IPAP2 Implementation and Strategic Direction Portfolio Committee – Trade and Industry

1. IPAP2 Implementation and Strategic Direction Portfolio Committee – Trade and Industry 8 February 2012 1

2. Key Achievements - Transversal Significant progress and achievements since the launch of IPAP has created a number of strategic platforms to facilitate industrial development. These include: Designations DTI developed sector designation methodology and compiled necessary research that laid the basis for the first phase of designations for a range of sectors. Development of guidelines and instructions that give effect to the amended PPPFA regulations. South African Technical Standard (SATS) that specifies requirements and procedures to verify the local content of products in designated sectors and subsectors. 2

3. Key Achievements - Transversal • Industrial Financing • Funding by IDC for IPAP and NGP sectors: • R102bn over the next five years for investment in NGP and IPAP sectors, dependant on economic conditions • R10bn Job Creation Fund at Prime less 3% over five years • R25bn earmarked towards Green Economy • R500m energy efficiency fund • R7.7bn Agricultural and Forestry value chains • R6.1bn made available to support distressed companies during the global financial crisis • Industrial Financing 12(i) Tax Incentive • Supported large manufacturing investments worth R7bn • Long term funding • Industrial financing model for plastics and buses sectors developed. • To be broadened to support key IPAP sectors with conditionalities for financing and other government policy instruments such as designations.

4. Key achievements - Transversal Competition Policy Settlements reached with SASOL and grain trading and storage companies for anti-competitive behaviour. Investigations completed - fertilizer, maize and wheat milling, bread, milk sub-sectors, steel, polymers, construction bid-rigging, forestry, cement, fuel and various food products. Cases referred and in the Tribunal hearing process include: polymer chemicals, reinforcing steel, poultry, mealie meal and wheat flour. Developmental trade policies ITAC processed numerous applications for increases, rebates and reductions of duties. ITAC has commenced process to ensure tariff support conditional on reciprocal commitment ‘s to gauge performance of beneficiaries in line with IPAP priorities. SABS and SANAS developed a range of enabling standards and accreditation programs; increased testing capacity for various industries / products . 4

5. Key achievements - Transversal. Customs fraud and illegal imports. Coordinated SARS programmes scaled up: 112 raids over last year - 42 in clothing in 3 provinces with 260 tonnes of confiscations . Over 3 years R1 billion confiscated - 2 tonnes of hard drives. Modernisation Programme - real time electronic system, includes reference pricing and risk engine for search and seizure. Supported by technical upgrading, co-ordination of intelligence and tripling of staff to 3 000 at ports of entry. 5

6. Key Achievements - Sectors Automotives Automotive Investment Scheme (AIS) instrumental in securing: Approximately R15bn in investment commitments from assemblers and component suppliers with recent commitment of $100 million in truck and car assembly plant by FAW. Programme supported a conservative estimate of 15,014 jobs since inception. Large increases in levels of volume and localisation. Clothing & Textiles, Leather and Footwear The Clothing and Textiles Sector incentive programmes continue to stabilise the steep decline recorded in the sector. PI R624m approved, R310m disbursed for 208 companies. CTCIP R112m approved, R14.4m disbursed for 106 companies. Supported at least 48,384 direct and indirect jobs. Upward employment trends in the footwear and leather sector 6

7. Key achievements - Sectors • Business Process Services • 2011/12 financial year • R3.4 bn investments leveraged and 1,373 jobs created • Approved projects to create approximately 11,000 jobs over 3 years • 3,400 young trainees trained under the Monyetla II Programme – 70% placed by BPO consortium. • Launch first Amazon African customer service centre in Cape Town in August to service global English and German speaking clients. • Green Industries • Energy Efficiency Building Regulations published and effective from November 2011. • Solar and Wind energy strategy completed, public comments elicited. • The REIPP issued by DOE. First RFP published in August 2011. Momentum for local component manufacture requires firming up. • Industrial Energy Efficiency Programme launched in November 2011. • New regulation on mandatory blending of biofuels published for comment in government gazette.

8. Key recent progress. Since the last report to the PPC key developments which build platform for deepening IPAP interventions: PPPFA amended Regulations came into effect on the 7 December 2011. Minister has designated the following industries: Buses Rolling Stock Power pylons Canned Vegetables Clothing Textiles, Leather and Footwear Set Top Boxes. High level co-commitments from business and labour secured in EDD-led Procurement Accord. Engagements by DTI with National Treasury on additional manufacturing support led to the announcement by Minister of Finance in 2011 MTBS of Manufacturing Competitiveness Upgrading Programme (MCEP) 8

9. Strategic Direction IPAP Qualitative progress with transversal interventions – procurement, finance, trade and completions policy and Significant achievements in the Automotives Sector and the stabilisation of the Clothing, Textiles, Leather and Footwear Sector Have created a platform to scale up the use and effectiveness of transversal levers and cascade achievements in Auto’s, CTFL and BPS sectors to other IPAP sectors: Procurement: Next ‘wave’ of designations in range of sectors. Deepen supplier development policy, systems and programmes in SOE’s. EDD work with provinces and municipalities to strengthen local procurement in non-designated sectors. Ensure co-commitments and targets for business and labour set out in the Procurement Accord are met. 9

10. Strategic Direction IPAP Build on progress platforms achieved to date: Industrial financing: Deployment of significant quantum of funds available through the IDC Manufacturing Competitiveness Enhancement Programme (MCEP) of the DTI MCEP - further manufacturing support response to global crisis and pervasive market and institutional failures; Overvalued and volatile currency Sharply escalating electricity and other administered prices Inefficient and unreliable rail, port and electricity infrastructure due to investment backlogs Low absolute and relative levels of profitability and low investment in productivity enhancement Inadequate provision of suitable financial instruments by private financial sector Significant subsidies, trade measures and other distortions within global trade 10

11. Strategic Direction IPAP MCEP – indicative framework: Grant finance with clear rules bound access criteria aimed at firms in key sectors to upgrade production facilities, process, products and people : capital investment working capital and pre-shipment finance feasibility studies product development and process improvement value chain, cluster studies and new market access; energy efficiency and logistics with Strengthen the responsiveness of available incentives and building on achievements and positive experience of CTCP/PI and MIDP Maximise employment and value-added potential in key sectors Stipulated exclusions to include sectors already benefitting from dedicated support (Auto’s, CTFL and BPS); capital intensive sectors; high market concentration and firms engaging in anti-competitive behaviour. 11

12. Strategic Direction IPAP Scale up key sectors additional to considerable achievements in Auto’s, CTFL and BPS Green Industries Designation and levels of local content for solar and wind renewable generation and SWH’s, Utilisation of MCEP to accommodate existing and new entrants (including FDI) in component manufacture Unlock industrial opportunities with respect to energy efficient buildings Agro-industries scaling up interventions in the Food-processing, Beverage and Confectionary sectors/sub-sectors renewed focus on import substitution for local production of soybean meal and oil, furniture, and processed food products - standards, compulsory specifications and designations to be ramped up. Secure progress on regulatory environment for Biofuels and to prepare emerging and commercial farmers to produce biofuels feedstock crops 12

13. Strategic Direction IPAP Scale up key sectors additional to considerable achievements in Auto’s, CTFL and BPS Metal Fabrication, Transport and Capital Equipment Utilise MCEP to finance supply side capabilities Designation and sector specific co-commitments Supplier development in SOE’s. 13

14. Challenges and Threats Sustained currency overvaluation and volatility Protracted recession and decreased demand for SA exports particularly in SA’s traditional export markets in the US and Euro Zone Weakened domestic demand as the credit-fueled boom of 2005-2007 unwinds Significantly above inflation increases for administered prices, with huge electricity price increases of the order of 75-90% from Eskom and up to 140% increases where municipal increases are factored in Continued uncompetitive pricing of key intermediate inputs Slowdown and backlogs in infrastructure expenditure at all levels of government The high cost and inefficiencies in the rail and ports freight and logistics Slow progress with skills development programmes especially for key sectors Specific areas of intra-governmental co-ordination. 14

15. Evolution of NIPP Large and increasing budgeted public expenditure Public sector infrastructure expenditure and estimates 2006/07 – 2012/13 15 Source: National Treasury

16. Evolution of NIPP Obligations monitored in the region of US$16.5bn, since inception in 1996 Of these, 80% arise out of the Strategic Defence packages Since inception, more than 220 projects have been implemented Since inception, 21 393 jobs have been created, export credits of $11.5 billion and investment credits of $21.4 billion achieved Detailed project report tabled with Portfolio Committee in 2011 16

17. Evolution of NIPP Three procurement / supplier development mechanisms currently in place National Industrial Participation Programme (DTI) since 1996 Competitive Supplier Development Programme (DPE) since 2007: participating SOE’s must develop supplier development plans Regulations to the Preferential Procurement Policy Framework Act (NT) amended in 2011: allows Department of Trade and Industry to designate sectors for domestic production Of the estimated R900 bn state capital expenditure between 1998 and 2009, only 12% has been subject to NIPP Since NIPP has been the predominant policy tool for leveraging public procurement, the vast majority of public capital expenditure over recent years has not been subject to any public procurement lever Policy review has two objectives Strategic alignment with other procurement levers Strengthen NIPP Project performance review in 2012/13 17

18. Evolution of NIPP Designation of Fleets via PPPFA of areas of large, ongoing procurement for domestic production e.g. rolling stock procurement by Transnet / PRASA, electricity pylon procurement by Eskom Competitive Supplier Development Programme will largely overlap with designation of fleets, supporting suppliers to become competitive Introduction of Direct NIPP for large but irregular procurement in sectors with clear industrial policy interest e.g. aircraft procurement by SAA Indirect NIPP for balance of public procurement Strengthening of monitoring and evaluation Strengthening of multipliers applied 18

19. Key challenges: Currency Balance on current account, financial account (Rm) and real effective exchange rate (Index 2000=100) ) Source: SARB

20. Key challenges: Investment Real gross fixed capital formation Q1 2005 to Q3 2011 (R’m 2005 prices) Source: SARB

21. Key challenges: Real interest rates Short term interest rates – January 2012 Source: SARB

22. Key challenges: Real interest rates Long term interest rates – January 2012 Source: SARB

23. Key challenges: Currency Real Effective Exchange Rate (2000 = 100) and Rand / US Dollar, Jan 2009 – Sep 2011 23 23 Source: SARB

24. Key challenges: Manufacturing Manufacturing monthly production indexed (2005 = 100) and Y-O-Y growth, January 2005 to October 2011 24 24 Source: StatsSA

25. Key challenges: Trade Balance Trade balance by sector Q1 1990 – Q3 2011 (Rm) 25 Source: Quantec

26. Key challenges:Manufacturing employment Employment in the manufacturing sector ‘000, Q1 2008 – Q3 2011 26 26 Source: StatsSA