EVENTS

The Infrastructure Program
as a catalyst to unlock local
industrial capacity

Lulama-Tlakula-Author

Lulama Tlakula

Senior Banker: Public Sector and Growth Capital
at Absa Corporate and Investment Banking

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For us to successfully rebuild and reignite our economy, we need to reimagine our economic structures and transform industries for recovery and reform.

South Africa is the most industrialised economy in Africa and the continent’s business hub, but the COVID-19 pandemic has laid bare the structural weaknesses and sometimes challenging policy environment that has prevented the country from realising its full potential.

As a country, we have been pioneers in developing several technological advancements with everything from the Kreepy Krauly for your pool to the CT Scanning technology used in hospitals worldwide. Organisations like Denel and Sasol both have developed world-class technology that has been adopted in international markets.

However, in recent years, South Africa has lost some of its shine as an investment destination and local manufacturing capacity has dwindled for various reasons. When the COVID-19 pandemic hit, South Africa’s lack of local capacity was clear as global supply chains bottle-necked. When the severity of the lockdowns begun to bite, we simply were not able to produce critical products like vaccines, PPE equipment and ventilators; and we were left at the mercy of global market forces.

While we were initially not as fast or agile as some of our peers, we did begin to see local capacity come onboard and some of our success stories – specifically around the vaccine manufacturing – seemed to highlight why it was so important for us to not be depending on global suppliers.

Importantly we also began to celebrate some of our local intellectual property and skills in the pharmaceutical sector as we led the world in some of the genome sequencing related to COVID-19.

All of these developments have revived calls for manufacturing led growth, but there has been some rigorous debate around what route the country should pursue and how it can incentivise the right types of manufacturing and industrial activities in the country.

It is evident that industrialisation should be the chosen route to be taken and that local manufacturing is at the top of this list of solutions. What is more important is the recognition that the solutions lie with both the private sector and the government.

Strengthening our manufacturing sector and developing appropriate policy is not a “government problem” – there is often a perception that policy is driven by government and the private sector does not have a role to play. If we are going to develop appropriate policy, we are going to require an integrated public and private sector approach to develop accommodative policy that will allow for real transformation.

A good example of this would be the Special Economic Zones (SEZs) and the automotive sector. The government has coordinated its approach with multi-national automotive manufacturers and introduced some very attractive incentives over the last few years to attract manufacturers and develop downstream suppliers. In return manufacturers like Ford and Toyota have committed to investing in local infrastructure and job creation initiatives.

Others however have left despite the strong incentives. Highlighting the fact that sometimes the best laid out plans and incentives are not enough to overcome the numerous bottlenecks that have kept the country stuck in a low growth gear.

We also can’t ignore the warnings from the Centre for Development and Enterprise (CDE) who recently published an article entitled: “Why ‘localisation’ is the siren song of the South African economy” in which they highlighted many legitimate concerns around this current policy push. The report emphasised that we need to be wary of mixing up narrow localisation where a handful of designated goods are localised in terms of public procurement versus broad-based industrialisation.

Where do we start to fix the problems? National Treasury has pointed out that the National Development Plan is targeting a capital investment of 30% Gross Domestic Product (GDP). If this ambitious target is to be met, public sector investment would need to rise from 5.4% of GDP to 10% of GDP by 2030 while private sector investment would need to rise from 12.5% to 20%.

But for this investment to translate to inclusive growth, we need to create space for new players. The DTI’s Black Industrialist Scheme has often been criticised for its impact, but it has some merit. It could offer a sound foundation for broad-based and inclusive industrialisation in the coming years. This incentive which offers matching grant funding up to R50m can capacitate manufacturing initiatives and develop new black-owned industrial operations in the country.

The investment targets and their potential to transform the economy/unlock local industrial capacity highlight the importance of both the public and private sector participants being on the same page when it comes to industrial policy. Public sector finances have taken a hit through the COVID-19 pandemic while the Private Sector potentially has the capital to deploy and foreign investors are looking for yield on their money, they are wary of investing if they are not confident in the policy landscape.

While the private sector is right to be wary of the outlook, they shouldn’t dismiss out of hand, the transformative impact of some of the public sector purse. For 2022/2023, some big numbers are being committed including R50bn into energy infrastructure, R40bn into Water and Sanitation and R96bn into the road, logistics and transport upgrades.

Industrialisation is a long-term game and it is not simple to adjust industrial policy, particularly when a lot of it is part of the ideological make-up of the ruling party in South Africa. However, there is recognition that we can’t keep doing the same things over and over again and expecting a different result.

The next 12 months presents an ideal opportunity to re-imagine the South African infrastructure landscape and we look forward to playing our part in financing this transformation in conjunction with entrepreneurs passionate about a brighter future for all.

Lulama-Tlakula-Author
Lulama Tlakula

Senior Banker: Public Sector and Growth Capital at Absa Corporate and Investment Banking

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