Business and Economy

How the DTI plans to turn SA into Africa’s industrial oasis?

Trade and Industry Minister Rob Davies has improved the performance of the dti ever since he took the reins of the department in 2009. Photo: GCIS

In the past, the department of trade and industry (dti) was ridiculed as a bloated heap of inefficient bureaucracy that was out of its depth in implementing its mandate.

At the height of this heavy criticism, the department was saddled with 21 agencies reporting to it and struggled to fill hundreds of job vacancies – in the process hurting service delivery to its clients, mainly large and small businesses.

Apart from negotiating international trade deals and promoting the industrial diversification of the South African economy, the dti was also responsible for handling export promotion, small business development, black economic empowerment (BEE) and administering industrial incentives as well as overseeing competition and gambling laws, among other responsibilities.

In the end, the department’s staggering mandate was overwhelming for its overstretched staff and officials, who struggled to cope with an excessive workload. Frustrated business owners complained that the department was taking too long to respond to queries and process applications for grant and tax incentives.

 But, under the political stewardship of Rob Davies, the dti has made significant strides in turning around its performance. Since Davies took over the reins in 2009, efficiency and service delivery have improved significantly, partly thanks to the decision to streamline the dti, first in 2009 and again in 2014, which has enabled the now-focused department to give its current mandate special attention.

Davies is the first to admit that the streamlining of the dti has paid dividends. “We have seen an improvement in our performance and we closely monitor our performance indicators. Last year, we received an award for the best-performing department and our director-general (Lionel October) was voted the best DG. We also received a clean audit from the Auditor-General (AG). We have consistently been reducing findings about our performance and took on board recommendations from the AG,” said Davies in an interview with GetBiz.

The first hiving off of agencies previously under the dti stable took place in 2009 when five agencies were transferred to the newly created economic development department, led by Ebrahim Patel, once a vocal trade unionist. This cut the number of agencies reporting to the dti to 16 from 21.

In 2014, the department was streamlined again when all the agencies dealing with small business development and support were moved to the newly established department of small business development. This move reduced the agencies in dti’s portfolio to 13 from 16.

 

State of the economy

Despite the scale-back in its mandate, the dti still handles international trade negotiations, export promotion, industrialisation strategy, BEE policy and company registrations while also regulating gambling and the liquor trade.

The improved performance at the dti has rubbed off positively on the value-adding manufacturing sector, whose contribution to the South African economy has declined sharply over the past two decades.

“Manufacturing expanded despite the economy contracting by 1.2% in the first quarter. Some of the growth in manufacturing has got to do with the favourable currency. We have seen a sizeable increase in the exports of automotive products and value-added exports to the African continent,” noted Davies.

The South African economy shrank 1.2% in the first quarter of 2016 after expanding 0.4% in the fourth quarter of 2015, dragged down by sharp contractions in mining and agriculture, which declined 18.1% and 6.5% respectively. Manufacturing grew 0.6% while trade and finance expanded 1.3% and 1.9% respectively.

“The reasons for the contraction in our economy are principally external. The reduction in demand for commodities and the consequent fall in commodity prices have negatively affected the mining industry and the economies of other commodity producing countries like Canada and Australia as well as oil producers. Agriculture saw a decline mainly because of drought,” said Davies.

He believes that the economy will experience a rebound next year even though it is widely forecast by the central bank, National Treasury, and the World Bank that the economy will grow at less than a percentage this year.

“We have seen the bottom. We anticipate a small recovery next year. This is probably the worst we will see this year,” he predicted.

 

Reindustrialising South Africa

Over the past two decades, the local economy has undergone serious de-industrialisation, particularly in the clothing and textile sector, which was decimated by an influx of cheap imports from China and other Asian countries.

During this period, the contribution to the economy of productive sectors such as mining and manufacturing declined sharply while consumption-driven sectors like banking and consumer retailing became more influential and prominent.

Essentially factories and mines were closed down while shopping malls, where banks and retailers are anchor tenants, mushroomed across the country. According to the Industrial Development Corporation (IDC), the manufacturing sector’s share of GDP declined from 20.9% in 1994 to 12.4% in 2013.

Textiles and clothing, furniture and other manufacturing have lost substantial market share since 1994. However, sectors with links to mining (chemicals, metals and machinery) experienced relatively high growth rates post 1994, thanks to the commodities boom that was cut short by the global economic recession of 2008 and 2009.

This change in the structure of the economy partly explains why the economy has shed thousands of jobs over the last 20 years and why it is struggling to create jobs presently. It also explains why the economy grew by 3.3% annually between 1994 and 2012.

Between 2012 and last year, growth averaged 2.3% annually as the economy suffered from the hangover of the global recession. Davies and his team of technocrats at the dti are attempting to reindustrialise the economy and help find markets for South African exporters.

They are looking to grow labour-intensive industries such as agro-processing, railway manufacturing, oil and gas, clothing and textile, film and business process outsourcing (BPO) – particularly outsourcing of call centre operations to third-party service providers.

The revival of the industrial sector will also be linked to infrastructure development and mineral beneficiation as SA seeks to move up the value chain from an exporter of raw materials to a manufacturer of value-added goods.

Davies is this year robustly implementing the Industrial Policy Action Plan (IPAP), where the main focus is encouraging use of local materials and inputs in production, or the so-called localisation, supporting South African products to meet high levels of standards, and eradicating non-compliant products in the local market.

 

Investment in industrial development zones

Efforts to reindustrialise the economy are also being led by the industrial development zones (IDZs), which were once seen as laggards when it comes to attracting investment despite getting massive support from government to build physical and industrial infrastructure.

 “The performance of a number of IDZs has improved, particularly Coega and East London. We have a new IDZ in Saldanha Bay, which focuses on the oil and gas sector. It is doing well despite weak oil and gas prices. There is increased demand for servicing of oil rigs and vessels,” Davies said.

In Musina in Limpopo, an IDZ that is targeting metals processing and agro-processing is being mooted. SA has five operational IDZs, namely Coega, East London, Saldanha Bay, Richards Bay and the Dube Trade Port.

But recently, the dti has introduced Special Economic Zones (SEZs) to expand industrial activity to areas that are not located close to airports or harbours. Davies said each of the nine provinces have identified their own SEZs, which are essentially giant industrial parks where manufacturers will operate from.

 Dr Ayanda Vilakazi, spokesperson for the Coega Development Corporation (CDC), the operator of Coega IDZ, said the Port Elizabeth-based industrial park had in the last three years signed 37 new investors, who had brought with them investments with a total value of R4.94 billion and created 44 465 jobs while investments under consideration, or the so-called investment pipeline, stood at R181 billion.

Vilakazi said Coega’s performance was commendable given that foreign direct investment (FDI) into South Africa had dropped significantly last year due to the weak global economy and had even attracted less FDI than Angola ($8.7 billion), Ghana ($3.2 billion) and Mozambique ($3.7 billion).

 According to the UN Conference on Trade & Development, FDI into the country amounted to $1.5 billion in 2015, which represents a 74% drop in FDI compared with a year before.

“The CDC, like many other organisations in SA and the world’s developing countries in particular, such as Brazil and India, has found the current economic landscape not conducive to stimulate investment and growth. Despite this, the CDC has managed to go against the tide to ensure continued growth and sustainability,” he said.

 

Building black industrialists

The government has also linked the reindustrialisation strategy to BEE through the black industrialist programme (BIP), which aims to create 100 large-scale black industrialists over the next three years.

Davies said R130bn has been pledged for the programme, mainly funding that will come from state-owned development finance institutions such as the IDC and the Public Investment Corporation. “We felt that we needed a focused programme as we do not have enough black industrialists in the commanding heights of our economy,” he said. Already the dti has received 107 applications from aspiring black industrialists who want to participate in the programme.

Only five participants were selected and they operate in the pharmaceutical, railway, and agro-processing sectors. The five industrialists have jointly received R550 million in funding to help them realise their ambitions.

A draft concept document on the BIP compiled by the dti last year recommended that the black industrialists be given preferential access to large state tenders whereby they leverage state procurement through the Preferential Public Procurement Act and the mooted tender set-asides.

 

The battle for tenders

The National Treasury has been under pressure from black business lobby groups Black Business Council (BBC) and Progressive Professionals Forum (PPF), which want the Preferential Procurement Policy Framework Act (PPPFA) to be scrapped because it disadvantaged black businesses when they bid against established white suppliers who easily undercut their black competitors.

The BBC and PFP want the PPPFA replaced with the preferential tender set-asides. Davies refused to be drawn into the stand-off between the National Treasury and black business lobbyists over the introduction of the tender set-asides.

The Office of the Chief Procurement Officer, led by National Treasury veteran Kenneth Brown, is developing new public procurement legislation that will revise regulations dealing with preferential access to tenders by black suppliers.

 On 11 May this year, Brown told Parliament’s Finance Standing Committee that the Public Procurement Bill will clarify how procurement will target business owned by black people, women and those who are disabled.

 “But no matter how good the legislation is, it is also up to the procuring entities to implement the policies. Some departments use a panel system, which is a smaller database of suppliers for that particular entity,” Brown told the committee.

“Often these panels will have several companies on them, but only two or three are ever given business. So, yes, we can change the legislation, but there are certain practices within the system that also need to change in order for empowerment to work properly.”

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