LULAMA TLAKULA: New infrastructure likely to unlock industrial capacity

SA is the most industrialised economy in Africa and the continent’s business hub, but the Covid 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 such as Denel and Sasol have developed world-class technologies that have been adopted internationally.

However, in recent years SA has lost some of its shine as an investment destination and local manufacturing capacity has dwindled for various reasons. When the pandemic hit, SA’s lack of capacity was clear as global supply chains bottlenecked. When the lockdowns began to bite, we were not able to produce critical products such as vaccines, PPE equipment and ventilators; and we were left at the mercy of global market forces.

While we were initially not as agile as some of our peers, we did begin to see local capacity come on board and some of our success stories — specifically regarding  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 intellectual property and skills in the pharmaceutical sector as we led the world in instances of genome sequencing related to Covid-19.

All of these developments have revived calls for manufacturing-led growth, but there has been some rigorous debate about 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 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 co-ordinated its approach with multinational 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.

However, others have left despite the strong incentives, highlighting the fact that sometimes the best laid plans and incentives are not enough to overcome bottlenecks that have kept the country stuck in a low growth gear. 

We also can’t ignore the warnings from the Centre for Development & Finance, which recently published an article, “Why ‘localisation’ is the siren song of the SA economy”, in which it highlighted many legitimate concerns about 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? The Treasury has pointed out that the National Development Plan is targeting a capital investment of 30% of GDP. If this ambitious target is to be met, public sector investment would need to rise from 5.4% of GDP to 10% by 2030, while private sector investment would need to rise from 12.5% to 20%.

But for investment to translate to inclusive growth we need to create space for new players. The department of trade, industry & competition’s Black Industrialist Scheme has often been criticised, 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 and 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 pandemic, while the private sector potentially has the capital to deploy and foreign investors are looking for yield on their money. But 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 potential of some of the public sector purse. For 2022/2023 some big numbers are being committed, including R50bn into energy infrastructure, R40bn into water & sanitation and R96bn into 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 SA’s governing party. However, there is recognition that we can’t keep doing the same things over and over again and expect a different result.

The next 12 months present an ideal opportunity to reimagine the SA infrastructure landscape, and we look forward to playing our part in financing this transformation in conjunction with entrepreneurs who are passionate about a brighter future for all.

• Tlakula is senior banker: public sector & growth capital at Absa Corporate & Investment Banking.