GARTH STRACHAN: Critical that SA creates framework to support ‘sunrise’ sectors
SA’s rapid response to Covid-19 has shown our capacity to sidestep bureaucratic paralysis and our ability to rapidly set up and operate systems
SA has moved fast and, so far, successfully to contain the spread of Covid-19. For the foreseeable future, the national focus will be on the pandemic’s consequences.
In the months ahead, this national public health and economic effort to undo the damage Covid-19 wreaks on our people and the economy that sustains them, will be undertaken in conditions of a deeply constrained fiscus and in the wake of a deep-seated domestic economic downturn.
In addition to measures already announced by the government (and others presumably in the pipeline) to support the economy, it is critical that SA focuses increasingly on all available opportunities.
Urgent policy and investment-friendly regulatory framework development to support the emergence of new or “sunrise” sectors and subsectors is critical — particularly those with the potential to lift the economy on to a new growth path by enabling and stimulating investment; supporting and enabling new entrants into markets, including the previously marginalised; and are labour intensive with value-adding export potential.
Easier said than done. But we have no option but to boldly explore new opportunities. One such opportunity is the hemp and cannabis sector. The value chain extends from upstream of the farm gate into seeds, farm equipment, fertilisers; onwards into “on the land” primary agricultural production and downstream of the farm gate into processing and value-added manufacturing. Across this value chain further economic activity will be generated in the services and transport and logistics sectors.
Parts of the value chain are labour intensive; other parts technology intensive and complementarities and spill-over effects from and to other economic sectors are significant. Global demand for CBD and CBG oils in the health and lifestyle products market has grown exponentially — aside from the more contentious recreational market that a growing number of countries have decriminalised and regulated — as well as potential pharmaceutical applications which must, correctly, be the subject of more rigorous clinical testing requirements.
There are an estimated 25 industrial uses for hemp including clothing and textiles, composite materials, wood, paper and packaging products and oil-based derivates. The use of hemp as an alternative to plastic, given the highly deleterious effect of plastics on the global environment, constitutes an enormous, medium-term opportunity.
A range of countries, including some of our neighbours, have seized the opportunity for investment to secure early mover country advantage, without getting stuck in complex regulatory “analysis paralysis”. Lesotho has secured a R500m investment in cannabis production for CBD oil-based applications, with other investments set to go ahead.
So why is SA so slow to seize the opportunity? Why are international investors moving to other investment destinations? There is compelling evidence and at least one significant example to demonstrate that some investors who indicated an initial appetite to invest here have moved elsewhere or held back on further investment after initial outlays.
We have had a poor record of enabling potential sunrise sectors. Our failure to establish a biofuel industry is one recent example. Another is the renewables sector: despite significant energy generation projects put in place with public sector support, investments across the value chain including in component manufacture did not happen.
SA also has a dismal record in “big bet” industrial investments, involving the deployment of public finances and public sector institutional capacities. The multibillion-rand Pebble Bed Modular Reactor (PBMR) and Joule (Electric Vehicle) Projects bear witness to this failure.
Worse still, de-risking projects by creating an investment-friendly framework that limits public-sector spending commitments, allowing the private sector to carry the risks, is not something the country has done well. National interest concerns have to be taken into account, but there is no substitute for an expeditious regulatory framework that minimises “red-tape” hurdles to secure much-needed investment.
Policy development for the hemp and cannabis sector eloquently illustrates the problem. The hemp or cannabis plant is biologically the same plant, (with varying physical or chemical characteristics across a huge number of strains). But the current regulatory function falls under the SA Health Products Regulatory Authority (Sahpra) which, as the name implies, regulates health products, not agricultural production. Sahpra licencing conditions for agricultural production of cannabis (CBD extraction) are onerous and profoundly flawed.
Onerous and costly capital-intensive conditions must be met before a licence can be issued. A prospective entrant must secure considerable investment in plant and equipment, including in high level security, without any reasonable assurance of a licence. Of equal concern is that research permits have been issued by Saphra (through the department of health) in a protracted process which, at best, appears not to meet government’s own requirements for equity, fairness, transparency and even legal sustainability.
Permit conditions appear to have been unilaterally altered and the regulatory “bridge” between research and full-scale production has not been set out. Small wonder then that investors are choosing alternative investment destinations where regulatory and red-tape hurdles are less onerous — despite more favourable factors in SA — among them access to upstream supply chains and downstream logistics and transport services.
President Cyril Ramaphosa’s 2020 state of the nation address (Sona) that in 2020, SA would “open up and regulate the commercial use of hemp products, providing opportunities for small scale farmers; and formulate policy on the use of cannabis products for medicinal purposes” is cause for optimism.
The need for rapid economic development interventions will be critical even while we continue to battle Covid-19, especially those that address rural poverty and inequality. This will require urgent policy development work; intragovernment policy coherence and close proactive engagement with investors, organised business, small business and labour to develop a pragmatic, implementable plan.
Ironically, it is precisely our rapid and comprehensive response to Covid-19 that has demonstrated not only our capacity to sidestep the bureaucratic paralysis characterising our previous failures, but also our ability to rapidly set up and operate systems, some of which are acknowledged as among the best in the world.
The government must learn from this experience when responding to Covid-19’s collateral economic damage. In the hemp/cannabis sector, instead of sitting on the bank, endlessly designing the means to cross the river, while others cross “one stone at a time” — leaving SA, once again, stranded with first- and early-mover advantage lost forever, we must act now. We must replace an interminable process of seeking a “perfect” regulatory blueprint before acting to support the establishment of a hemp/cannabis sector.
An incremental approach to pragmatic policy development should focus on a collaborative approach with business to secure private-sector investment, small-scale farmer participation and getting “plants in the soil”.
• Strachan was the former Western Cape finance & economic affairs MEC, and is a researcher on economic and industrial policy, country investment and risk, innovation and technology.
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