Improvements in energy, transport, water and social infrastructure will be integral over the next decade

South Africa’s industrial policy has been underpinned by the Industrial Policy Action Plan (IPAP), which is launched each year by the Department of Trade and Industry (DTI) on a three-year rolling basis and covering a 10-year outlook. The latest iteration, which will cover the period from 2014 to 2017, will place greater emphasis on trade competitiveness by directing incentives to recipients who demonstrate the potential to become active exporters.

“As industry, we consider the IPAP to be improving,” said Coenraad Bezuidenhout, executive director of industry representative body the Manufacturing Circle. “In the past, some of the manufacturing incentives were difficult to access, whereas today it seems there are a lot more instruments available to support competitiveness. The DTI also seems be more focused on growing dynamic industries that offer export growth and are worthier recipients of support.”

A Targeted Approach

IPAP continues to champion sectors in which South Africa has attained global success, such as automotives (see analysis), and the scheme is introducing new provisions for sectors such as business process outsourcing, agro-processing and green industries that have been identified as areas in which South Africa has the attributes to enjoy a sustained competitive advantage.

Through its Manufacturing Competitiveness and Enhancement Programme, IPAP is also seeking to turn around the fortunes of sectors such as textiles and furniture, which are under stress and would be experiencing decline without intervention. While not contributing significantly to competitiveness – manufacturing value add as a percentage of GDP was a mere 0.7% in 2011 and the trade balance negative R25bn ($2.37bn) – the clothing, textiles, leather and footwear sectors are seen as important to revitalise owing to their high job absorption rates and significant representation of small and medium-sized enterprises.

According to the DTI, the sectoral intervention, which aims to enhance supply chain efficiencies and promote skills development, has thus far provided assistance to 469 textile manufacturers and contributed 12,200 new jobs.

Improving Infrastructure

South Africa, under the National Development Plan (NDP), is tapped to be investing R827bn ($78.32bn) over the next three years and R4trn ($378.8bn) over the next 15 years in energy, transport, water and social infrastructure. A core pillar of the latest IPAP concerns promoting further localisation requirements for public procurement. This should not only ensure that local industry benefits from the infrastructure build programme, but also avoids imports that could impact negatively on the current account balance. “We would be remiss to throw all this money on infrastructure without advancing local industry,” Garth Strachan, the deputy director-general for Industrial Development Policy of the DTI, told OBG. “As long as we are not in breach of the World Trade Organisation, we will introduce localisation thresholds for all components.”

According to the South African Reserve Bank, stateowned enterprises account for around 80% of government infrastructure spending. Moreover, the likes of Eskom (the national power utility), Transnet (the state run rail, pipeline and ports authority) and the Passenger Rail Agency of South Africa have been tasked with achieving various local content requirements for component and input manufacturing. For Eskom, for example, this is being applied to solar geysers and transformers (80% local content), while for Transnet instances of local sourcing commitments relate to rolling stock (55% diesel, and 65% for electrical) as it expands its locomotive fleet. Other departments set to issue requests for proposals with strategic local content stipulations include the Department of Science and Technology, which will oversee the provision of set-top boxes as part of a national digital migration strategy, and the Department of Health, which will distribute a range of generic medicines as it rolls out the National Health Insurance scheme.

Capacity Support

Strachan stresses that wherever local content is to be stipulated this must coincide with supplier development programmes to ensure that local suppliers not only have the capacity to provide the inputs, but that they are able to produce them competitively so as not to enjoy any artificially created advantage. Segments in the past that have been held up as successful models for governmenttargeted local industrial development are the support and training initiatives extended to original equipment manufacturers serving the automotive industry and equipment manufacturers supplying the mining sector. To respond to the requirements of the government projects, a new business association aimed at improving prospects for higher levels of localisation in infrastructure projects, known as the Industrialisation Supplier Development Association, was formed in April 2014. “It is important to constantly be in contact with government to understand their priorities and the sequencing of projects so that we can build up our supplier base accordingly,” said Bezuidenhout.

Singing Off The Same Sheet

South Africa is not short of plans driving economic policy, making it critical that the goals and jurisdiction set out within each are complementary rather disparate and conflicting. “IPAP makes no bones about the fact that a lack of policy coherence and integration between government departments is the single biggest constraint to success,” according to the DTI’s Strachan.

The NDP is targeting GDP growth of 5.5% until 2020, while the New Growth Path, which falls under the auspices of the Department of Economic Development, is seeking to reduce unemployment from 24% to 15% by 2020 through the creation of an additional 5m jobs. As a strong manufacturing sector improves national output and employment, both programmes, in theory, are interdependent with IPAP’s ambitions of achieving export volume growth of 6% per year.

Departments and agencies may have differing objectives at times. In the case of port charges, the DTI in its export promotion capacity supports reducing tariffs, while Transnet, as the custodian of the ports, relies on user fees to fund its operations.

However, the Transnet National Ports Authority committed to changing its pricing model in favour of exporting manufactured goods by lowering tariffs on tradable exports by 40% in April 2013. Customs and standards enforcement also offer scope for increased coordination. The National Regulator for Compulsory Specifications, under the DTI, regulates the South African Bureau of Standards (SABS), which tests and verifies products. The Customs Administration forms part of SARS, which falls under the National Treasury. There are also concerns that a number of government departments are often not aware of or choose not to apply certain content standards in their tenders, resulting in import substitution of cheaper products.

In The Zone

To foster industrial economies in some of the more underdeveloped regions of the country, IPAP allocates significant focus to the establishment of new industrial hubs. In the past these took the form of industrial development zones (IDZs), which the DTI has since recognised have had limited success. Subsequently, in May 2014, the special economic zones (SEZ) act was signed into law. This new legislation brought about a significant overhaul of the country’s regulatory framework, in which IDZs were previously governed. “SEZs will be far more commercially driven and premised on clustering and more focused foreign direct investment (FDI). Incentives will be conditional on value addition and export intentions,” said the DTI’s Strachan.

Whereas IDZs were only situated near airports and coastal regions, SEZs, in recognition of the fact that land-linked Africa is capturing an increasing share of exports, have no such locational restrictions for attaining free zone status. The first SEZs due to be rolled out were Saldanha Bay and the Dube Trade Port. According to President Jacob Zuma, the Dube Trade Port SEZ was expected to create more than 150,000 jobs by 2060. To encourage clustering and a more targeted industrial development approach, the act also allows for the creation of sector-specific zones. For example, the Coega IDZ, located in the Eastern Cape where a number of wind farms are being constructed, aims to establish a green industry cluster. Meanwhile the Saldanha Bay IDZ, located in the Western Cape and adjacent to most of the country’s offshore activity and African shipping routes, will look to evolve into an oil and gas services and marine repair cluster.

On the other hand, the Manufacturing Circle’s Bezuidenhout has also questioned the net impact SEZs would have on attracting fresh FDI. Preferring that the package of incentives should be extended to all the existing manufacturers who qualify as making positive contributions to skills development and other metrics, irrespective of their location. “The incentives are not enough to encourage a manufacturer to come to South Africa that otherwise would have gone to, say, India or China. So all the SEZs are doing is causing a geographic shift within the country.”

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