CONTRIBUTIONS TO GROWTH, EMPLOYMENT AND EQUITY THROUGH ITAC

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CONTRIBUTIONS TO GROWTH, EMPLOYMENT AND EQUITY
THROUGH ITACs INTERVENTIONS (Key findings
emanating from impact assessments) Dr. Moses
Obinyeluaku Chief Economist 05 November 2013
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Contextual issues

• Governments 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 ITACs 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 firms 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 firms
  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 firms 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
  firms 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 Samsungs 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 SAs 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 firms 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 Eskoms 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 US99), TRICOM is
  almost undercut by more than 70 per cent (or
  US709) 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 worlds
  aluminium market
• This in turn has undermined the firms 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
  governments efforts to promote industrialisation
  and accelerate growth as well as employment in
  South Africa
• Some recommendations
• Improve SAs 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 YouOffice Contact Details 012 394
5163Cell 083 617 1682 MObinyeluaku_at_itac.org.za
www.itac.org.za