REJUVENATING SOUTH AFRICA'S ECONOMY - MANUFACTURING SECTOR PERSPECTIVE

INCLUSIVE SOCIETY INSTITUTE

Rejuvenating South Africa’s Economy – Manufacturing sector perspective July 2021

Copyright © 2021 Inclusive Society Institute 50 Long Street Cape Town, 8001 South Africa Registration: 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute

DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members. All records and findings included in this report, originate from a panel discussion on developing a new economic blueprint for South Africa, which took place in July 2021

The engagement with the manufacturing sector was enabled through the kind support of the National Employers Association of South Africa.

Author: Mariaan Webb, Creamer Media Writer Edited by: Daryl Swanepoel

Contents

Abbreviations & acronyms...........................................................4 Introduction...................................................................................5 Identifying weaknesses...............................................................6

Bureaucracy and red tape.........................................................................................6

Education, skills and work ethic.............................................................................6

Impact of crime..........................................................................................................7

Misalignment in credit provision..............................................................................8

Municipal malaise......................................................................................................8

Onerous labour legislation........................................................................................9

Overreliance on grants............................................................................................10

Steel protection measures.....................................................................................10

Transformation policies..........................................................................................12

Interventions for fostering growth.......................................... 13 Conclusion.................................................................................. 15 Reference list............................................................................. 16

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Abbreviations & acronyms

AMSA.......................................................................ArcelorMittal South Africa BEE.................................................................black economic empowerment GDP.............................................................................gross domestic product HRC............................................................................................... hot-rolled coil ISI............................................................................Inclusive Society Institute LRA....................................................................................Labour Relations Act Neasa............................... National Employers Association of South Africa SMME.........................................small, medium-sized and micro enterprise

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Introduction Although still a sizeable component of the South African economy, the manufacturing sector has been performing poorly over the years. The country is in effect deindustrialising, with manufacturing’s contribution to gross domestic product (GDP) having decreased to a low of 12.90% in 2020 (IDC, 2021). At this level, its contribution to GDP is less than half of what is appropriate for a country at South Africa’s stage of development (Manufacturing Circle, 2017).

The decline in manufacturing over the past two decades has had detrimental impacts on the overall economy and on jobs. Manufacturing could generate significant employment, which is essential if South Africa is to tackle persistent inequality and high joblessness. The unemployment rate is currently 32.60% (narrow definition) and 46.30% (expanded definition) (Stats SA, 2021a). In the Covid-impacted year of 2020, total manufacturing production decreased by 11% – the worst performance since the 2009 global financial crisis – and all ten manufacturing divisions reported negative growth rates (Stats SA, 2021b).

The Manufacturing Circle, an association of corporate manufacturers, estimates that if manufacturing were to expand to 30% of GDP, between 800 000 and 1.1 million direct jobs could be created, with five to eight times that number in indirect jobs (Manufacturing Circle, 2017).

On a mission to craft a new growth-centred economic blueprint for South Africa, the Inclusive Society Institute (ISI) is engaging with different economic sectors to identify the reasons behind the country’s depressed growth performance and to provide a forum for innovative thought on forging a path of higher growth.

The ISI has held discussions with the financial sector and sought input from multinational funding institutions to gain an understanding of what policies should be pursued. This report focuses on the discussions that were held with representatives of the manufacturing industry.

The engagement showed that the automotive industry, which is the country’s biggest manufacturing sector, is generally content with its current state. The industry has for decades benefitted from consecutive industrial policy plans and detailed incentives programmes.

South Africa’s automotive sector is a centre of strength and technical know-how, which is highly integrated into global supply chains. Through industry associations, original-equipment manufacturers and component producers have made great strides in their collaboration with government.

However, the automotive industry, with its long history of substantial government support, is the exception and does not reflect the general mood among manufacturers. Acknowledging that the industry is diverse and that not all subsectors are as strong as the automotive sector, the report argues that there is a common thread that calls for a more a business-friendly environment, more flexible labour polices, improved education outcomes, more competitive inputs, and the fixing of municipalities, among others.

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Identifying weaknesses Bureaucracy and red tape The bureaucratic obstacles that businesses face have a direct impact on economic development and growth. A lot has been said about the need for reform to improve South Africa’s ranking on the World Bank’s yearly Doing Business index, which defines the extent to which the regulatory environment is conducive to the starting and operation of a firm.

South Africa is aiming to be among the top 50 global performers by 2022 (Ramaphosa, 2019).

That objective seems far off as South Africa fell from 82 to 84 out of 190 countries assessed in the ‘Doing Business 2020’ survey (World Bank, 2019).

Participants in the webinar have raised concerns about bureaucracy and red tape, stating that it is particularly burdensome for smaller firms, and acts as a disincentive against new business start-ups. To comply with the onerous administrative legalities is time consuming and slays the entrepreneurial spirit so desperately needed in the country. It uses resources that could have been channelled towards growing rather than bureaucratic compliance issues.

Education, skills and work ethic

“The bureaucratic obstacles that businesses face have a direct impact on economic development and growth.”

Education quality contributes considerably to a country’s economic growth and getting the basics of schooling right will be important to place South Africa on a sustainable growth path.

However, the South African education system continues to fall behind when achievement is measured against international metrics. The result is an education system that does not adequately prepare young people for the workplace.

In the most recent Trends in International Mathematics and Science Study – a project of the International Association for the Evaluation of Educational Achievement, measuring Grade 5 level mathematics and science accomplishment – South Africa scored among the five lowest performing countries of 64 nations that took part in the assessment. The top five countries were from East Asia and include Singapore, Hong Kong, South Korea, Chinese Taipei and Japan.

(Reddy et al, 2020). These countries have also been successful in achieving accelerated economic growth in recent decades. The ISI has studied South Korea and Japan to draw lessons for the South African economy. In both instances, education was a key factor in their success.

South Africa’s education outcomes are inadequate despite substantial investment. Total public expenditure on education for primary, secondary, and post-secondary nontertiary education, as a percentage of total government expenditure, is relatively high when compared with Organisation for Economic Cooperation and Development countries (Education GPS, 2021).

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Identifying weaknesses

Educational failures filter through to the job market. The manufacturing industry experiences the impact of education challenges first-hand and believes it is an important weakness that must be addressed. A well-educated workforce is central to reviving the sector and ensuring that it is globally competitive.

The education system must also cultivate skills that better prepare learners for the future workforce. Each year, too many matriculants are graduating into joblessness. Statistics show that although those with higher levels of education are more likely to find a job, the unemployment problem is so pervasive that as many as 37.70% of those who are unemployed have passed Grade 12 (Stats SA, 2021b).

There is also a sense that work ethic and pride are lacking among the work force. A lack of a productivity mindset, culture and accountability damages the country’s potential. An attitude of entitlement must make way for a spirit of hard work and honesty.

The values that a nation adopts influence actions and are thus key predictors of a country’s success (Steel, 2017).

Impact of crime Businesses are finding it increasingly difficult to absorb the impact of crime. According to the Global Peace Index, the economic impact of violence on the South African economy in 2019 was R145-billion a year (Institute for Economics and Peace, 2020). With the July 2021 wave of looting and unrest in Kwa-Zulu Natal and Gauteng having exponentially increased these costs to society.

An increasing lack of faith in the capabilities of the police has led to an increase in the use of private security, pushing up the cost to companies and the prices of end-products.

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Identifying weaknesses Misalignment in credit provision Research for the South African Reserve Bank has indicated that access to finance is not a major concern for most manufacturing businesses, but it concedes that smaller firms do have a higher probability of facing financing constraints (Smith, 2019).

A participant in the webinar representing a medium-sized industrial business has identified the misalignment in the provisioning of credit for industrial development as a concern.

According to the participant, banks appear to finance the building of shopping centres or buying of new vehicles more easily than they do investment in new equipment to allow factories to modernise or expand. “Imagine if we built factories at the rate that we build shopping centres and if we then exported these products?”

Municipal malaise The disintegration of municipalities, causing a lack of service delivery, is having a severely negative impact on business. Companies suffer large losses from unmaintained infrastructure, such as potholes and water and electricity disruptions.

These concerns have been highlighted by poultry producer Astral’s High Court order against the Lekwa municipality for failing to deliver basic services to its factory in Standerton, Mpumalanga, and dairy group Clover, which is closing its cheese factory in Lichtenburg, in North-West, has blamed ongoing poor service delivery by the local municipality for its decision (News24, 2021).

The demise of service delivery is linked to financial mismanagement at local government level. The auditor-general’s report on municipalities produces a grim picture, underlining the persistent underperformance as far as financial management and performance reporting is concerned. The report for the 2019/20 financial year shows that the financial position of more than a quarter of the 257 municipalities is so dire that there is significant doubt that they will be able to continue as going concerns, while almost half are exhibiting indicators of financial strain. Only 27 municipalities achieved a clean audit in 2019/20 (Business Day, 2021).

To deal with a lack of basic service delivery in municipalities, many businesses are taking it upon themselves to clean up towns, fix roads and maintain other infrastructure. However, this duplicates the cost of municipal services, impacting on companies’ bottom lines.

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“The demise of service delivery is linked to financial mismanagement at local government level.”

Identifying weaknesses The ever-increasing cost of water and electricity are also negatively impacting on business.

Between 2007 and 2020, electricity tariffs increased by more than 500% and average municipal water tariffs have increased four times faster than inflation since 1996 (IOL, 2021).

Onerous labour legislation South Africa’s labour legislation mediates the relationship between employers, employees, and trade unions. Although aimed at ensuring fair practices, some issues have been raised about the inflexibility of current labour laws and their impact on small, medium-sized and micro enterprises (SMMEs).

Centralised collective bargaining provided for in the Labour Relations Act (LRA) elicits strong opinions on both sides. The National Employers Association of South Africa (Neasa) has been vocal in its opposition to the ‘one-size-fits-all’ wage approach of centralised collective bargaining, which culminates in bargaining councils extending agreements to non-parties.

Neasa states that a statutory dispensation, as contained in the LRA, marginalises the

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Identifying weaknesses voting power of SMMEs. An employer whose cost of labour as a percentage of turnover is less than 5%, can enforce a wage on another employer whose cost of labour as a percentage of turnover is more than 50% (Papenfus, 2018).

Trade unions are generally powerful, which is a concern for business owners considering the threat they pose to economic stability when things do not go the unions’ way.

The law on dismissals also makes it cumbersome for business owners to dismiss unproductive employees. Wary of the difficulty of dismissing staff, employers are reluctant to hire people, contributing to the high unemployment rate of the country.

Labour legislation does not make provision for the different economic realities of a small employer in a rural area, compared with a big business situated in an economic hub. Those two types of employers, for instance, are judged by the same economic and operational measures when it comes to collective bargaining and the national minimum wage.

The national minimum wage, if it is set too high, could have adverse impacts on employment.

Critics of the national minimum wage, which is currently set at R21.69 an hour, argue that the requirement denies a work seeker the right to negotiate for a wage that he or she finds acceptable, and which would have offered an escape from unemployment. Proponents argue that it begins to address the problem of the millions of working poor, whose wages are kept low by the prevalence of high rates of unemployment.

Overreliance on grants At 3.30% of GDP, South Africa is among the biggest spenders on social protection, through which it seeks to tackle poverty and inequality (World Bank, 2021). The social assistance programme provides direct income support to the elderly, children, war veterans and people with disabilities. The welfare system has expanded fast in the past 20 years and currently has about 18.2 million beneficiaries, with another 1.1 million expected to become beneficiaries over the next three years (National Treasury, 2021). Although social transfers do protect the most vulnerable members of society, it cannot be a substitute for growth and jobs (World Bank, 2021). There is concern that an overreliance on grants creates a culture of dependency.

Steel protection measures There is growing frustration within the steel industry about ongoing tariff protection for primary steel producer ArcelorMittal South Africa (AMSA). Several downstream steel customers have expressed unhappiness with safeguard duties, as well as about steel backlogs and pricing developments.

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Identifying weaknesses South African flat-steel prices are set using a government-approved ‘basket price’ methodology, whereby the price is arrived at following analysis of selling prices in a range of markets included in the basket. Flat and long steel product imports are subject to base tariff protection of 10%, but certain flat products are also subject to safeguard duties of a further 8%, resulting in overall protection of 18% on certain grades. The 8% safeguard on hot-rolled coil (HRC) was initially meant to expire in August 2020, but was extended following an AMSA application to the International Trade and Administration Commission of South Africa (Engineering News, 2021a). Safeguards were first introduced on a sliding scale in 2017 to level the playing field against unfair import competition.

South Africa’s biggest steel merchant, Macsteel, took the Department of Trade, Industry and Competition to court over the extended implementation of safeguard duties on HRC imports. The case was settled in the High Court in June, following an agreement that, once the current 8% safeguard expires in August 2021, there would be a moratorium on the implementation of further safeguard duties on HRC for at least two years (Engineering News, 2021b).

Steel industry players participating in the webinar have questioned the economic benefits of sustaining a primary steel producer in the form of AMSA. They say locally manufactured steel products have become uncompetitive, owing to expensive AMSA steel and that access to cost-effective, high-quality, duty-free input material is needed to revive the downstream industry.

In June 2021, the ‘South African Steel and Metal Fabrication Master Plan 1.0’ was adopted by business, labour and government. The document aims to create a platform for the revival of the embattled downstream steel fabricators. The plan has been developed on three pillars, namely: • boosting demand for steel and steel products, primarily by reviving South Africa’s stalled public infrastructure roll-out; driving localisation, or import substitution; and by leveraging the market access being created through the implementation of the African Continental Free Trade Agreement; • addressing supply-side constraints, including electricity disruptions and tariff hikes, logistics bottlenecks, uncompetitive inputs and inadequate skills and research and development; and • a series of cross-cutting interventions, including the creation of a Steel Industry Development Fund, to be capitalised through the introduction of a levy of between R5/t and R10/t on all steel sold domestically, whether it be produced locally or imported (Engineering News, 2021c).

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Identifying weaknesses Transformation policies The manufacturing industry is subject to the broad political environment in which it functions.

To a large extent, that is informed by the policies of the African National Congress, the ideology of which aims to transform the country from an Apartheid State to a non-racial, non-sexist, united democratic society.

The principal policies that seek to reverse inequality, poverty and exclusion are through stimulating inclusive growth and investment, bolstered by black economic empowerment (BEE) and employment equity, along with the safety-net of an expansive welfare system.

Concerns have been raised that transformation policies, such as the Employment Equity Act and the Broad-Based Black Economic Empowerment Act, do not foster an environment in which entrepreneurs can flourish. Although there is an acceptance that transformation is needed, there is doubt over whether narrow BEE policies are the way to go. Instead of promoting true empowerment, critics say BEE has made it more difficult for many SMMEs to do business with government or big enterprises and that it has created a detrimental side-effect in the form or ‘tenderpreneurship’. In general, complying with employment equity and BEE policies has raised the cost of doing business.

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Interventions for fostering growth Suggestions for fostering growth Enhance export competitiveness

Faster export growth will help propel economic growth, but to achieve this, manufacturing competitiveness must improve. South Africa’s score on the 2020 Competitive Industrial Performance index dropped four positions to 52 out of 152 countries assessed (Unido, 2020).

Suggestions to enhance export competitiveness include: • Implement export incentives.

• Reduce port tariffs and improve port efficiency.

• Consider re-instating rail subsidies for containers destined for export.

• Emulate the automotive support programme for key industries.

Fix municipalities

It is imperative that municipalities function properly. To achieve this, ethical leadership, service orientation and good governance are required.

Local governments need to be properly capacitated and free from political interference and constant churn. Strong external controls must be in place to prevent financial loss and wastage.

Given the central role that the manufacturing sector plays in creating jobs and national wealth, and the need for a well-functioning manufacturing sector to ensure the economic sustainability to ensure the wellbeing of the nation, the maintenance of municipal infrastructure and services within industrial areas needs to be prioritised by local authorities.

Communities also need to be more involved in municipal matters and hold local government accountable.

Flexible labour laws Labour legislation is viewed as onerous and hampers employment.

Suggestions to modernise labour laws include: • Revisiting the centralised collective bargaining model.

•M aking it easier for employers to hire and fire workers. The current standard three-month probation period should be extended to at least one year to properly establish a person’s skills and attitude.

Implement transport subsidies

It is expensive for workers, who often live far from their places of employment, to commute to and from work. Implementing transport subsidies will assist manufacturers and help overcome spatial distortions.

Improved access to financing

Having access to sufficient financial resources is crucial to enable entrepreneurs and smaller businesses to grow. The current financing rules should be revisited to ensure that they actively promote economic development by mobilising and allocating resources efficiently – making it easier for entrepreneurs to access credit.

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Interventions for fostering growth Increase domestic demand

Creating additional demand for local goods is key to a virtuous cycle that promotes economic growth. Demand for local goods can be stimulated by increasing the procurement of locally manufactured goods, provided their cost and quality are competitive. Local industries could be protected more through assertive trade policies, but this should be pursued based only on competitiveness.

Keep costs down

Allow business to catch its breath by keeping increases in rates and services below inflation for the next five years. Unions’ wage demands should also not exceed the inflationary rate. South Korea’s experience shows that a competitive agricultural sector with low food costs helped keep labour costs competitive.

Reduce red tape

Business owners are being inhibited by red tape. Making the business process simple to navigate will foster enthusiasm, investment and support entrepreneurial growth.

Revitalise ‘old’ industrial parks

Revitalising ‘old’ industrial parks located in former Apartheid-era homelands acts as a catalyst for economic and industrial development in lagging rural areas. These parks support job creation in manufacturing and arrest the migration of people to overpopulated urban areas.

Government embarked on an initiative in 2016 to revitalise ten Stateowned industrial parks located in underdeveloped former homeland areas. This initiative dovetails with the special economic zones programme, which is a major focus for attracting investment and promoting industrialisation.

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Scrap raw material protection mechanisms

Steel protection measures have been severely criticised by domestic steel consumers, which argue that without a safeguard duty, fabricators will be able to compete on a level playing field and export steel products. Primary steel producers should not enjoy more protection than what the downstream sector is afforded. If such circumstances persist, then similar protection measures will also be required for downstream participants.

Speed up technology commercialisation

Centres must be developed at universities to transition technologies from the research lab to the marketplace faster. Technology commercialisation centres will require collaboration between tertiary institutions, the private sector and entrepreneurs.

Stimulate battery industry

Batteries are at the core of a modern energy system and play an important role in the shift to electric mobility. South Africa is presented with an opportunity to carve out a niche for itself in what is a fastgrowing and rapidly evolving market. South Africa already has some battery manufacturing capabilities and experience with beneficiating minerals. Besides lithium, the value chain for lithium-ion batteries includes a host of materials produced at scale in South Africa, such as manganese, iron-ore, nickel and titanium.

Conclusion Although the manufacturing sector has been in decline, it continues to be of great importance to South Africa and has pockets of excellence – such as in the automotive sector – that could be replicated elsewhere in the economy.

The long-term strategic partnership between government and the automotive industry provides a clear illustration of the power of cooperation between government and business – local and global – as well as the importance of a shared vision and a common purpose among business managers, trade unions and surrounding communities.

Faced with a global pandemic, South African manufacturers, business and labour formed a united front, bringing together vision, ingenuity and technical skills to accomplish two highly successful projects in 2020: the local manufacture of medical equipment and personal protective equipment, as well as the national ventilator project. These are both prime examples of what could be achieved through greater collaboration, and the lessons learnt from their successful execution should be reproduced across various industries.

Through such a spirit of cooperation and common purpose it will be possible to move South African manufacturing forward into a new era of success; to blow life-giving breath onto the embers of the once-roaring furnaces of South African industry and to see the lights come on once again through the grimy windows of abandoned factories.

Reviving the manufacturing sector can restore a much-needed engine for growth for the South African economy.

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Reference list Business Day. 2021. Auditor-general appalled by the state of municipal finances, June 30, 2021.

[Online]. Available at: https://www.businesslive.co.za/bd/national/2021-06-30-auditor-generalappalled-by-the-state-of-municipal-finances/ [accessed July 9, 2021].

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This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions separately from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy.

The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental State. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. www.inclusivesociety.org.za