectors • Specified period with sunset clause • Stronger systems for the design, management, monitoring and evaluation of industrial financing. • Minimum effective scale  structural change

  9. Industrial Policy Approach • Government will always have to engage across substantial parts of manufacturing, services and primary sectors involving championship and coordination across multiple departments and actors • Government will from time-to-time single out sectors for particular focus, based on: substantial growth and employment potential; diversification and growth of exports; substantive research and self-discovery processes • This requires active use of appropriate policy instruments to upscale industries to their full potential, particularly: • Supporting investment to update ageing machinery and equipment stock through appropriate targeting and scale • Industrial upgrading to deepen manufacturing capabilities • Support for industry and cluster specific infrastructure • Addressing monopoly pricing

  10. Industrial Policy Action Plan (IPAP) • The Industrial Policy Action Plan • Reflects work which has been undertaken by DTI and other departments and is ready for implementation • Multi-year rolling programme that will be built upon going forward • Further work around a range of sectors will come to fruition at differing stages • Basis upon which government makes decisions on allocation of resources

  11. Overview: IPAP actions for immediate implementation • Sectoral actions • Fast-track implementation of four lead sectors which have emerged from research and intensive interactions with stakeholders • Maintain momentum on ASGI-SA sector priorities • Sectors for which further strategy work needs to be developed • Cross-cutting actions • New areas of emphasis: • Industrial Upgrading Programme • Industrial financing • Reducing input costs through competition policy and trade policy (selected import duties) • A range of industrial policy related cross-cutting imperatives are being implemented as set out in Government’s POA • Improvements in government organisation and capacity

  12. Lead sectors for fast-tracking Capital/Transport equipment and Metals • Major opportunity to stimulate manufacturing through reducing import leakage of the public Capex programme and capitalising on the current mining and mineral-processing boom • Platform to position these sectors as major future exporters onto the rest of the continent and beyond Automotives and Components • SA’s leading manufacturing sector, generating strong backward linkages from other sectors, particularly metals, leather, textiles and plastics • Major opportunity to double current vehicle production to 1.2 million units by 2020 with a corresponding deepening of local content Chemicals, Plastic fabrication and Pharmaceuticals • Major opportunity to increase local beneficiation of polymers, particularly for automotive and packaging applications and leverage state procurement for local production of pharmaceuticals Forestry, Pulp and paper, and Furniture • The sector has the potential to bring jobs and income to poor rural communities • Increased plantations in EC and KZN in the next 10 years will contribute to the provinces’ growth and employment and stimulate processing activities, such as sawmilling and furniture

  13. Lead sectors: Capital / transport equipment and downstream metals • Status: SA capital goods, metal fabrication and transport equipment sectors accounted for 18% of manufacturing jobs – employing 216,263 (2005) and 2% of GDP. • Opportunity: Major opportunity to stimulate manufacturing sectors through reducing the import leakage of the public Capex programme from 40% to 30% and capitalising on the current mining and mineral-processing boom. The resuscitation of these sectors will form a platform to position these sectors as major future exporters onto the rest of the continent and beyond. • Constraints/challenges: low historic levels of expenditure in public infrastructure, co-ordination between Capex demand and domestic manufacturing supply capabilities, uncompetitive pricing of raw material inputs, lower than optimal mining investment, skills development, ageing foundry and tooling industries • Key Departments: DTI, DPE, DOT, DST, DOL, DME

  14. Lead sectors: Capital / transport equipment and downstream metals • Measures to stimulate more competitive input pricing: – Finalise the Competition Policy and Law Review to strengthen the Act – December 2007 – Develop a SOE Pricing and Procurement Framework – December 2007 – Finalise measures on scrap metals – October 2007 – Review import duties on upstream aluminium products to reduce the costs of inputs into downstream activities – March 2008 • Finalise Supplier Development Plans to reduce import leakage of Capex programme (Transnet and Eskom) from 40% to 30% – February 2008 • Finalise supplier development strategy with respect to public transport strategy, especially locomotives for commuter transport – December 2007 • National Foundry Technology Network – March 2008 • National Tooling Initiative – ongoing

  15. Lead sectors: Automotives and components • Status: SA’s leading manufacturing sector, contributing 8% to GDP. • Domestic vehicle production grew from 388,442 units in 1995 to 615,000 in 2006. New vehicle exports grew from 15,764 units in 1995 to 179,869 in 2006. • Employment (OEMs, components and retail) grew from 277,400 in 1995 to 306,500 in 2006. • Automotives generates strong backward linkages from other sectors, particularly metals, leather, textiles and plastics. • Opportunity: double vehicle production to 1.2 million units by 2020 with corresponding deepening of local content • Constraints/challenges: establish long-term investment environment, insufficient component manufacturing capacity, slow transformation • Key Departments: DTI, NT, DST, DOL

  16. Lead sectors: Automotives and components • Announce broad direction of the automotive programme going forward to create investor certainty – September 2007 • Implement three-year supplier development programme, aimed at raising local content by improving manufacturing processes along the value chain – September 2007 • Finalise the MIDP review and development of a replacement scheme (with comparable architecture and levels of support) to ensure the industry’s long-term sustainability – December 2007 • Formulate an empowerment plan to fast-track transformation in the sector – March 2008

  17. Lead sectors: Chemicals, plastic fabrication and pharmaceuticals • Status: Chemicals comprises a well-developed capital-intensive upstream industry and a more labour-intensive downstream plastics industry. Collectively all three contributed 2.8 percent to GDP in 2006. Basic and Other Chemicals employed 64,285 people and Plastics 39,893. Pharmaceutical industry employs 10,000 people with local production of R9.5bn • Opportunity: leveraging fluoro-chemistry expertise through increased beneficiation of fluorspar, increase local beneficiation of polypropylene for automotives and packaging industries, leverage state procurement for pharmaceuticals local production • Constraints/challenges: Downstream plastic fabrication: uncompetitive pricing of polymer inputs, skills, technical capabilities, and R&D. Upstream projects: risks and coordination problems associated with large capital-intensive projects. Pharmaceuticals: high-levels of import penetration (50% of local market, 90% of inputs into drugs), coordination of supply with state procurement demand, medicine licensing procedures, price administration • Key Departments: DTI, DME, DST, NT, DOL, DOH, Presidency

  18. Lead sectors: Chemicals, plastic fabrication and pharmaceuticals • Review import duties on upstream chemical products to reduce the costs of inputs into downstream activities – March 2008 • Project to increase polypropylene value-added products used in automotives and packaging industries – February 2008 • Initiative to expand the fluoro-chemical industry in SA: – Land/site allocation – Environmental Impact Assessment (commence August 2007) – Bankable feasibility study • Finalise pharmaceutical strategy – March 2008 • interim measure: designate pharmaceuticals as a strategic industry to leverage ARV tender to expand local capabilities

  19. Lead sectors: Forestry, pulp and paper, furniture • Status: The forestry sector contributes R14 billion to GDP (2006) and employs more than 170,000 people. It has the potential to bring jobs and income to poor rural communities • Opportunity: aforestation of 100,000 ha in EC over the next 10 years with potential to contribute R215 million to GDP and job creation of 26,000 at plantation level and 1,700 at primary processing level; 40,000 ha in KZN over the next 10 years with potential to contribute R500 million to GDP and job creation of 15,000 at plantation level and 429 at primary processing level • Constraints/challenges: water licensing processes, technical and financial support for emerging small growers, transport infrastructure, skills, transformation • Key Departments: DWAF, DLA, DTI, Presidency

  20. Lead sectors: Forestry, pulp and paper, furniture • Fast-track issuing of water licenses for producers for aforestation of 100,000 ha in EC 40,000 in KZN – ongoing • Develop a programme for skills transfer and to upgrade the technological equipment for small saw millers – March 2008 • Expansion of furniture industry: – Establishment of additional furniture incubator in EC – March 2008 – Explore potential of furniture sector outside EC and KZN – March 2008

  21. Stabilisation of Clothing and Textiles: capacity and employment • Status: Clothing and textiles are highly labour-intensive industries employing approximately 131,715 people (11% of total manufacturing employment). They contribute around 0.6% to GDP • Challenge: the industry has experienced substantial job losses over the past few years related to increased competition from China in particular, and currency strength. However, it remains a major employer with capabilities that can be restructured for long term sustainability. • Constraints: outdated capital equipment and technology; insufficient skills development; inadequate innovation and product upgrading; high input costs (textiles) • Key Departments: DTI, NT, DOL, DST

  22. Stabilisation of Clothing and Textiles: capacity and employment • Implement measures to recapture and stabilise the domestic market • Country of origin labelling regulations – July 2007 • Monitor implementation of quotas on Chinese imports – December 2008 • Review import duties of key inputs into the sector (certain textiles) – March 2008 • Design a customised industrial upgrading programme for the sector – March 2008 • Fast-track development of more appropriate support mechanism for the industry than the Duty Credit Certificate Scheme – March 2008

  23. Further sector work • Maintain momentum on ASGI-SA Sectors: • BPO&O • Tourism • Biofuels • Other key sectoral projects: • Diamond beneficiation / jewellery • Agro-processing • Film and Television • Crafts • More comprehensive strategies and interventions to be developed, such as: • Mining and mineral beneficiation • Agriculture /Agro-processing • ICT (services and products) • Creative Industries • White goods

  24. Cross-cutting Actions • Industrialisation requires a range of associated and supporting policies. Government’s Programme of Action has already identified a range of comprehensive interventions related to industrial policy in the following areas: • Macroeconomic • Infrastructure • Skills • Technology • IPAP identifies three new areas of emphasis: • Industrial Upgrading Programme • Industrial financing • Reducing input costs through competition policy and trade policy (selected import duties)

  25. Cross-cutting Actions: Industrial Financing • Review of incentives has been completed • A number of schemes have proved successful • SMEDP  R67bn of investment • IDZ’s Coega has secured R30bn of new investments • SIP  R29bn of investment • Critical Infrastructure Fund  R17,5bn of investment • In general incentive administration needs to be strengthened to improve conditionality, monitoring and ensure more targeted focus • IDC financing has successfully assisted with restructuring of a number of industries, through its cumulative financing support of R66bn (1995 – 2006). However the support remains low in proportion of its asset base  need to increase IDC financing to priority sectors

  26. Cross-cutting Actions: Industrial Financing • Incentives • Design an Industrial Upgrading Programme to improve the productivity and competitiveness of manufacturing industries – March 2008 • Fast-track process with National Treasury to finalise improved suite of incentives, including: • Methodologies for incentives • Reintroduction, targeting and upscaling of tax incentives • Revised and more targeted SMEDP • Upscaling of Critical Infrastructure Fund • New sectoral incentives and upscaling of existing incentives will be incorporated in the MTEF budgeting process • Industrial Development Zones • Explore expanding IDZs to additional regions (e.g. Mafikeng) • Finalise governance and financing mechanisms for IDZs • Development financing • Agree modalities with Industrial Development Corporation to align and expand its financing in line with industrial policy priorities

  27. Intra-governmental Coordination and Capacity • Implementation of IPAP requires effective and strengthened intra-governmental coordination • The Minister of Trade and Industry will champion this work through the Economic Cluster • This work will be aligned with the three-year rolling MTSF, POA and MTEF • The Economic Cluster will support the implementation of IPAP through: • Appropriate levels of resourcing • Associated and supportive policies and institutions • Strengthen the strategic capacity of key cluster departments • Presidency/DP to play championship, advocacy and unblocking role to ensure co-ordination and implementation across government

  28. Summary • SA’s major industrial policy challenge: to grow and diversify manufacturing and tradable services • NIPF sets out the industrial policy vision. IPAP articulates the implementation approach and outlines key interventions focussing on: • Four lead sectors for immediate implementation: • Capital/transport equipment and downstream metals • Automotives and components • Chemicals, plastic fabrication and pharmaceuticals • Forestry, pulp and paper, and furniture • Stabilise Clothing and textiles to preserve capabilities and employment • Maintain momentum on ASGI-SA sectors: BPO&O, Tourism and Biofuels • Further strategies and interventions will be developed:Mining/mineral beneficiation, Agriculture /Agro-processing, ICT and Creative Industries • Further sector projects:Diamond beneficiation / jewellery, Agro-processing, Film and Television, Crafts • Key cross-cutting actions: Industrial upgrading, Industrial financing, Reducing input costs

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