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CONTRIBUTIONS TO GROWTH, EMPLOYMENT AND EQUITY THROUGH ITAC’s INTERVENTIONS

(Key findings emanating from impact assessments)

Dr. Moses Obinyeluaku

Chief Economist

05 November 2013

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Contextual issues

• Government’s outcomes approach provides a framework for enhanced the monitoring of service delivery, including guidelines for results-driven performance that forms the basis of ministerial performance agreements and the related delivery agreements to which the dti and EDD are party

• To ensure continued relevance to both departments and alignment of ITAC to the NGP and NDP, the Commission has begun to gauge the performance of the beneficiaries of its instruments against the policy objectives set out in the NGP and TPSF

• Whether or not ITAC’s instruments have made a positive impact depends on the extent to which the support has resulted in increased domestic manufacturing, investment, employment, value addition and competitiveness after the support was given in comparison to the periods before the support

• To date, a total of 7 impact assessments have been carried out on the following critical sectors: Home Textiles, Tower and Lattice masts, Aluminium Extrusions and Televisions

• In each case, before finalising the report, the Commission also conducted an exploratory discussion of the findings with the relevant firm regarding how to realise better performance in the subsequent years

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Home Textiles sector

• In April 2010, ITAC amended the rebate item 311.42 on certain fabrics used in the manufacture of linens, interior blinds, mattress and articles of bedding to support the Home Textiles sector in:

– Increasing cost competitiveness without lowering their profit margins

– Replacing imports with domestic production

• Data limitation meant that only the following firms whose information is available for the period 2007-2012 were assessed:

– Volpes: Located in Port Elizabeth, the firm is a manufacturer and consumer (supply to its outlets) of its products

– Sheraton Textiles: Located in Cape Town, the firm manufactures and supplies to the final consumers

– Khanadler Investments CC: Located in Cape Town, operate in the same manner as Sheraton, but is relatively new (began operating in 2005)

• Volpes:– The creation of the rebate changed the composition of production in Volpes, from being a major

consumer to becoming the main producer of what it consumes. The firm’s domestic manufacturing increased by an additional 79 000 volumes (or 29 per cent each year since 2010), as its outlets rose from 6 before the support to 17 after the support

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Home Textiles sector (2)

• Volpes:– On average real total investment increased by an additional R1 million following an

improvement in sales, owing to the opening of more outlets since the rebate facility was created – The provision of the rebate enabled Volpes to create an additional 27 direct jobs and 38 indirect

jobs since 2010– The average real wage of unskilled labour has outgrown that of skilled by more than 28 per cent

since 2010, which works towards the firm’s efforts in narrowing income inequality– Gains were made in domestic value addition, which increased by 4 per cent following the rebate

provision– The provision of the rebate also enabled Volpes to be more competitive. Total factor

productivity grew by 13 per cent in 2010 compared to negative 7 per cent in 2009. Had it not been for a weakened and volatile rand which affected production costs (through material costs), the competitiveness position of the firm would have been improved more than the current performance

– To improve on the current performance: Volpes still imports more than half of its finished items, which it can neither produce locally nor purchase from other local firms (due to cost ineffectiveness). While some of the determinant factors are exogenous, re-establishment and/or establishment of competitive local milling factories could assist in addressing rising input costs and growing production costs

– In order to reduce the importation of more finished goods and increase local manufacturing, the importance of the production incentive programme offered by the DTI was discussed with Volpes and the firm is currently in the process of applying for the production incentive

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Home Textiles sector (3)

• Sheraton Textiles– The creation of rebate facility saw this firm cease the importation of finished goods, making domestic

production almost equal to total production. A total of 385 000 gains in the volume (or 19.3 per cent) of domestic production were recovered in 2010

– Real total investment has more than doubled since the provision of the support. Sheraton Textiles invested an additional R3.9 million (or 25 per cent of the total investment) since 2010 mainly due to the production incentive programme by the DTI

– Despite a decline in output during 2011 and 2012 (mainly due to losses in the volume of production to 20 new entrants into the market following the creation of therebate facility), the firm managed to sustain production and jobs during difficult times

– Domestic value addition increased by 8 per cent with the introduction of newly designed products into the market, following the provision of the rebate support

– After a sharp recovery following the provision of rebate support in 2010 (total factor productivity grew by 30 per cent), the firm’s competitiveness position deteriorated again during 2011-2012, owing to a weaker and volatile rand. This could have been worse had the rebate support not been provided. The firm would have paid an additional 22 per cent in duty

– To improve on the current performance: A more coordinated sectoral policy is required to ensure that the long term benefits of government interventions (of growing production and jobs) are realised. While the rebate support from ITAC provides for cheaper imports of raw materials, and the production incentive programme bythe DTI supports the manufacture of new products through the availability of new machines, it is necessary to also ensure that illegal imports and a shortage of skills in design do not hinder the achievement of government goals

– In order to retain and grow sales, the firm has devised a new production strategy, introducing henceforth a brand name regarding its products sold to retailers

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Home Textiles sector (4)

• Khanadler Investments CC– Khanadler Investments is one of the new entrants into the market following the creation of the rebate

facility. Since 2010, the firm has moved from premises that are 600 square metres to that of 1 200 square metres. Currently the firm is considering procuring its own premises of more than double the current square metres in size

– Total domestic production and capacity in Khanadler Investments CC has more than doubled, owing to the creation of the rebate facility. On average, a total of 60 000 gains in volume (and 2 600 in capacity) have been made since 2010

– Real total investment has more than doubled since the provision of the support. Khanadler Investments CC has invested an additional R56 000 (or 24 per cent of the total investment) since 2010

– The provision of the rebate support has contributed to the direct employment of about 22 additional people in Khanadler Investments. A further 32 per cent increase in output each year could see the firm doubling this performance by 2015

– The domestic value addition increased by 8 per cent following the support

– To improve on the current performance: For a variety of reasons, greater competitiveness has not been realised since the provision of the rebate support (evidenced by the persistence of negative total factor productivity growth since 2009). Steady growth in material costs (imported input costs to be specific) has undermined the firm’s ability to make a difference. The weaker and volatile rand are major contributing factors

– Given the limited size of business premises, the firm has not been able to take advantage of the production incentive programme by the DTI. The firm looks forward to procuring new machines through the incentive programme as it grows its market share and secures bigger business premises

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Television industry

• In October 2009, ITAC amended the rebate item 316.17 to support the television industry– The rebate facility allowed the industry to enjoy a full rebate of the duty for investing locally in machines

that insert components onto circuit boards instead of importing circuit boards already fully populated with components − and moved from SKD to CKD assembly

• Only two firms that existed before the creation of the rebate are still operating; the remaining 7 have either changed their branding or are new into the market: The focus is on one of the two firms:

– Vektronix: Located in East London, the factory was one of the first four television plants in South Africa

• Vektronix:– With the rebate amendment, the firm commenced the local manufacture of flat-panel televisions (LCD

and plasma)

– In order to take advantage of the new opportunity for the CKD-manufacture of flat –panel televisions (LCD and plasma), Vektronix has invested R46.9 million since the period of the support to acquire the necessary equipment to meet Samsung’s requirements for local manufacture

– The firm created 87 additional direct jobs during 2010-2012. This rose to 150 jobs in July 2013. Further 43 indirect jobs were also created in the following contracting firms: Isolite, Coral Print and Shave and Gibson

– The sharp increase in sales and annual turnover after the rebate support, together with the recent loan from the IDC, provided for additional capacity for future expansion projects such as manufacturing set-top boxes for SA’s digital migration and CKD-manufacture of Pace set-top boxes in 2014

– To improve on the current performance: Additional investment and job creation is expected through the most recent introduction of import duties and rebate for set-top boxes in December 2012

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Tower & Lattice masts industry

• In December 2010, ITAC increased the general rate of customs duty on towers and lattice masts for telegraph lines and electric power lines, classifiable under tariff subheading 7308.20.10, from free of duty to 15 per cent ad varolem

– The products are power pylons and cellular communication masts. These are manufactured using steel angles, sections, plates, bolts, and nuts, which are sourced locally

• Data limitation meant that only two major firms whose information is available for the period 2005-2012 were assessed:

– TRICOM: Located in Pretoria, the firm’s focus is on the international market particularly Africa

– Babcock: Located in Johannesburg, the company has been the driving force behind more than 70 per cent of Eskom’s high voltage transmission line infrastructure in South Africa

• TRICOM:

– The support gave the firm a form of protection, which it needed in the current face of uncompetitive export pricing with China, India and Turkey

– Gains are realised from greater domestic value addition and competitiveness

– The negative effect of the loss in export share on total production was partly offset by the provision of the tariff support, as the firm switched from depending on exports to focusing largely on the local market in order to sustain output. Today, TRICOM is one of the biggest domestic producers

– The firm was able to retain 50 per cent of jobs, following the recovery in domestic production after the support was made available. Nonetheless, the firm is still underutilised by 2 500 tonnes per month

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Tower & Lattice masts industry (2)

• TRICOM:

– To improve on the current performance: Considering that China receives a 9 per cent rebate on exports per tonne (or US$99), TRICOM is almost undercut by more than 70 per cent (or US$709) and therefore cannot compete effectively in the international market despite the recent weakening of the rand. The firm intends to source other markets for exports to enable it to address the current problem of underutilisation

– It also plans to diversify its production toward “value” production of services, in order to create more jobs and increase domestic value addition and competitiveness in subsequent years

• BABCOCK:

– Had it not been for the support, the unanticipated delays in Eskom projects would have adversely affected the towers and lattice masts section of the firm, if not closed it down completely

– Domestic production would not have recovered in 2012 and unemployment could have worsened by more than 16 per cent, but the firm recovered about 16 jobs in 2012

– To improve on the current performance: To increase employment by 50 per cent (or create an additional 57 jobs) over the next three years, the output of the firm would need to grow by an additional 10 per cent on average each year between 2013 and 2015

– Meanwhile, with the advent of additional transmission line work from Eskom anticipated in early 2014, the firm is expected to achieve the growth of 10 per cent in output

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Aluminium Extrusions

• The closure of the BHP Billiton Bayside Cast House in Richards Bay during October 2009 deprived extruders of a competitive source of billet (an important input into the aluminium extrusion industry) which resulted in an increase in the manufacturing costs of extrusions

• Meanwhile, the extrusion sector is one of the most critical sectors in the economy. For instance, in addition to 1 500 jobs created in the manufacturing of extrusions (or in semi-fabrication sector), about 30 000 more jobs are generated downstream by the medium sized final product manufacturers

• ITAC increased the general rate of customs duty on aluminium extrusions (bars, rods and profiles), classifiable under tariff subheading 7604.10.35, 7604.10.65, 7604.21.15, 7604.29.15 and 7604.29.65, from free of duty to 5 per cent ad varolem in March 2011

• Data limitation meant that only one major firm (controlling about 36-40 per cent extrusions market) whose information is available for the period 2008-2012 was assessed: Hulamin Extrusion located in Midland

• Hulamin:

– To date, an import duty of 5 per cent on extrusions, which was implemented in 2011 has not helped to curb the exponential growth of Chinese imports the share of which has increased from 16 per cent in 2008 to 26 per cent in 2012. As at 2012, China produces 50 per cent of the world‘s aluminium market

– This in turn has undermined the firm’s ability to progress in the areas of domestic investment, employment, value addition and competitiveness

– To improve on the current performance: The re-establishment of local billet production remains critical for the survival of this sector. In the absence of this, the firm will have to create greater remelt capacity to deal with the growing imported input costs

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Conclusion and policy recommendations

• There is an assertion that the recent weaker rand will raise exports and improve trade balance. However, faced with the current reality of a globalised economy, industries are vertically integrated and exported products can contain a large proportion of more costly imported components that are not necessarily substitutable with domestically-produced products

• To address rising input costs and cross-subsidise the resultant growing production costs, some of the firms whose main focus is on:

– The international market, have now established their branches in China to take advantage of low production costs

– The local market, have now adopted an “import strategy” aimed at complementing domestic production with more imported finished products

• Should this continue, it would undermine government’s efforts to promote industrialisation and accelerate growth as well as employment in South Africa

Some recommendations: • Improve SA’s competitiveness: develop sector specific competitiveness enhancement programmes • Consider re-establishing and/or establishing competitive local production of raw materials where possible• Support curbing of excessive logistic costs at ports• Given the critical nature of the aluminium industry it is suggested that a strategic forum be held between

ITAC, IDC, DTI, EDD and the Aluminium Association to find more sustainable solutions to diverse challenges faced by the industry

• The success of Vektronix has revealed how co-operation between government institutions could help promote industrialisation in South Africa: after ITAC laid the foundation through the provision of the rebate support, the IDC, in complement, provided the firm with a loan, and both measures subsequently contributed to its achievements

• Africa needs a harmonised industrial policy to take advantage of the growing intra-trade and export opportunities within the continent

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Thank You

Office Contact Details: 012 394 5163

Cell: 083 617 1682 MObinyeluaku@itac.org.za

www.itac.org.za