INDUSTRIAL POLICY ACTION PLAN 2011/12 ANNUAL REPORT

1. INDUSTRIAL POLICY ACTION PLAN 2011/12 ANNUAL REPORT of the Economic Sectors and Employment Cluster (ESEC) TRADE AND INDUSTRY PORTFOLIO COMMITTEE 25 October 2012 1

2. Overview • Key IPAP Achievements and Strategic Platforms • Critical challenges to implementation • Intra-government priority issues • Key opportunities • Appendix: Overview of the manufacturing sector 2

3. Key Achievements: Strategic Platforms Public Procurement • Amended PPPFA Regulations effective from 7 December 2011. DTI empowered to designate sectors / industries from which government departments and state owned enterprises (SOEs) must procure locally. • First round of sector designations: • Rail Rolling Stock: locomotives, wagons and carriages; Power Pylons; Buses; Clothing, Textiles, Leather and Footwear; Canned Vegetables; Set Top Boxes. • Second round designation included 70 pharmaceutical products (Oral Dosage Tender) • Instruction notes for all sent out by NT. RFP issued by DoCfor Set Top Boxes and revised to include the local content requirements of 30%. • Work on third ‘wave’ of designations to include school and office furniture, SWH’s and cables. Work on other capital equipment is underway. 3

4. Key Achievements: Strategic Platforms Public Procurement • Designations include recommendation to National Treasury (NT) and procuring entities on mechanisms to ensure: • Value-for-money to the fiscus e.g. • Exclusion of certain intermediate inputs • International price benchmarks • Two stage tenders with price negotiations • Supplier competitiveness upgrading support • Renewable Energy Independent Power Producer Procurement (REIPPP) Programme: minimum and increasing levels of local content secured as a fundamental criterion. Current local content thresholds vary between 25% and 35% with targets set to rise to 65% • Non-designated sectors • EDD-led process with Provinces and Metros to support local procurement in terms of section 9.3 of the amended regulations of the PPPFA. 4

5. Key Achievements: Strategic Platforms Procurement Accord • Procurement Accord process led by Economic Development Department (EDD) – convert high level commitments by business and labour to concrete actions. • Ongoing engagement with industry associations and business organisations. National Industrial Participation Programme(NIPP) • Policy Review complete. Project Review in progress • Revised proposals to deepen and extend NIPP contained in Submission and Cabinet Memorandum. • Provides for alignment of NIPP with Fleets/Designations; Competitive Supplier Development Programme (CSDP) and strengthens NIPP with Direct and Indirect NIP provisions. • “New NIPP” regulations will be formulated and tabled to achieve alignment and maximum impact. It will shift to direct offsets in key IPAP sectors. 5

6. Key Achievements: Strategic Platforms Industrial Financing • Ongoing reorientation of Industrial Development Corporation (IDC) to finance IPAP and NGP sectors • R102bn over the next five years for investment in NGP and IPAP sectors, dependant on economic conditions. To date R13.5bn has been committed with 268 companies benefiting from the fund • To date the value of funding approved increased to 55 percent, with a 33 percent increase in the number of funding approvals • Out of R25bn earmarked towards the Green Economy, R5.5bn has been committed • With respect to R7.7 bn for agricultural and forestry value chains, R1.1bn has been committed • 102 companies are beneficiaries of R6.1bn support for companies in distress 6

7. Key Achievements: Strategic Platforms Industrial Financing • IDC calculation of jobs created/saved through funding approvals from 2009/10 - 2011/12 is 111 349 • IDC will also lower the cost of funding for businesses, by sourcing an additional R2bn from the UIF for funding more labour intensive businesses • 12(i) Tax Incentive of R5.6bn has supported large manufacturing investments worth R22.5bn • Research and Development (R&D) tax incentive (DST) supported R1bn in tax deductions and encouraged R&D activity worth R9.6bn between 2006 and 2011 • R207 m paid out of the R1bn rebate paid to Autos on wheels for exports and containers as at 25 June 2012. 7

8. Key Achievements: Strategic Platforms Industrial Financing- MCEP • Budget allocation of R5,8bn over current three year MTEF announced in 2012/13 Budget – launched in May 2012 • Support response deployed towards upgrading competitiveness of labour intensive and value-adding manufacturing sectors to maximise employment and value-added potential in key sectors. • MCEP is inclusive of grant finance and interest make up and working capital with clear rules-bound access criteria aimed at firms in key sectors to upgrade production facilities, acquire new technologies. Provides for cluster competitiveness, standards and conformity assessment and feasibility studies. • To date 144 applications have been received with the total value of grants applied for at R1.9 billion and the total number of employees by the firms is 22000. • National Marketing and media campaign to advertise MCEP has been launched. • TEO currently working with UNIDO to design an M&E framework for Industrial Competitiveness. This will serve as a Performance Monitoring tool to develop and manage performance indicators. 8

9. Key Achievements: Strategic Platforms Developmental Trade Policies • Tariff setting informed by strategic sectoral priorities with ongoing processing by International Trade Administration Commission (ITAC) of tariff increases, rebates and reductions • South African Bureau of Standards (SABS) and South African National Accreditation System (SANAS) facilitated new industries through the creation of enabling standards, especially for green and renewable energy industries • Concerted and integrated efforts to tackle customs fraud, illegal imports and importation of substandard goods • Ongoing technical upgrading, greater capacity at ports of entry with real-time electronic system, inclusive of risk engine and reference price system • Establishment of SARS/DTI/Industry forum 9

10. Key Achievements: Strategic Platforms Competition Policies • Fuel: The collusion information exchange investigation finalised in the year ended March 2012, pending referral • Steel: Excessive pricing - investigation still underway • Construction bid-rigging: The Commission received 25 settlement applications since the launch of the process, 88 marker applications, 1 leniency application. The Commission is currently validating the information received • Cement: Settlements by Afrisam and Lafarge with regards to collusion in cement completed and confirmed by the Tribunal in the year ended March 2012 • Food: The Commission has concluded a settlement with Oceana settling a number of price fixing and market allocation contraventions 10

11. Key Achievements: Sectors Automotives • Transition from MIDP to APDP largely completed with the new regulations gazetted end June. Massive vote of confidence has been expressed by the industry: • Approximately R15bn in investment commitments from assemblers and component suppliers • Recent commitment of $100 million for truck and car assembly plant by China’s First Auto Works • Tata commitment to assemble trucks at the Rosslyn plant • Toyota SA Ses’fikile taxi assembly line officially opened in June at Toyota South Africa Motors’ manufacturing facility at Prospecton, Durban • IDC approved funding for component manufactures for the localisation of components for the motor vehicle industry • Large increases in vehicle production volumes and localisation in sector • Roll-out of AIS has been on-going in support of approximately 63 003 jobs, inclusive of 7,858 Project jobs, will be supported /sustained over a 3 year period 11

12. Key Achievements: Sectors Clothing, Textiles, Leather and Footwear • Clothing Textiles Competitiveness Programme (CTCP) has stabilised production and employment in the sector • Approximately R148million worth of approvals in support of 123 companies. Represents support for 49,888 out of a total of 101 511 jobs in the sector • Additional R501m has been approved by IDC and is expected to create and save 2 400 jobs • Three major retailers are participating in CTCP – Foschini, Truworths and Edcon • Foschini has committed to procuring 70 per cent of their merchandise domestically • Footwear sector projects increase in annual production from 52 million shoes to 100 million over the next three years • Approximately 32000 are employed in the footwear and leather value chain. 12

13. Key Achievements: Sectors Agro-processing • DTI launched the Emerging Organic Farmer/Retailer Programme with Pick n Pay in 50 stores nationwide • Company-specific action plans are being implemented with companies with an investment pipeline of R924m (Pioneer), R220m (GWK) and R120m (Astral) • DTI intervened in two retrenchment processes (SAPPI and FoodCorp) to save more than 2000 jobs • Two small-scale Soybean processing investments facilitated in line with DTI Soy Strategy • DTI developed 12 new canning products to revitalise fruit canning sector • DTI disbursed MIP and CIS incentives of R736m (over 3 years) and facilitated investment of R3,7bn in the food processing sector. This contributed to the retention of 14,000 jobs and created 7,000 new jobs • Two major projects in food-processing to the value of R1.1bn have been approved for the 12i Tax incentive • The furniture strategy and action plan was finalised and implementation of key interventions in skills and standards commenced 13

14. Key Achievements: Sectors Metal Fabrication, Capital and Transport Equipment • DTI instrumental in the opening of a R1bn metals coating facility (Safal Steel) in KZN • Continuous engagement with PRASA on its rolling stock renewal programme • Commitment to minimum local content requirement of 65% remains an integral part of engagements • Major SOC’s renewal and build programmes fall under Designations and Competitiveness Supplier Development Programme (CSDP) and more components are targeted in this regard • SOC’s renewal programme is estimated to create 65,000 direct and indirect jobs over 20 years • Transnet renewal port handling equipment – local manufacture of crane spares and provision of after sales support and maintenance • Over 522 students enrolled for the tooling apprenticeship programme • Over 200 workers were trained under the National Foundry Technology Network. 14

15. Key Achievements: Sectors Business Process Services • R4.1bn investments leveraged • Approved projects to create approximately 15,149 jobs over 3 years • 3,000 young trainees trained under the Monyetla II Programme – 70% placed by 27 BPS consortia • Launch of 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 make Solar Water Heating obligatory for most new buildings • In support of government’s bid to promote local production, IDC approved funding for two local manufactures of solar water heaters • Solar and Wind energy manufacturing strategy completed • Two rounds of Renewable Energy generation bids awarded, with minimum levels of local content ranging from 25% to 45% and maximum targets set to increase to 65% with stronger local component requirements in Solar, Wind and Solar CSP. • Industrial Energy Efficiency Programme launched in November 2011 15

16. Critical challenges • Protracted global recession and slow demand of demand for SA exports particularly from SA’s traditional markets – Eurozone and US. Significant global economic uncertainty around resolution of financial and economic crises in EU and US and geopolitical risks • Slow and difficult process of re-orienting exports to high growth developing regions and countries and securing foreign direct investment into strategic sectors • Exchange rate overvaluation and volatility with high relative real interest rates • Significant subsidies, trade measures and other distortions within global trade 16

17. Critical challenges • ‘User pay’ principle for funding electricity build programme is inducing massive economic shocks to manufacturing sector. Steeply escalating electricity prices (especially where triple digit price premiums are added by municipalities) is seriously eroding viability of companies and will ultimately erode revenue base of municipalities themselves • If additional elements of economic infrastructure programme such as rail and ports are funded on ‘user pay’ principle manufacturing will face further shocks with potentially further damaging consequences, including further closures and job losses • SA Port charges are amongst the highest in the world. Port pricing on manufactured goods is above global norms and port pricing on iron ore and coal is below the global average. • Monopolistic / oligopolistic pricing of intermediate inputs into manufacturing – steel/plastics and polymers

18. Critical challenges • Inadequate provision of suitable long-term financing instruments for industry • Absence of financing mechanism to fund majority black owned manufacturing companies with strict conditionalities on owner/management participation, risk sharing and raising competitiveness • Slow progress with skills development programmes for priority sectors. Need to duplicate Monyetla and National Tooling Initiative (NTI) successes to other sectors • Need to ensure close alignment with PICC driven infrastructure programme and dtiprogrammes on localisation in support of local manufacturing

19. Intra-governmental issues of concern • Electricity: Intra-governmental process underway to assess vulnerability of manufacturing sectors and make explicit proposals on possible demand management, tariff and rebate options.(Lead Departments DOE; DPE and DTI) • Biofuels: Long outstanding and limited progress with respect to promulgation of Biofuels Mandatory Uplift Regulations in particular the financial incentive mechanism process in place to finalise. (Lead Departments: DOE, DTI and NT supported by EDD and DAFF) • Iron and Steel: Securing a developmental price for Iron Ore and Steel. (Lead Department: DMR, supported by DTI,EDD,DPE) 19

20. Intra-governmental issues of concern • Beneficiation: Minerals Beneficiation Strategy adopted by Cabinet and implementation framework under development. Task teams and frameworks for iron and steel and energy value chains approved by Cabinet and work underway with addressing implementation in PGMs, jewellery and titanium value chains. (Lead Department: DMR supported by DTI, EDD and DST) • Aquaculture: Progress registered with development of Marine Aquaculture Zones strategy but requires expediting of EIA’s.(Lead Department: DAFF, supported by DTI, EDD and DWEA) • Upstream Oil and Gas: Port constraints to unlock significant investment potential in the sector. ( Lead department : DPE supported by DTI, DOT and TNPA) 20

21. Key Opportunities • Increase manufacturing opportunities linked to large public sector infrastructure programme in sectors – Metals, Capital & Transport Equipment, Rail & Renewable energy. Deepen and embed supplier development policies and programmes in SOC and improve impact assessment and policy improvement for aligned procurement policy instruments. • Opportunities to grow manufacturing exports to net food importing countries in Sub – Sahara Africa linked to mining, infrastructure & construction and growing single export markets linked to consumer goods. • Strong enforcement and alignment with customs on fraud & illegal imports and non – compliant products.

22. Key Opportunities • Launch of Government/Business and Labour “Buy SA” campaign. Strengthening of private sector commitments to buy local will be significant. • Finalisation of Biofuels regulatory regime and incentives to unlock significant growth in feedstock, production and downstream activity. Modeling suggests 100 000jobs to be created. • Better utilisation of SA’s enormous competitive advantage in minerals endowment to build up & downstream sectors.

23. Challenges: Electricity Tariff Increases compared to CPI (annualised)

24. Growth rates of administered prices between 2000 and 2010

25. Average industrial tariff

26. Appendix: Overview of the manufacturing sector PMI: Jan 2008 - August 2012 Source: Econometrix

27. Appendix: Overview of the manufacturing sector Manufacturing Monthly Production and Y-o-Y growth, Jan 2009 - July 2012 Source Stats SA

28. Appendix: Overview of the manufacturing sector Manufacturing Utilisation Q1 2005 - Q2 2012 Source: Stats SA

29. Appendix: Overview of the manufacturing sector Trade Balance by sector Q1 2000 - Q2 2012 Source: Reserve Bank

30. Appendix: Overview of the manufacturing sector Balance on current account, financial account (Rm) and REER by sector Q1 2000 - Q2 2012 Source: Reserve Bank

31. Appendix: Overview of the manufacturing sector Manufacturing Employment Q1 2008 - Q2 2012 Source: Stats SA