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13 SEPTEMBER 2010: 16:45 – 17:00
DELIVERED BY: MARTIN L KINGSTON
VICE PRESIDENT – BUSA

1. Introduction

As we mark the 25th anniversary of South Africa’s democracy and within the first few months of the 6th democratic Government in our country, we have the opportunity to reflect on the advances that South Africa has made over the past two and a half decades:

  • We have the most advanced economy on the continent with a thriving democracy;
  • Real GDP per capita has almost doubled from c.$3,500 p.a. in 1994 to c.$6,300 p.a. today;
  • [Our banking sector, with assets that have grown more than 15 fold since 1994 to R5.8tn today, is one of the leading in the world; and
  • Foreign direct investment, although coming off a low base and currently under pressure, has grown almost 15 times to R71bn in 2018].

However, and as discussed earlier, South Africa is facing significant headwinds, coupled with a growing sense of negativity as illustrated by Wednesday’s announcement of the business confidence index having reached a 20 year low. The environment facing the country is one that is hallmarked by 6 key issues:

  1. A constrained global macro environment, aided and abetted by unprecedented geopolitical tensions;
    Current growth levels continue to significantly lag global GDP growth of 3.3% (Q1 2019). South Africa’s growth now lagging both developed economies (2.2%) and emerging economies (4.2%). The constant downward revenue of our growth statistics undermines both our credibility and confidence levels in the environment. Importantly, in recent years GDP growth has lagged population growth, implying that average incomes are falling;
  2. Stubbornly high unemployment, with South Africa’s expanded definition of unemployment at almost 40%, whilst youth unemployment is 55%;
  3. Infrastructure challenges, SOE governance and fiscal constraints;
  4. A hostile labour market. Accordingly to the most recent WEF Global Competitiveness Report, South Africa is ranked 136th out of 140 countries in terms of cooperation in labour employer relations;
  5. The need to address the skills shortage. The most recent OECD Survey ranked South Africa 75 out of 76 countries based on maths and science; and
  6. The country’s credit rating at risk of being downgraded to subinvestment grade. Moody’s, the last remaining investment-grade rating, is set to reassess South Africa’s credit rating in November 2019, although recent indications may offer us a brief respite.
  • We are in the eye of the storm where we need to take responsibility for the circumstances confronting us.
    • All stakeholders need to urgently accelerate efforts to create an environment conducive to stability and investment given the significant headwinds we need to navigate.
    • We need to accept the link between investment, growth and jobs. In so doing, we must honestly assess the constraints and address them decisively and collaboratively, involving all social partners (government, business, labour and community).
  • As outlined by the National Development Plan (“NDP”) and National Treasury’s recent Economic Strategy for South Africa, the most effective weapon in the campaign against the triple challenges of poverty, unemployment and inequality is faster economic growth, underpinned by education and skills development.
  • The private sector, including the metals and manufacturing sectors, has a critical role to play in assisting the State to achieve inclusive economic growth and reach its developmental goals, primarily through investment but also through collaboration with government and its social partners. It is increasingly acknowledged by government including the Minister this morning that it is the private sector that is the key contributor to economic activity: GDP, taxes, employment, fixed direct investment. However, that does not translate adequately into clear and aligned patterns of co-operation and partnership.
  • Structures such as Business Unity South Africa, and its members including SEIFSA, SACCI, Business Leadership South Africa, and other sectoral and country chambers play an essential role in ensuring a coordinated effort across all stakeholders to optimise the investment environment.

2. Role of the metals and engineering related sectors

  • The mining, metals, engineering and manufacturing sectors have long been viewed as labour-absorbing industries that could provide a significant solution to South Africa’s structural unemployment and assist in driving GDP growth.
  • Key Government policy documents, including the NDP, outline the basis upon which these sectors can assist in driving inclusive growth.
  • However, both the manufacturing and mining industries have seen a decline in their contribution to the overall South African economy:
    • Manufacturing’s contribution to GDP has decreased from almost 16% in 1994 to 13% in June 2019.
    • Over this same period, the manufacturing sector’s overall contribution to South Africa’s employment has steadily decreased from 15% in 1994 to just above 10% in 2019.
    • The mining sector’s contribution to GDP has halved over the last 25 years, with the current contribution to GDP being less than 8%.
    • Employment by the sector has followed a similar trend, with the sector’s contribution to employment falling from 11% to below 5%, shedding 220,000 jobs in the process.

3. Key sector challenges

  • The downturn in South Africa’s manufacturing sector has been driven largely by unreliable and uncompetitive electricity supply, high administrative costs, inadequate skills, outdated technologies, cheaper global competition and weak demand.
  • The latest statistics show that South African manufacturing production is running at 81% utilisation – almost 20% below available manufacturing capacity.
  • Rectifying this is critical as manufacturing is a key enabler of development given its role in promoting productivity growth, skills development and relatively high-income elasticity of demand in world markets. The metals sector has a significant role to play in South Africa’s economic trajectory.
  • In mining, a number of leading South African mining companies have restructured their operations. By way of example:
    • Anglo American completed the sale of its domestic coal assets to Seriti;
    • South32 has announced the sale of its SA coal assets; and
    • Impala Platinum recently announced the closure of some of its less profitable shafts.
  • Further challenges facing the sector include:
    • Soft commodity prices, combined with high input cost inflation,
    • Infrastructure constraints including electricity, transportation and water availability and competitiveness; and
    • Labour relations – managing wage inflation, whilst productivity remains under pressure
  • The new Mining Charter was finalised in 2018 and has been a positive development relative to the uncertainty that existed for an extended period of time prior to its finalisation.
  • Although we are making some progress, much more needs to be done if we are to ensure the growth of the mining, metals, engineering and manufacturing sectors.

4. Infrastructure constraints impact growth

  • Eskom:
    • The manufacturing, metals and mining sectors account for just under two-thirds of
      South Africa’s electricity consumption.
    • Eskom’s current financial crisis (in excess of R440bn in debt), represents a material threat to these industries (as it does for the rest of the South African economy), with the key issues relating to the reliability, predictability and competiveness of electricity.
    • In March 2019, the National Energy Regulator of South Africa approved electricity increases of 9.4%, 8.1% and 5.2% for the next three financial years. These increases were significantly below Eskom’s application for double-digit tariff increases – which were opposed by business and labour.
    • However, current and future tariff increases, which are above inflation, will continue to put the mining, metals and manufacturing sectors under pressure.
    • Failing to deal comprehensively with Eskom is no longer an option. It must be restructured, a significant proportion of its debt must be assumed by the state directly, its workforce must be right-sized, its cost base and clients addressed and competition introduced.
  • Other:
    • Rail and port capacity remain a concern.
    • We need to investigate solutions to fund the development of increased capacity to assist in driving new investment and the expansion of manufacturing and mining output.
    • Given the funding constraints of Government and SOEs more broadly, public-private partnerships need to be seriously considered for future infrastructure rollout. There is no doubt that public private partnerships represents not only an opportunity but a fundamental solution to dealing with the deficit of capital and skills in key areas of the economy. I am glad that government is now acknowledging this.

5. Investment

  • Inbound FDI was at its lowest level in a decade in 2017 – at R27bn. In 2018, the FDI recovered to R71bn assisted, in part, by President Ramaphosa’s drive to attract investment of $100bn over a five year period. The Investment Conference held
    November 2018 and scheduled to occur again in November 2019 are designed to provide a platform to maximise investor interest.
  • South Africa is in desperate need of increased investment, this starts with the government actively taking steps to increase investor confidence, which will drive increased investment leading to improved economic growth, creating sustainable jobs
    and employment. We cannot create jobs without investment and growth. Increased tax revenue, enabling the government to tackle poverty and inequality as well as to address the challenges facing the public sector, will predominantly come from the private sector.
  • As BUSA, we recognise that if we are to maximise investment and deal with constraints underpinning viable and sustainable commercial operations at an individual, sectoral and national level, a number of key issues need to be addressed. We have accordingly raised them directly with the President and the political leadership of the country. These include:
    • Lack of policy alignment and implementation;
    • Corruption, maladministration and malfeasance (both in the public and private sector);
    • Failure to address political and populist rhetoric, which alienates investors and the citizenry more broadly, including the vexed issues of the status of the SARB, land expropriation, attitude towards immigrants;
    • An inflexible attitude often displayed by labour suggesting that there is an inadequate acceptance of the parlous state of the economy;
    • Dysfunctional, poorly managed and governed SOEs, which are inadequately capitalised and generally not fit for purpose. We need to take difficult decisions as to how we address these challenges, recognising that failure to do so will simply exacerbate problems in the future;
    • The recent examples of gender-based violence, civil unrest and xenophobia, the high levels of criminality and a culture of impunity matched by a limited accountability; and – Debt levels that are unacceptably high, threatening the viability of individual businesses and the economy at large.

6. Other actions that could be taken by the Government to assist

  • National Treasury, in its recent Economic Strategy for South Africa Paper, estimated that manufacturing could grow by as high as 3.9% over the short term and 4% over the long term with the right policy approach. I would encourage SEIFSA to review and comment on this paper.
  • In this context, potential areas of Government support include:
    • The Sectoral Master Plan for the Steel & Metals Sector is in the process of being concluded between the Department of Trade, Industry and Competition and industry. This should be encouraged, considering the success of interventions
      such as the Automotive Production and Development Programme – generally seen as a successful example of state support and intervention.
    • Steel products and components for construction are designated by government, meaning that designated sectors’ goods must be manufactured locally. [However, designation is not always implemented by municipalities and SOEs. Consequently, the success story on the Competitive Supplier Development Programme by Eskom and Transnet, for example, is limited. This needs to be addressed and Business has tabled this for consideration by the Minister of Trade, Industry and Competition.]
    • The decline in the Infrastructure Spend Programme arising from the fiscal crunch has resulted in a significant reduction in construction activity, including the demise of a number of large South African construction companies. Government action to invest effectively in infrastructure is critical.
    • To improve the potential of Special Economic Zones (“SEZs”) to incentivise investment.
    • The Chinese interest in and commitment to Africa presents both an opportunity and a threat. To ensure that local businesses and skills development are not prejudiced, Government needs to explicitly prioritise the use of local skills, contractors and engineers and complies with designation of inputs in local projects.
    • The African Continental Free Trade Agreement (“AfCFTA”) has been signed and will enter into force in July 2020. The AfCFTA represents a significant opportunity for South African business. Regional growth opportunities should be harnessed to promote export growth, and , as Minister stressed, the AfCFTA may provide a much-needed boost to South Africa’s manufacturing sector.
  • [To support and encourage the aforementioned areas, BUSA have agreed to participate in various structures recently established by Minister Patel, including:
    • The SEZ Reference Group;
    • A Ministerial Export Promotion Panel;
    • The National Committee on the African Continental Free Trade Agreement; and
    • A Committee on Digital Trade.]
  • Non-tariff barriers in the form of transport and logistics bottlenecks, customs barriers and high port charges, etc. also need to be addressed across the region to fully exploit the potential benefits of regional integration. On this, BUSA has established a BUSA /Transnet working group and has commenced engagements with Government in the context of the Ports Charges Joint Committee (led by BUSA and the DTIC) to explore ways of reducing ports charges to render exports more competitive.

7. Conclusion

  • It is critical that all stakeholders recognise that economic growth is the most effective instrument to address South Africa’s challenges.
  • As I have said, whilst the private and public sectors are collectively looking to drive growth and attract investment, it is in fact private sector investment that is the key lever to delivers sustainable and inclusive growth given public sector constraints.
  • As the apex body for organised business in South Africa, BUSA believes that it is our responsibility to take the lead on behalf of and alongside our members, such as SEIFSA, in defining how business can maximise its contribution and, together with our partners in labour and government, ensure we deliver on South Africa’s undoubted potential, despite the current challenges.
  • As Kaizer said at the opening yesterday, South Africa can be saved if we work together as a team. I fully agree that neither government not business can achieve this independently of one another. We need to harness the energy that I have seen here, speak openly and directly and commit to implementable actions where we take individual and collective responsibility for navigating our problems thus ensuring that South Africa properly positions itself for success.
SEIFSA

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