TIPS and World Bank Conference 27 October 2011

1. TIPS and World Bank Conference27 October 2011 Industrial Policy Action Plan - Progress and Priorities. Garth Strachan. Industrial Policy the dti.

2. IPAP – Progress and Priorities Content • Problem Statement. • The IPAP • Progress • Constraints • Conclusion

3. Problem statement • Prior to global crisis SA achieved relatively high growth rates but this masks key structural problems • SA growth rates lower than peers • Growth driven by unsustainable increases in credit extension and consumption (financial intermediation, insurance, real estate, transport, storage, communication, wholesale and retail, catering accommodation) grew 7.7% annually, • Production sectors, (agriculture, mining, manufacturing, electricity, water and construction) only grew 2,9% annually. • Contributed to imbalances in economy – current account deficit • Employment has remained unacceptably high – never below 22.8%

4. Problem statement – the global economic crisis and SA • Since the 2008 crisis manufacturing has experienced a virtual 'perfect storm' of: • Slow global growth particularly in traditional export markets of the US and EU. Growth of exports to new global economic powerhouses dominated by primary commodities. • Weakened domestic demand as the credit-fueled boom of 2005-2007 unwound • Currency overvaluation/volatility and high real effective exchange rate • High administered prices - escalating electricity price increases of the order of 75-90% from Eskom and up to 140% including municipal increases. Port charges among highest in world. • Backlogs in infrastructure expenditure across levels of government, • Significant decline in business confidence and capital investment. • Slow progress with skills development • and recent industrial action.

5. Current Account/ financial account and REER Source: SARB

6. Investment Real gross fixed capital formation Q1 2005 to Q2 2011 (Rm 2005 prices) Source: SARB

7. Manufacturing Production Manufacturing monthly production indexed (2005 = 100) and Y-O-Y growth, January 2005 to August 2011 7 7 Source: StatsSA

8. Trade Balance Trade balance by sector Q1 1990 – Q2 2011 (Rm) 8 Source: Quantec

9. Manufacturing employment Employment in the manufacturing sector ‘000, Q1 2008 – Q2 2011 9 9 Source: StatsSA

10. The Policy and Programme Framework • The NIPF adopted by Cabinet in 2007 set out the broad approach. Aligned with New Growth Path adopted in 2010. • IPAP 2 launched in February 2010. Next iteration in 2011. ‘Rolling’ action plan aligned to MTEF budget cycle. • Intended to: • Facilitate diversification beyond traditional commodities • Increased value addition in tradable goods and services • Long term industrialisation • Promotion of long term labour absorbing economic development • Industrialisation that ensures increased participation (B- BBBEE) and marginalised regions • In the medium term contributes to building industrial development on African continent • Underpinned by the view that no country has experienced rapid employment and per capita income growth without a strong industrialization effort. • Manufacturing has the highest growth multipliers in the SA economy, significant employment multipliers and is key to sustainable consumption growth and employment in the medium to long-term

11. IPAP Sectors IPAP: value-added sectors with high employment and growth multipliers 11 Source: CSID

12. IPAP2: Requires comprehensive and integrated action 1.Macro-economicpolicies which support more competitive and stable real exchange and interest rates 2. Industrial financing channelled to more labour-intensive and value-adding sectors 3. Leveraging procurement to raise domestic production and employment in a range of sectors 4. Developmental trade policies such as tariffs and standards deployed in a selective and strategic manner 5. Competition and regulation policies: competitive input costs for productive investments and affordable goods and services for poor and working-class households 6. Skills, technology and innovation policies better aligned to sectoral priorities 7.Deploying these policies in general and in relation to more ambitious sector strategies, as set out in detailed Cross-cutting and Sector KAPs 12

13. IPAP2: Sectors Cluster 1: Qualitatively new areas of focus Metals fabrication, capital and transport equipment sectors: leverage Capex programme, rebuild and position as future exporters Green and energy saving industries: solar water heating, concentrated solar power, wind power, energy efficiency Agro-processing linked to food security and food pricing imperatives Upstream Oil and Gas and Boatbuilding to unlock significant opportunities. Cluster 2: Scale up / broaden interventions in existing IPAP sectors Automotives, Components, Medium and Heavy Commercial Vehicles: raise economies of scale and localisation of components Downstream Mineral Beneficiation: based on establishing minimum beneficiation levels Plastics, Pharmaceuticals and Chemicals: focused on plastics and value-adding pharmaceuticals Clothing, Textiles, Footwear, Leather: recapture domestic market share through competitiveness upgrading and tackling illegal imports 13

14. IPAP2: Sectors Cluster 2: Scale up / broaden interventions in existing IPAP sectors Biofuels: establish regulatory framework and support agricultural and refining investment Forestry, Paper & Pulp, Furniture: unblock water licences and promote further processing Strengthening linkages between Cultural Industries and Tourism Business Process Services: broaden and deepen SA’s product offerings Cluster 3: Sectors to develop long-term advanced capabilities Nuclear: leveraging local production and technology transfer Advanced Materials: feeding into new growth industries such as aerospace, solar and nuclear Aerospace: strengthening integration into supply chains 14

15. Some cross-cutting progress highlights Public procurement and SOE supplier development The amended regulations of the PPPFA will become effective from December 2011. Will enable designation for local procurement and align the PPPFA with BBB-EE objectives. Extensive research and engagement with business, labour and community laid basis for designation of six sectors before effective date with more sectors to follow. Procurement Accord being finalised by EDD. Local Production SANS will be finalised by effective date. PSA to launch national Proudly SA Campaign to support localisation. First phase of mobilisation within SOEs to introduce localisation and supplier development into the procurement process. SOEs introducing new policies, processes, systems and capacity building to embed supplier procurement leverage more systematically. National Industrial Participation Programme Study into more strategic evolution of NIPP – including consolidation of CSDP and NIPP completed. Executive decision will introduce Fleet, Indirect and Direct procurement provisions to support other procurement interventions including designations. 15

16. Some cross-cutting highlights Industrial Financing IDC has made available R102 bn mostly in loan finance for IPAP and NGP sectors. R10bn Job Creation Fund at Prime less 3% over five years R25bn earmarked towards Green Economy R7.7 5bn agricultural value chain, including forestry. The completion of Phase One of a study into concessional industrial financing lays the foundation for a framework for securing long-term sources and provision of concessional industrial financing. Phase Two of the work regarding requisite financial products for key sectors set for completion before year end. Trade Exporters Early Warning System on Technical Barriers to Trade developed by SABS and fully operational ; identifies technical barriers to trade for exporters. ITAC processed numerous applications for increases, rebates and reductions of duties in line with IPAP priorities SABS developed a wide range of enabling standards for various industries and products including solar water heaters; water efficient buildings; wind energy turbines; energy efficient appliances; electrical components; water efficient components; electric vehicle batteries; automotive fuels; energy/electricity co-generation etc,. New accreditation program for energy efficient measurement and verification finalised. 16

17. Some sectoral highlights • Automotives • Automotive Investment Incentive with a budget of R2, 69bn over the MTEF period has been instrumental in securing R14 billion investment • Includes R9 billion investment commitments by Ford (Ranger); GM (Production of Spark in SA); VW (investment in new press shop for Polo and Daimler Chrysler and New C Class) • ITAC and SARS finalising new APDP regulatory amendment. • OEM Purchasing Council finalised proposal to bolster localisation. • MHCV value chain report and action plan completed • Clothing & Textiles • The new incentive architecture – the CTCP and PI with strong conditions for competitiveness upgrading , capital investments and skills development has enabled on budget incentives for manufacturers to halt the decline of the sector, job retention, competitiveness and recapture of some market share and exports, particularly in leather. • Over R1bn committed in incentives with strong conditions.

18. Some sectoral highlights • Business Process Services • New incentive framework. • R40 million investments made. R42 million new investment commitments • 3,400 young trainees being trained under the Monyetla II Programme – 79% employed in period. Significant positive example of demand side skills programme. • Green Industries • IDC allocated R25bn with 54 pilot projects in pipeline. • Draft Green Industries customised sector programme (CSP) developed for finalisation and draft action plans for solar and wind completed. • Intra-departmental South African Renewables Initiative (SARI) initiative to leverage international climate finance to supplement domestic funding sources for renewable energy production linked to domestic manufacturing

19. Taking IPAP2 Forward - 2011/12 -2013/14 • Very substantial progress has been recorded in IPAP2 2010/11 and 2011/12 including in latter case with respect to developing demand side skills interventions and support measures for prototyping and commercialisation of new technologies. • Effective internal monitoring and evaluation combined with external impact assessment is designed to overcome constraints related to policy coherence, complicated regulatory and operational coordination and integration as well as budgetary constraints. • The Minister has signaled an intention for further interventions to respond to the global crisis and support competitive enhancement interventions. Next iteration to consolidate and scale up sector and cross-cutting interventions.