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12 February 2007

Introduction and mid-term review of the Economic Cluster

The South African economy has experienced the longest upswing in its history. This is widely acknowledged to be the product of South Africa's transition to democracy, government's economic policies and favourable global economic conditions. While average Gross Domestic Product (GDP) per capita growth was less than 1% per annum between 1994 and 2003, it has accelerated from 3,1% in 2003 to 4,8% in 2004 and to 5,1% in 2005. Clearly, government's objective of growing the economy by at least 6 percent beyond 2010 is attainable.

However there remain challenges that need government's focused attention, foremost amongst these being unemployment and poverty.

This is the backdrop against which the Economic Cluster reviewed progress and challenges with regard to government's Programme of Action on the economy as an input to the recent Cabinet Lekgotla in January.

In this regard, the following key achievements are noteworthy:

Accelerated and Shared Growth Initiative for South Africa (AsgiSA) introduced

The Economic Cluster prioritised the work of AsgiSA in its work last year and achieved a number of key milestones. Key successes include:

* the approval of the National Biofuels Strategy in November 2006
* the approval of the National Airlift Strategy in July 2006
* In Business Process Outsourcing and Offshoring (BPO&O), the finalisation of the Government Assistance and Support Programme with the design of incentives and agreement on the training of 1 000 young people.

AsgiSA-specific cross-cutting initiatives like the Joint Initiative for Priority Skills Acquisition (JIPSA) have also enjoyed significant progress. A highlight for JIPSA was the Critical Scarce Skills Audit and the subsequent finalisation of the Critical Scarce Skills Master List.

Broad-Based Black Economic Empowerment (BEE) Codes of Good Practice finalised

This last Friday (9 February 2007) the Codes of Good Practice on Broad Based Black Economic Empowerment were gazetted along with two sector charters (Construction and Finance). This followed Cabinet's approval of the Codes in December 2006. The Codes allocate 70% of their points to broad-based elements (such as enterprise development, skills development, preferential procurement and socio-economic development), and will thereby contribute to more inclusive economic growth.

With the gazetting of the Codes, the process of appointing the BEE Advisory Council is also under way.

Road infrastructure in Expanded Public Works Programme (EPWP)

In terms of Expanded Public Works, R3 billion over the Medium Term Expenditure Framework (MTEF) has been allocated through the Infrastructure Grant for Provinces to fund labour-intensive construction of access roads. There are success stories in this programme that provide important lessons. In particular, Zibambele, an innovative programme that originated in KwaZulu-Natal (KZN) and brings together work opportunities, skills development and enterprises development, is being replicated in Mpumalanga and the Free State.

Improved Research and Development (R&D) allocations

Government is committed to moving South Africa towards the knowledge economy through increasing research and development. A consistent project has been the effort, led by the Department of Science and Technology to drive up Research and Development (R&D) expenditure as a share of GDP. It has risen from 0,76% of GDP to 0,87% by 2005. It is hoped to reach the targeted goal of 1% by early next year.

Besides this progress in R&D expenditure, there is supplementary evidence to suggest that South Africa is emerging as a regional technology hub: We are one of two short-listed candidates for the Square Kilometre Array (SKA) project; our low orbit satellite ("SUMBANDILAsat") is due to be launched in May 2007; the Department of Science and Technology (DST) has partnered with Airbus in Aerospace and Aeronautics research and South Africa is considered a leader in Pebble Bed Modular Reactor (PBMR) technology adoption.

Key plans in transport [including public transport and National Freight Logistics Strategy (NFLS)]

Certain key sub-plans in the transport arena have recently been granted Cabinet approval, in particular the five-year Airlift Strategy (approved in July 2006) and the National Passenger Rail Plan (approved in December 2006). Minister Erwin will discuss this further this afternoon in the Economic Cluster focus on infrastructure.

Completion of National Industrial Policy Framework (NIPF) draft as a guiding framework for specific interventions

The National Industrial Policy Framework has been adopted by Cabinet and the Department of Trade and Industry and the Cluster have been directed to rapidly move forward to implementation, focusing on identifying key strategic industrial policy interventions. This will be elaborated on below.

Implementation of the National Skills Development Strategy

The implementation of the National Skills Development Strategy has made significant strides. These will be discussed by Minister Naledi Pandor tomorrow along with the challenges still faced.

Information and Communications Technology (ICT) Policy Landscape

Since the enactment of the Telecommunications Act of 1996 the government has continued to implement policies for the phased liberalisation of the telecommunications sector. This includes the removal of Telkom's monopoly, the introduction of the Second Network Operator (SNO) [NeoTel], and the introduction of the Electronics and Communications Act. This area will also be dealt with in the Economic Cluster briefing on infrastructure.

Lowering cost of doing business

Research has shown that many of the costs of doing business remain relatively high. While there are many regulatory improvements by individual departments there is a need for systematic regulation of administered prices and work will continue on this area. The strengthening of economic regulators, including a focus on concurrent jurisdictions especially in network industries (e.g. electricity, telecommunications, rail and ports) is a high priority item in the Cluster's Programme of Action (POA) going forward.

Small enterprise programmes (particularly financing)

Our institutional response to the challenges faced by small enterprises involves providing greater access to micro-finance and finances at the lower end of the spectrum, the roll-out of infrastructure that provides financial support such as the expansion of Khula and the rolling out of the Small Enterprise Development Agency (SEDA) as a provider of non-financial support with an expanded infrastructure to enable improved delivery.

Khula Start-Up Fund and the South African Micro-finance Apex Fund (SAMAF) have made progress. The Start-Up Fund has a capitalisation of R150 million (over five years) to be disbursed to small enterprises with a minimum 26% black shareholding.

The Apex Fund has been launched in all nine provinces with 27 approved loan application outlets (partner organisations). Between May and October 2006 R23 million was disbursed. Permanent provincial managers are in service in all nine provinces.

The National Empowerment Fund continues to make good progress in providing access to finance for black entrepreneurs, facilitating economic transformation in a sustainable manner.

The 2007 POA that will be released shortly is to address continuing challenges that we have identified. Some of the interventions we are considering include preferential procurement options, a retail strategy for small and micro enterprises, investigating support for marketing co-operatives and strengthening state backing for financial and non-financial small enterprise support, amongst other measures. In short, Government is to focus on improved service delivery to small enterprises and to ensure a more streamlined service.

Management of the exchange rate

The International Expert Panel (the "Harvard group") has raised concerns around the volatility of the exchange rate and the possibility of its over-valuation. The latter is a potential problem given that increasing export orientation is viewed by the Panel as a key employment creation strategy.

Government considers this an issue that requires some consideration, in particular the articulation of key macro-economic factors in light of our commitment to halve unemployment and poverty.

Government implementation capacity

Government's capacity to deliver was also a focus of the Cluster's mid-term review. Improving institutional arrangements must be part of an overall strategy to improve implementation capacity. The type of improvements envisaged include: strengthening of monitoring and evaluation of government programmes, improved co-ordination between government Clusters as well as the adoption of a system of Regulatory Impact Assessment.

Our mid term review and our analysis of the 2006 Programme of Action has informed the approach of the Cluster going forward.

Economic Cluster Approach

The July 2006 Cabinet Lekgotla approved that the Cluster articulate a critical path towards government's 2014 and AsgiSA goals, as the basis for a more coherent and focused Programme of Action.

In effecting this mandate, the Economic Cluster considered various scenarios and undertook modelling exercises to identify those interventions that are likely to be critical to the achievement of the 2014 goals.

Arising form this work, the Cluster will, going forward, focus on three key areas, namely:

Firstly, to focus on increasing economic efficiencies, such as amending competition policy to support effective regulation.

Secondly are efforts to promote dynamic growth sectors as part of applying the National Industrial Policy Framework, including the leveraging of public investment and spending as well as ensuring the effective implementation of finalised sector strategies.

Thirdly, the implementation of programmes aimed at the successful integration of small and micro-enterprises, including the reduction of regulatory burdens.

In addition the Cluster will pursue interventions with considerable potential to change the structure of the economy focusing on:

* ICT infrastructure, especially broadband
* public transport
* energy.

The industrial policy dimensions of this work will form an important part of the industrial policy work going forward. These three sectors will be discussed in some detail by Minister Erwin in the infrastructural briefing.

An additional area of focus to be discussed below is the second economy and interventions targeted at this area.

The Economic Cluster's Programme of Action (2007)

Although it is not finalised, the Cluster would like to highlight some aspects of our POA for 2007.

National Industrial Policy Framework (NIPF)

The dti has been engaged in the development of the NIPF through an intensive research and consultation process. Cabinet has approved the NIPF, which paves the way for implementation of strategic programmes set out in the framework.

An annual Industrial Policy Action Plan that identifies priority areas is to be developed to guide implementation. Greater co-ordination between the different departments will be pursued in order to overcome co-ordination failures in implementing industrial policy.

The final version of the Framework will be released at an appropriate time in the near future.

Sector Strategies

The NIPF will assist in the effective implementation of those sector strategies that have been finalised and the identification of further sectors.

There are three categories of sector strategies:

First, AsgiSA has identified three immediate priority sectors i.e. Business Process Outsourcing and Offshoring (BPO&O), Tourism and Bio-fuels. Significant progress has been made to develop and implement strategies in these sectors for example the Government Assistance and Support programme for BPO & O.

Second, our major infrastructural investment programme and our focus on ICT, energy and public transport has implications for various industries and will require management if we are to avoid difficulties on our current account. We will therefore be investigating sector interventions in capital goods, engineering and construction inputs.

Third, as ongoing work of the National Industrial Policy Framework, the Department of Trade and Industry (dti) will be highlighting some sector strategies, or aspects thereof for the Economic Cluster to focus its attention on. For example the highly advanced work on strategies for clothing and textiles and chemicals will be progressed to implementation phase going forward.

Second Economy Interventions

The Cluster believes that the best approach to address challenges of the Second Economy is to create employment in the formal economy. However there continues to be a need to develop interventions that will be specifically targeted to key groups in the Second Economy such as the support provided to small and micro-enterprises and the Expanded Public Works Programme. These interventions, as well as others targeted at marginalised households, particularly in the former homelands, will continue and be strengthened.

Conclusion

In conclusion, halving unemployment and poverty by 2014 is within reach. This is a key message as an Economic Cluster. To enable the achievement of these goals, the Cluster has developed a critical path highlighting necessary actions. A focus on increasing economic efficiencies, promoting dynamic sectors and focusing on support for small enterprises will be our key focus over the next three years. The rollout of the National Industrial Policy and its articulation with these areas of emphasis is key to our success. In addition the Cluster will place additional focus on policy co-ordination and implementation.

Issued by: Department of Trade and Industry
12 February 2007