Presentation by the Department of Trade and Industry.

Parliamentary Portfolio Committee on Trade and Industry

6th March 2013

Administered Prices and the Manufacturing Sector.

1

Context Issues - Multiple shocks on the manufacturing sector include:

- Protracted global recession and decreased demand from traditional trading partners impacting heavily on manufacturing sector – jobs/exports/capacity utilisation/investment

- Successive annual iterations of IPAP have highlighted serious negative impact of ‘bunched up’ and sharply escalating administered prices on the manufacturing sector:

- electricity prices (especially where high municipal premiums are added)-Port charges amongst highest in the world with significant port and logistics inefficiencies

2

Context Issues - Electricity and port tariff setting and regulation are neither functions

nor core competencies of the DTI. - Industrial Policy, the IPAP included, is a complex set of inter-locking,

inter-departmental, transversal and sector specific policies and interventions. Policies outside of the DTI do have a profound impact on industrial development.

- DTI provides a perspective mindful that the PPC has invited key institutions to provide the positions of other service provider, regulator and line function departments on the issues under discussion.

- DTI informed by the often repeated perspective that sharply escalating electricity prices and grossly distorted port charges constitute serious dangers to the viability of the manufacturing sector

3

Electricity Supply & Distribution Environment

- The electricity supply and demand environment remains difficult for the manufacturing sector:

– NERSA has recently awarded an electricity tariff increase of 8% over the next 5 years

– High, sometimes triple digit, increases are added to the Eskom tariff by municipalities

– There are very significant electricity tariff disparities within and between municipalities

4

Possible short-term policy options

• Strengthen of the Manufacturing Competitiveness Enhancement Programme (MCEP) and propose amendments to the 12i incentive to up-scale support for cleaner production and energy-efficiency project development and implementation. For the MCEP this can take the form of an increase in the capex ‘cap’ for energy efficiency projects and/or an increase in the matching grant formula with an increase in the dti’s contribution.

• An appropriate strategic approach and institutional location to scale up and expedite implementation of Eskom’s Integrated Demand Management (IDM) with an explicit prioritisation of the most vulnerable and strategic industrial sectors.

5

Possible short-term policy options

• Scale-up support to the National Cleaner Production Centre (NCPC) in both energy audit implementation, under the MCEP and in training private sector energy auditors

- NCPC (13 staff members) has worked with over 200 companies in the last 2 years, saving 185 GWh for companies by introducing

energy efficiency measures.

• Engagement of SALGA; Metros and Municipalities with significant numbers of vulnerable and strategic sectors to encourage a coordinated approach to assisting these sectors and to encourage moderation of municipal tariff increases under the current circumstances.

6

Possible short-term policy options

– Rolling out and localisation of Smart Grid and Smart Metering technology as an urgent priority, with conditional localisation component through Designation. Improve efficiency and billing systems.

– Conceptualisation of labour-intensive IDM approaches. e.g.; Australia where suburbs are systematically targeted

for residential light-bulb replacement.

7

Port Charges and Implications for the Manufacturing Sector

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Context Issues

- Successive iterations of IPAP for last 5 years raised following: - SA has amongst the highest port charges in the world

- Container and automotive cargo owners face price premiums of between 710% and 874% above the global norm. (See Slides 10 and 11)

– Compounded by significant ports inefficiencies

- Represents a very significant constraint to exports of value-added, labour intensive, tradable manufactured goods

9

10

Administered prices – port charges

Source: AIDC Port Benchmarking Study, 2007

$0.00

$100,000.00

$200,000.00

$300,000.00

$400,000.00

$500,000.00

$600,000.00

SAN

TOS

VER

A C

RU

ZB

UEN

OS

AIR

ESLA

EM C

HA

BA

NG

YO

KO

HA

MA

NA

GO

YA

AN

TWER

PSI

NG

APO

RE

LE H

AV

RE

TILB

UR

YB

REM

ERH

AV

ENC

APE

TO

WN

DU

RB

AN

POR

T EL

IZA

BET

HC

HA

RLE

STO

NB

ALT

IMO

RE

NEW

YO

RK

Terminal Handling Charge Cargo Dues Sea Side Costs

Average Cost per vessel call

11

Implications - Current Port Tariff Structure

- SA Manufacturers are apparently ‘subsidising’ other TNPA operations.

- Tariffs for the export of bulk commodities are charged lower prices than the global averages. (Source: Ports Regulator) The export of primary commodities, mainly coal & iron ore and to a lesser extent importers of manufactured goods are priced below those required for export of tradables.

- Foreign owned cargo trans-shipments through a SA port also benefit from lower prices.

- Stands in direct contradiction to government policy (NIPF/IPAP and NGP) to support export of manufactured goods with wider economic benefits, including the balance of trade

12

TNPA Proposed Pricing Strategy• TNPA draft pricing strategy presently subject of stakeholder

engagement, including government departments

• TNPA suggested approach - welcome break with status quo

but remains problematic. The following could be considered:– Alternative or independent asset valuation as basis for cost recovery

model– Rigorous, inclusive assessment and economic cost-benefit analyses of

proposed ports pricing strategy for the domestic economy, including manufacturing sector

– International bench-marking of ports pricing strategy and ports efficiency– Inclusion of other value adding, revenue generating activities in the

income generation and pricing model. e.g.; Upstream Oil and Gas industry.

13

Thank You

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