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Speeches

Minister Davies' speaking notes at the launch of the Industrial Policy Action Plan 2016/17-2018/19

2016-05-09

Salutations

Thanks to the CEO, Pieter Du Plessis and the Executive Chairman Mr Sibusiso Maphathiane, management and workers of Guestro for hosting this launch of the 8th annual iteration of the Industrial Policy Action Plan ? IPAP 2016/17 ? 18/19.

We launch IPAP here today because this venue is important for a number of reasons. These include:
- The fact that Guestro NI Forge is a black-owned manufacturing company competing successfully as a foundry in a very competitive market
- Guestro NI has benefitted from the dti support measures and is a supplier to Transnet?s locomotive and rolling stock programme designed to support local manufacturers and advance black economic empowerment
- Guestro NI is therefore a very good company example of what can be done to build strong links between a state-owned company like Transnet, global OEMs supplying into government?s rail procurement programme and local manufacturers coming into the supply chain.
- These are exactly the kinds of connections we have to foster in order to carry on making steady progress in rebuilding South Africa?s industrial rail capabilities.

So let me take this opportunity to congratulate Mr Maphathiane and Mr Du Plessis, the management and workers at Guestro for their efforts and for the lead they have taken in showing that the emergence and growth of black-owned manufacturing companies is not a pipe dream.

It can and must be done - not only in the rail sector but across all sectors of manufacturing. It?s about systematically joining the dots to allow for a strong collaborative effort between government departments, state owned companies and the private sector.

So it really is with a lot of pride that we are here today to launch the IPAP 2016.

And let me make a point I have often made before, because it bears repeating: IPAP 2016 is not ? as is often suggested ? ?yet another government strategy or policy document? for the manufacturing sector ? the implication being that government is involved in a never-ending game of thinking up new policy perspectives.

IPAP 2016 is simply the latest annual iteration of a continuous action plan to reindustrialise our economy.

This is an arduous task. It requires a laser-focused industrial strategy supported by all of government and the SOCs; it requires policy coherence and programme alignment across government departments; and of course, as I have just said, it requires an increasingly close collaborative relationship between the private sector and government.

This process is one in which there are very few quick fixes or easy wins. It?s a process that I think is well captured by the eminent Japanese economist Prof Kinichi Ohno when he speaks about the hard graft involved in ?learning to industrialise?.

It is also worth repeating that this effort has to address the deep-seated structural problems that characterise our economy.

IPAP 2016 again stresses the pressing need for structural change in the economy. It underlines the point that if South Africa was unable to optimise the opportunity to effect structural changes that the commodity boom provided, then doing so now is an even tougher ask.

The severe and negative domestic impact of the global recession and ensuing commodity slump only serve to underline how urgent and inescapable this task is ? even as we recognise, unfortunately, that the challenges now have to be met under much more adverse circumstances, including very tight fiscal conditions which constrain the extent to which support for the manufacturing sector can be leveraged.

And now let me make what I think is a very important point: namely, that the South African government and most of South African society, (along with most countries in both the developed and developing world) have moved beyond the debate about whether or not an industrial policy is needed.

Indeed, the real questions now are the following:
- How we achieve a higher impact industrial policy?
  • How do we achieve stronger policy coherence and programme alignment across government departments and agencies - and what are the key institutional arrangements that can achieve this?
  • How do we strengthen the collaborative working relationships between government and the private sector to secure higher levels of investment in the productive sectors of the economy?
  • - How do we mobilise domestic capital to help strengthen and diversify the economy, increase its competitiveness, grow exports and create employment?
  • How do we build on the very significant progress outlined in the key achievement highlights section of IPAP 2016 ? particularly in automotives, clothing, textiles, leather and footwear and agro-processing sectors - and increasingly in the rail and transport capital goods sector?
  • Finally, how do we overcome the remaining structural constraints to our re-industrialisation drive - and what are the key policy levers which should be deployed for maximum impact?

These are the kinds of questions around which the debate should be focuses as we move forward together.

In the case of rail, South Africa has an important advantage in that we have a 100 plus year-old rail sector with a 22,000 kilometre rail network. But over the last few decades its age has caught up with it; and we are acutely aware of the urgent need to revitalise it.

So ? what have we been doing and what do we intend to do over the coming years?

Well, in fact, by using a combination of policy instruments, working closely with Transnet and with private sector companies, we have already taken considerable steps towards rebuilding our rail sector industrial capabilities.

At the present time, the supply chain supports 14,000 jobs, and many supply companies have not only rebuilt their fabrication capabilities but developed niche capabilities in high value and

complex systems such as traction and propulsion motors and bogie systems.

Then there are the key policy instruments we have put in place:
  • Designations for local procurement;
  • The Competitive Supplier Development Programme;
  • The work of the Technology Localisation Unit of the CSIR, supported by the Department of Science and Technology;
  • These measures, together with a range of government incentives, have all contributed to the significant progress we have been able to make.
  • Local procurement requirements provide a framework for achieving a minimum local content of 55%, rising to 85% in different rolling stock classes and involving 4 OEMs in Transnet, Transnet Freight Rail and PRASA procurement.
  • The fact that many domestic Tier 1, 2 and 3 suppliers have the capability to produce components to the required standard, at a competitive price and within ?just in time? manufacturing principles is important.

It demonstrates that these companies now have the possibility of entering the global supply chains of these same OEMs.

We should celebrate this progress because it clearly illustrates what can be done by working together.

Secondly: taken together with the achievements I have already mentioned in other key sectors, this progress points the way towards what can and must be done to rebuild our industrial capabilities each and every sector where we wish to build or rebuild globally competitive capabilities.

These include, amongst others, aerospace and defence, and electro-technical equipment.

Allow me to again point you to the achievement highlights section in the IPAP, which provides more detail in all of these areas.

You will bear with me if I repeat the obvious: these are measurable achievements ? not just well-meaning plans.

Let?s keep talking about concrete things. What else will you find in IPAP, apart from the achievement highlights, which are themselves set in the context of a thorough global and domestic economic analysis?

You will find that IPAP again presents a set of realistic, achievable, time-bound action programmes, with precise milestones, assigned to a range of departments and agencies. They are both cross-cutting and sector specific in their focus, and their impact is incremental.

This is a train that doesn?t stand still. This year?s IPAP is no exception to its predecessors in that it sets out certain new themes to focus the work over the next year and into the outer years, all aligned to the Medium Term Expenditure Framework.

These indicate the direction in which we need to move as we endeavour to secure a higher impact industrial policy ? which as I have stated must be the core focus of all the work.

These new points of emphasis include the following:
  • The energetic implementation of the recently launched Black Industrialists programme ? the details of which have been provided in previous announcements;
  • More carefully targeted industrial financing and incentive support, including and especially putting in place much stronger export credit and export credit insurance to support SA?s export effort;
  • A stronger focus on sector-specific rather than generalised incentives.

Although the Manufacturing Competitiveness Enhancement Programme by all accounts was successful and supported many companies across a range of sectors at the height of the global recession, we now want to shift the point of focus towards the kinds of sector-specific incentives whose success has been clearly demonstrated in the automotive and clothing and textiles sectors.

This is why IPAP 2016 includes a section of work to design sector-specific incentives for the agro- processing and rail components sectors. These are of particular importance in the context of our ongoing efforts to support labour-intensive sectors of the economy.

Let me turn now to the crucial area of exports.

While it is common knowledge that SA?s exports to its traditional trading partners have taken a hard knock in the wake of the global recession, the better news is that this has been offset to some extent by rising exports to the African continent ? most notably in autos, agro-processing, transport equipment and chemicals. You will find the numbers in the Economic Analysis section of the IPAP, in the context of ongoing efforts to boost regional industrial integration in Africa.

That said, there can be no doubt that SA must very significantly up its game with respect to exports ? this a major theme of IPAP 2016.

So you will see that the document places special emphasis on the need to work hard both with existing exporters and with those companies that can be supported to become export-ready.

The revitalisation of our export councils and the creation of a specialised Division within the dti to support this work bear testament to our resolve in this regard.

Going along with this, it is imperative that South African companies leverage the devaluation of the Rand to make locally manufactured products more globally competitive and create opportunities for the expansion of exports and further development of our domestic manufacturing capabilities.

As I have already pointed out, and as you all know, our automotives sector has performed exceptionally well. For example, R7.8 billion in government incentives has yielded R28.5 bn worth of investments by OEMs. At the same time, exports grew to R151.5 billion in 2015 and 113,360 jobs are supported in the sector. Once again the IPAP provides much more detail on all of this.

However, we would be foolhardy to rest on our laurels in what is both a hugely competitive and dynamic global automotives market characterised by enormous technology advances, not least in the development of low carbon vehicles. This why I wish to take this opportunity today to announce that the dti has established a team of technical experts to develop a post-2020 Automotives Master Plan.

The technical team is led by Professors Justin Barnes and Antony Black and includes a range of other industry and industrial policy experts from B&M Analysts, Trade and Industrial Policy Services (TIPS) and senior staff of the dti.

The mandate of the team is to examine the entire automotive sector and not just the existing Automotive Policy Development Plan (APDP), which means that it will now include light, medium and heavy vehicles and motorcycles. The team will therefore engage extensively with all stakeholders - including OEMs, component suppliers and organised labour ? and it will report to an Executive Oversight Reference Committee which will be chaired by me.

This Oversight Committee will include Mr Jeff Nemeth (The CEO of Ford SA) and Mr Chris Whitfield (The CEO of Nissan SA) representing NAAMSA; Mr. Ken Manners and Mr. Dave Coffee representing NAACAM; and representatives of NUMSA, the organised labour formation in the sector. It will be further supported by senior officials from the dti led by the Chief Director Automotives, Mr. Mkhululi Mlota.

The purpose of this work will be to ensure that in the context of long term policy certainty a post 2020 Master plan will create a framework to secure even higher levels of investment and production; higher exports and localisation and employment.

A further theme of IPAP 2016 introduces a medium term programme to ensure that gas-based industrialisation increasingly develops into one of the spines of our industrial strategy ? leveraging natural gas as both a source of power generation and a driver of industrial diversification.

The Southern African region is fast growing into an oil and gas jurisdiction, led by major on- and off-shore gas finds in Mozambique, Tanzania, Botswana and Namibia ? together with significant potential for substantial hydrocarbon resources in SA.

In this context, there is great potential both for cheaper, less carbon-intensive energy generation and for the utilisation of gas for up- and downstream industrialisation.

However, the regional context is vastly different from other major petroleum jurisdictions, with political complexities that will require very careful policy development, planning and coordination to unlock the full potential of a regional gas economy - not least because of the lack of developed transportation corridors and gas utilisation infrastructure in the region.

However, I repeat the remark I made earlier: this work is not characterized by endless planning. Already the TNPA has issued RFPs for the import, storage and reticulation of LPG ? a first step in the enablement of a gas market.

The full scope of this work-stream is set out in more detail in IPAP 2016. It is led by a Working Group comprised of senior dti managers; industry experts and representatives of SASOL; and the Group is working very closely with the IPP office of the Department of Energy, which, as is well known, piloted the successful Renewable Energy Independent Power Producers (REIPP) initiatives.

The work has already progressed significantly in terms of:
  • The development of an appropriate gas utilisation model for SA and the region;
  • The identification of a series of regional projects in the gas sector;
  • Driving the establishment of SA as a hub for the regional oil and gas services sector; and
  • The development of gas value chains.

Working with the IPP office and the department of Energy, the team will support the LNG-to-power procurement programme currently underway by assisting in driving the development of gas markets and non-IPP gas utilisation within the three ports identified for LNG importation by the DOE and IPP office.

It will also lead SA?s outreach on a regional level focusing on a collaborative arrangement to ensure the development of initial onshore utilisation facilities such as power generation, gas-to-liquids and fertiliser plants. This is just for starters. There are many other possible downstream uses that can be further developed over time.

I am happy to announce today that a formal launch of the Gas Industrialisation Unit - led by the Industrial Development Division of the dti, but including other government departments and key industry stakeholders - will take place on the 16th of May in Cape Town.

I would also like to take this opportunity to express my profound appreciation to the IPP office and the DOE for their ongoing efforts to secure increasingly stronger localisation requirements in the renewable energy generation industry. These have contributed significantly to the establishment of a renewable energy component-manufacturing sector- some of the highlights of which are further set out in the IPAP. We are confident that a great deal more progress can yet be achieved in this area.

I hope you will agree that all of the interventions I have been talking about provide significant grounds for, let us say, cautious optimism going forward.

But what is inescapable - and I mention this in my Foreword to IPAP 2016 ? is that everything we have been trying to accomplish has to be set in the context of very tough economic times. I make this point here today because when we state that we have been implementing IPAP against very strong headwinds it is sometimes suggested that government is looking for excuses.

The fact, however, is that successive iterations of IPAP have not only pointed to global headwinds but have also set out the very real domestic constraints confronting industrial policy. These, as you will know, include electricity supply and prices; port and rail prices and inefficiencies; the skills constraint and the ?red tape burden,.

But rather than lamenting these problems government has called for a collaborative problem-solving approach that gets the right players together in the right places at the right times. I am confident that this is the only workable approach - and that, indeed, significant progress is beginning to be achieved.

For example - and allow me to express my appreciation to the Ports Regulator in this regard ? the new tariff dispensation recently announced excludes any tariff increases for the export of manufactured value-added products. This is critically important.

Likewise, the Transnet National Port Authority?s support for the oil and gas and boatbuilding sectors has been pivotal in progress towards unlocking their enormous potential.

Continuing planned infrastructure development by the TNPA will be critical in providing an enabling framework for private sector investment and operations in the ports.
 
Now let me tackle the issue of red tape head-on: Government?s commitment to providing a more development-friendly business and investment environment is another key theme of IPAP 2016 and is demonstrated by two major initiatives:
  • the establishment of an Inter-Ministerial Committee to tighten up the intra-governmental coordination required to underpin the new One-Stop Investment Centres; and
  • a rapidly expanding partnership between the Companies and Intellectual Property Commission and all the major banks to provide official company registration facilities both within their branches and online.

A lot of what I have been talking about today has been focussed on sector-specific support measures and the successes we have been able to achieve through their application. But equally important in many respects are some of the cross-cutting policy instruments. Allow me to dwell for a moment on just one of them: procurement.

Government has set itself a target of 75% local procurement by the end of this term. But to achieve this, it has deployed a specific set of policy instruments. I will just highlight three of these for now:
  • The Competitive Supplier Development Programme.
  • The use of Clause 9(3) of the Preferential Procurement Policy Act, which enables any government entity to stipulate local procurement requirements; and
  • Designation for local procurement.

Government has Designated a significant number of products for local procurement and by all accounts manufacturing companies have benefited significantly from the fact that aggregate local demand has been raised for locally produced products.

This work is not an overnight effort. It requires building the requisite capacity in government to undertake strategic sourcing and strategic supplier development ? work which falls under the National Treasury. It also requires the systematic training of procurement officers at all levels of government and robust research to underpin the work. Every effort will continue to be made to ensure that compliance with the procurement law is secured - including the fact that compliance will now become an audit function.

But I also want to say that the responsibility for driving sustainable localisation should not be seen as resting just with government. For example, the buy local campaign requires a national effort.

Allow me therefore to appeal to the private sector ? in the health, mining, retail and telecommunications sectors in particular. Local procurement and supplier development can be a competitive advantage in many instances, allowing for shorter supply chains, on-time delivery and quality assurance. A stronger commitment from the private sector to support local manufacturers will create jobs and wider income which in turn will boost local demand in a virtuous cycle of growth.

Finally, let me make a brief but appreciative mention of the work of our two Divisions - Investment SA and IDIAD ? which are responsible for our foreign direct investment and incentive support. Their work is not set out in detail in IPAP, but is no less important for our industrialisation effort. I refer you again to the investment and incentive highlights support sections in IPAP 2016. This broader work includes the significant progress with respect to our IDZ and SEZ programmes, which is also set out in the IPAP.

In conclusion, ladies and gentlemen of the media: I think I can fairly say that significant progress has been achieved with regard to the difficult process of reindustrialising our domestic economy. Of course, much more needs to be done and continuing significant constraints and barriers have to be overcome as we traverse this difficult road.

As you will have seen ? or felt ? IPAP 2016 is a hefty document. It contains many programmes and examples of progress that I have not had the time to mention today.

But the key programmes and the successes that I have been able to touch on have provided us with the concrete experience and learnings to create real platforms for replicating and cascading these successes across other key sectors.

They have also provided us with the confidence that we can strengthen and deepen the national industrialisation effort.

So therefore allow me to draw to a close by expressing my deep appreciation to those who continue to support this effort and play an important role in the implementation of this collaborative effort.

In particular, to thank my fellow Ministers in the economic cluster; the DGs of the cluster; the IDC -represented here today by David Jarvis and Shakeel Meer - and to all those other supporting institutions that are central to this huge combined effort.

I have no doubt that we have a good story to tell and that by working more and more closely together much more can be achieved.