Business Update: Issue 15

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Progressive Leader - Issue 19

Progressive leader - Issue 19

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Speeches by Minister Rob Davies at the National General Council

I was asked to speak about the National Development Plan (NDP) as a partnership between government and business, and I am going to do that from the standpoint of our department's work. So I will talk about how our department's work, and in particular our efforts to promote, and industrialisation fit in with the NDP.

We have a number of domestic weaknesses when it comes to the performance of the economy, and the manufacturing sector in particular. What we are facing right now is another aftershock coming from the continuing global economic crisis. I think of the global economic crisis as an earthquake because the tectonic plates are interlinked, hits all parts of the world, and also has migrating epicentres. Because of extensive financialisation of the world economy, the bubble in the financial economy was the first signal of the global economic crisis - the first epicentre was in Wall Street. But the epicentre that is striking us now is in the East, and it is located in two things. The Chinese economy has been adjusting, trying to transform itself to what is called a new normal, which means that instead of extremely high levels of economic growth based on exports of value-added products to developed country markets, they are now trying to develop based on their domestic market, and move up the value chain. On top of that are concerns they may not be having such a smooth landing, and that has spooked the markets and led to a degree of uncertainty. The effect of that is hitting us not just in generally depressed conditions in the world economy - although those are definitely there. You might have seen that the IMF is downgrading its growth expectations for the world economy next year.

Global trade is seriously depressed, but it is striking us also in the form of much reduced prices for primary products. To give an example, the commodities super-cycle hit its peak in 2012, and if we compare the prices of some of our key minerals now to 2012, platinum has lost one third of the price, gold is about half of what it was and iron ore is only one third of what it was in 2012. And on top of that we now have a glut of steel, which means there is overproduction in the steel sector, with huge amount of movement of low-priced, dumped steel across the world. This challenge is hitting us right in the heart of our economy, which is based on the production and export of primary mineral commodities. We are not the only ones: Australia and Canada are both in a low-growth mode. Canada is in fact in a recession, and so is Brazil. I think many countries on the African continent are feeling and will feel the impact of this, as would many of the developing countries whose roles are producers and exporters of primary commodities.

So what do we need to do in these circumstances? I think we need to shift our place in the global division of labour. Being producer and exporter of primary commodities and importer of finished goods is not the most lucrative position to be in in the global position of labour. To give some examples: KPMG did a report a couple of years ago called Africa Risen. They said Africa produces and exports coffee and receives six billion US dollars for doing so. But that coffee is turned into products, blended, packaged and branded outside the borders of the African continent - that product fetches a hundred billion dollars outside. The part of the value chain where the real value lies is not in the primary production. Italy makes more from the production of gold jewellery than South Africa does from the production and export of gold.

These are the realities we need to come to terms with. And so I think that where the continent is going and where the continent is saved - and South Africa is very much part of that - is that our future lies in moving up the value chain and industrialising. Even if most of the jobs that will be created will be in service sectors, experience tells us that the linkages between a diversifying, higher value-added economy and service activities make the service activities stronger, more rooted and of higher quality than if these service sectors are completely footloose. Countries that have had completely footloose services find that they are extremely volatile. Take Cyprus banks as an example.

If we look at the performance of the manufacturing sector in the last quarter, of course we saw contraction, as we saw contraction in mining. But if we break it down, you will see that there was actually serious positive growth in automotives, there was growth in clothing and textiles, agro-processing and a number of other sub-sectors. We had declines in industries that are related to the iron and steel value chain -
with the glut of steel and iron - and some other metal fabrication subsectors, as well as sectors that are producing directly into the mining industry.

Chapter 3 of the NDP on the economy talks about the following objectives: Increasing exports in key sectors such as mining, agriculture and manufacturing. In other words, producing more value-added exports, infrastructure development to facilitate economic activity and job creation - a lot of that is coming from industries that provide inputs into the infrastructure programme - and developing a more comprehensive and effective innovation system. Minister Pandor will be pleased to hear that we do think innovation is a major driver of industrialisation and, in the end, it is the decisive factor; and it stimulates a higher rate of industrial innovation.

The government developed a nine-point programme to deal with the challenges facing the economy at the beginning of the year, which were largely home-grown and derived from the challenges in the energy sector. I think the work that has been done has stabilised the energy generation but has not solved all the problems yet. The nine-point plan had a number of elements in it, which included work on the agro-processing and agricultural value chain. It included the energy challenge, and a higher-impact industrial policy action plan. What does this mean? I am going to show a few examples of what we've achieved through industrial policy in the last five or six years, to make a point that industrial policy works where it is purposefully implemented, where it is the product of research consultation that makes sense in terms of the industry performance. But the impact is not felt tomorrow, it is felt in about five or six years after you have implemented the programme. That is the lesson we need to draw from this. We do believe we have been able to demonstrate this in the work in the automotive sector, clothing and textile, renewable energy, agro-processing, business process services, and the film sector, among others. We are now intending to prioritise three more sectors for high-impact work. One is the oil and gas sector - this is a product also of the Operation Phakisa and the Oceans Economy where we might have opportunities, among other things, for the servicing of oil equipment. We have an industrial development zone in the Saldanha area which is dedicated to that. Then there is agro-processing, linked to the agricultural value chain, because we think the quickest wins in job creation will come from agricultural jobs. The third one is a range of metal products capital equipment in engineering activities, linked particularly to infrastructure programme.

What do we think of the drivers of industrial development? First of all we think we can have infrastructure-driven industrialisation. Bear in mind we spent a record amount in the last term: R1 trillion, which is more than double the amount that was spent in any other term. This infrastructure spend can also generate industries if we use the right tools and localisation that we put into place. For example, in the railway sector localisation of bus bodies has demonstrated good results. As late as 2010, every single bus that came to service the World Cup was completely imported. Now, every bus body that is being procured for the bus rapid transit systems are manufactured in South Africa.

The next one is resource-based industrialisation. We are going to be moving quite soon into an Operation Phakisa on the mining sector. When existing customers are not buying as much of our product and are not paying the same prices, how do we generate new uses for our mineral commodities and how do we use that in particular as a tool to promote industrial development in South Africa? I am going to give you one example, which I have discussed with the CEOs of the industry who were very keen. We are and will be considering two applications for the establishment of platinum-based special economic zones. These could produce jewellery and catalytic convertors for the motor industry. But the most interesting example is that we could produce fuel-cell technology in two ways: Small power stations - I am told that if a village or community is 30 km or more from the grid it is actually cheaper to install a small fuel-cell unit that could generate power for clinics, community centres and even households.

That is something that is already being done with the Department of Science and Technology on an experimental basis. The other one, which South Africa could get involved in, is fuel-cell driven underground mining vehicles - there is experimental work being done on this as well.

The third one is advance manufacturing driven, innovation driven. The fourth driver of industrialisation is the work we have been doing on African regional integration. South Africa has been pushing this and now we see a big consensus developing in Africa. There are two things that should be driving integration on this continent. One, the priority at this moment, is to broaden integration by establishing large free-trade areas that reach beyond our existing regional economic communities. What this means is that the important priority now is to have a SADCC/COMESA African Community free-trade area functioning, and eventually the continental free-trade area. That has priority over deepening integration within our regional communities; that has priority over moving SADCC to our customs union, our monetary union, and things of that sort. The approach to integration has got to be driven by the concept of development integration. And that means we have to address the infrastructure backlogs which are very often the biggest challenges when it comes to promoting interregional trade, particularly infrastructure that link our economies. The second thing is we have to address the constraints on raising the level of interregional trade to above the 14% it is now, and we do not have sufficient diversification and industrialisation.

So SADCC has gone furthest in that regard and has produced a vision document that is supposed to be turned into an action plan by March this year. We are engaging in that process because we think that the development integration approach is a key driver.

It is going to mean important things for South Africa. We are not going to be able to occupy the same place in the African continent that we have, just simply providing manufactured goods into the African continent - they are the biggest market for manufactured goods. We are going to have to move up the value chain. We are having discussions now with, for example, Nigeria who wants to start an auto industry. We are supporting them in starting the auto industry but we want to position South African companies so they supply the kits that are going to be assembled. Some of the rail manufacturers have sub-assembly plants in other countries on the African continent. We are going to have to support more industrial development there. And we are also going to have to accept that certain value-added products that come from other African countries will have to find a presence in the South African market.

I mentioned earlier that the programmes have an impact five to seven years down the line. So one of the things that we did was to introduce the automotive production development plan - fast-tracking the automotive incentive scheme. There was a lot of discussion that took place, and we can see some of the results from this. Over the last five years we have had R25.7 billion worth of investment in the automotive sector, which includes some very significant investments by the established original equipment manufacturers. It also includes the entry of new original equipment manufacturers, including for example First Autoworks of China, diversifying by origin. We have also been changing the mix: public transport vehicles. I have already mentioned the bus bodies, but mini-bus taxi manufacturing is now also taking place in this country. Heavy and medium commercial vehicles are also coming in. The BMW Rosslyn plant won the JD Power Award for the best manufacturing plant. It beat the ones in Germany, so it shows what can be done.

We've seen a decline in exports in general, mostly because we are getting lower prices for our primary products. In some cases we are selling less of them, but actually the currency has stimulated some value-added exports. We are expecting to export 320,000 units of motor products this year. In fact, if you look at our export basket, automotive is one of the growing sectors.

Australia had a very similar programme, called the Motor Industry Development Programme. We learned from them. They decided to abandon their programme, and look what happened to them. Their last remaining automotive plant, Toyota, will be closing in 2017.

This is an event that has led the government there to set up a commission of enquiry into that.

The clothing textiles, leather and footwear sector was bleeding to death. It lost 45,000 jobs between 2000 and 2010. Many people said we can't make it, so why don't we just accept it. We will no longer have clothing and textile manufacturing in this country. We actually looked more deeply and a piece of work that was done some years ago led us to revise our programme, which was wrong. What we needed to do was to encourage raising competitiveness in the sector. So we changed the incentive programme to one that provided support for competitiveness raising. We also did work to identify sub-sectors of clothing and textiles which we thought could make progress. They included fast fashion - it means that if we have a month before imports can get here, local manufacturers could respond to the need of local retailers in less than that and have a head start. After a lot of work in supporting vertical clusters, we now have a situation where one of the leading fashion houses in this country, Foschini, which is quite happy to import from anywhere in the world, has actually invested in local manufacturing of clothing. There is a very active cluster, and they're happy with the competitiveness that is going on there.

The industrial textiles sector has also been growing. We won a tender from a company, three of four years ago, that was producing small tents for families to go on holiday. Now it won a tender in Dubai for a double-story hotel-size facility in the desert.

We have introduced a number of things in metals fabrication. These are industries that are benefitting from the infrastructure programme, for example companies like Score Metals producing railway wheels. We have seen other metal fabrication industries now moving into greater production. We've lost a huge amount of capacity over the past. We started to see some of that revived, particularly in the Ekurhuleni area where these industries are largely taken up.

The green economy is one of our big success stories in this country. It is beginning to come on-stream in the grid. We have actually by far the largest renewable energy programme on the African continent. And many people say the design of our REIPP is one of the best in the world. It has supported investments particularly in solar and wind, and one of the things we have also introduced is localisation. If we award a contract, we expect localisation. If we are focussing on green energy because we want to reduce our carbon footprint, what sense does it make to say that wind towers have to be put on to a ship and brought to us? We can make them here, so we have a number of companies - one in Atlantis, and one in Coega, for example - who are manufacturing those, and we have many other companies that are manufacturing parts for solar equipment. In fact, one of the potential Special Economic Zones that have to be worked through by the Special Economic Zones Advisory Board is a solar corridor based in the Northern Cape.

One of the big issues we confronted when we started our IPAPS was that the commercial finance sector does not provide a growing quantum of support for industrial investments in South Africa. In fact, the growing parts of the credit book of the commercial financial sector are actually consumer credit, and the smallest and declining part is to support productive sector activities.

We saw a need for development and for finance institutions to upgrade their efforts and to combine the work of development finance institutions, where we have seen the amount of IDC approvals going up. We've just been given the figure for April to December, where they supported projects for R7.7 billion in a number of value-added sectors. Those are combined with sectors where we offer tax incentives and other incentives from the DTI.

We want to develop a key flagship programme. A lot of work is being done already, and we are very close to taking a policy document through the cabinet process. But we have seen that manufacturing, while a key driver of putting us onto a growth path that can raise the levels of inclusive growth in this country, is one of the least transformed sectors. We have been introducing requirements so that companies that have benefitted from our incentives have to meet levels of BEE legislation. But we have far too little involvement by black-owned companies in manufacturing.

So we are now trying to develop a specialised dedicated programme that deals with the support for black industrialists. If we can develop a few national champions in this area, it can take the process much further forward. We have used tools like the new BEE codes. The requirement for big companies is that they should have some sort of supplier development programme. If companies don't have one, we take them down a place on their scorecard. There is a disincentive for not meeting this sub-minimum. But in addition to that we are going through a process where we are going to try to identify new industrialists. The definition will be tight. That is not the totality of support for black business that needs to take place, but this is a sub-programme that is trying to identify people that are involved in the industrial space and we will develop particular packages of support. There will be one billion (Rand) incentives from the DTI that will be deployed and R23 billion from the Industrial Development Corporation to support this programme. The rules and the way you get onto the programme will depend on the cabinet decision.

There are sixteen products or sectors that have been designated for localisation. This means we will take advantage of the fact that we have not signed the protocol on transparency in government procurement, which will require us to extend the same benefits to all other signatories in the WTO. That give us the policy space to be able to say we will have a localisation programme.

We are not unique in this. Many of the big economies - for example the United States under its Buy America Act - actually have more ambitious localisation programmes, in some respects, than we do. But we have a designated list of products. These are the new ones: steel conveyance, transformers, powerlines, mining construction vehicles, two-way radios, and building and construction materials. That is on top of clothing and footwear, and a whole range of what is called solid dosages for the public sector. These designations are not options - once something is designated, all organs of state will be required to procure according to that. Part of our work now is going to be to jack up the monitoring. We are also working with the Auditor General's Office. If you don't do it, you will not be compliant with applicable legislation and there will be an audit finding.

Some of the benefits in the rail sector: Before the designations they were fully imported; after the designations we've seen there are now manufacturing activities taking place. With pharmaceuticals it is the same thing, through the award of various tenders in the Department of Health.

I have already made the point that the biggest challenge facing the economy is the external shock that is striking us, and the imperative is to advance in our diversification. So what are challenges to achieving that?

First is electricity and water supply challenges and municipal premiums - ensuring that there is sufficient affordable electricity. We are not going to be able to offer knock-down prices for electricity to support smelter projects using imported raw materials like we have done before. But we do need to ensure that as far as possible we have affordable energy to support industrial activity in this country. There is a lot of work going on in this field, and a degree of stability in the grid that is more than it was at the beginning of last year. But the longer term challenges are the pricing. And the same is true with water, which I think is a key constraint now.

The next one is localisation and designations. I have already mentioned the work we are going to do on enforcement. Economic infrastructure normally lies in the prices of manufactured exports, including port charges. One of the outcomes of Operation Phakisa is that it was made clear in the discussions we were shooting ourselves in the foot. We were offering a huge discount, and the price of our ports for export of primary product was very competitive. But the prices for export of manufactured goods and products was raised by, for example, the automotive industry and was actually very uncompetitive. In fact, the prices were higher than the prices for the imports of manufactured goods. That work is proceeding.

There is work being done on second-order challenges of regulatory burden, like excessive red tape. One of the things that is quite important is that we are jacking up, as part of the nine-point plan, the work on investment. That will result in the creation of a stronger one-stop-shop for investors. We have already in the DTI separated out the Trade and Investment Promotion.

But the next step is to established a forum on investment at the level of presidency where there will be a permanently existing
meeting of all the existing bodies involved in regulatory matters, so that there can be a discussion to sort out issues and smooth the path for investors.

There is also ongoing work being done regarding insufficient coordination and alignment, and ongoing support for industrial financing. Many of the industrial financing institutions are now coming to the party to support funding for industrial development, the black industrialists programme and others. What we've identified that we need to do at project level is to be able to say that we don't have one process for capital investment; and then to apply to the DTI for an incentive. We want the two working in harmony at project level, and then we make a higher impact. Against that we will be seeking greater
conditionalities around job creation, the level of investment, the level of manufacturing, and so on.

Pricing of key intermediate product manufacturing steel and plastics is a big, long challenge. The fact that the steel industry is facing a serious existential matter and we're having to intervene and support them is helping us in the price conversation with this industry. We have provided tariff support with the condition that they cannot use it as a tool to raise prices. And then there is something that Operation Phakisa has been addressing: We need to be making more space in our ports for industrial activities. Many port officials traditionally see their core business as ships that come in, offload cargo, load cargo and go out. But actually the biggest value is things like servicing oil rigs. Servicing an oil rig is much more job-creating and value-adding than loading and unloading a vessel.

Similarly, boatbuilding is one of the areas of focus coming out of Operation Phakisa. We have boatbuilding companies in South Africa that are now able to make tugboats, small military vessels as well as leisure vessels. Some of those want to work in ports and there are issues for creating space for that, but Operation Phakisa has unlocked a certain amount of that.

My main take-out is that we have got to move up the value chain. We have to industrialise this economy. We can expect the mineral prices to be higher than they are now, but they are not going to go back to what they were in 2012. We've got to do what we have been saying for some time - move up the value chain, occupy a different place. We have some policy tools that have shown this can be done in this country. Our task now is to raise our game and the only way we can do that is by working together with business but also with organised labour in a partnership as envisaged in the National Development Plan.

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