JOHN STUART: SA drone industry a case study in regulatory overkill

Deindustrialisation refers to a declining relative size of the manufacturing industry in an economy. While this is an expected part of the evolution of a developed country, it is not expected in developing countries. Rather, developing countries are expected to reach a manufacturing industrial share of more than 30% before potentially deindustrialising.

Despite this, deindustrialisation of developing countries does occur, and since it departs from the expected development pattern is termed “premature deindustrialisation” by economists. There are a variety of drivers of such a situation though declining competitiveness looms large among the main causes.

While there are innate differences between countries and across the great variety of the global community, often competitive deficits are not inherent but rather created or worsened by poor regulations and governance. A particularly regrettable pattern is regulators operating in a vacuum, without adequate (or any) consultation with industry, without experience of industry and business, and unaware that their decisions will entail a compliance burden and a markup on businesses’ unit costs. That mark-up obviously has a direct bearing on the competitiveness of the industry. 

This situation played out 2014-2015 in SA when the regulations governing unmanned aerial vehicles (UAVS, termed RPAS by the SA regulator) were developed and implemented. SA is often cited as a good example of a middle-income developing country that is prematurely deindustrialising and has also fallen into a “middle income technology trap” — a declining share of manufacturing industry and stagnancy in technological development in industry. The latter also contributes to declining competitiveness, relative to other countries in a similar industrial and trade space.

Countries facing declining competitiveness and stagnation in the development of manufacturing technology need to embrace new and sometimes “disruptive” technology. This is done through supporting entrepreneurs, inventors, innovators, venture capitalists and angel investors. Various approaches can be used via industrial, tax and trade policy that offer direct support, waive taxes and surcharges or use trade barriers. Of special importance are industry-friendly regulations that streamline compliance to what should be a regulatory framework developed through broad consultation. 

Death of SA drones

Instead, the SA Civil Aviation Authority did the opposite in the case of UAVS, ignoring the feedback of the industry association — the Commercial Unmanned Aviation Association of SA — as well as other stakeholders. What resulted was a set of regulations (Part 101) that in effect killed off the burgeoning SA drone industry and reduced it to a few players that were prepared to bear the high compliance burden in return for the benefits of a smaller, oligopolised industry.

Many of these were supported by, or were branches of, existing commercial aviation ventures, which had the capital to cover the compliance costs and also to cross-subsidise the initial growth phases. Many of the early adopters and innovators of the industry before 2015 left the industry, and some that had gone through the expensive compliance phase subsequently failed — a result of not being able to recoup costs from the market.

A good example of the impact of the Part 101 regulations on the industry is the Cape Town start-up Aeroboticsiv. The company started as a drone manufacturer and services business, selling drone systems to farmers and agronomists and also collecting imagery using drone systems. When the regulations were introduced the company cleverly pivoted by repurposing as a data analysis business, generating machine-learning validated insights using imagery uploaded by clients, and no longer manufactured drone systems. 

Not every drone player that existed before 2015 was able to pivot, and the industry lost many valuable innovators. Use cases such as mining, quarrying, agriculture (remote sensing and crop spraying), conservation, land management, environmental protection, security, cinematics & entertainment, real estate and land surveying all forewent the benefits of a dramatically cheaper form of aerial services thanks to the regulations.

The broader economic picture is important. When it comes to technology in business, “if you are standing still, you are going backwards”. Unit costs were supposed to fall in these industries, as they did in other countries where the regulations were more reasonable. SA therefore lost competitiveness in multiple industries in the space of a few years. This situation endures and despite numerous representations by the industry associations no rationalising of the regulations has taken place.

From innovation to importation

No better evidence of the decline of the SA drone industry could exist than the announcement late last year that SA is import drones from Nigeria. SA is supposedly a tech hub and innovator on the African continent and would normally show a strong trade surplus in technology-intense goods vis à vis Africa. For this pattern to be reversed is quite unexpected, but in the context of the differences in drone regulatory structures it is understandable. Nigeria’s regulations are not as draconian as SA’s, and their licensing processes are also viewed as more streamlined and efficient. In SA a UASOC (operator certificate) and ASL (air services licence) can take up to two years, and cost hundreds of thousands of rand. 

Regulatory overkill is essentially an abuse of the power of the state and is harmful to consumers and producers. Economists have long proposed regulation of industries to prevent price distortions and the efficiency losses these impose on the economy. Of course, transport agencies such as the SA Civil Aviation Authority are also tasked with protecting the public from injury and loss. However, in the lead-up to the development of the Part 101 regulations no reported drone safety incidents had occurred and none of note has occurred since. The extent of the regulations, which were essentially copied from full-size aviation, is therefore difficult to understand.

It would therefore be reasonable to conclude that in the case of the SA drone industry, which now has to resort to imports from Nigeria, regulatory overkill has caused the drone industry to deindustrialise. In fact, the very impetus the authorities should have been encouraging has in effect been stifled, and many industry players that made losses and exited will never return.

This is a powerful lesson for African countries on the importance of developing appropriate regulatory structures, using rational concepts and correct data, consulting with all stakeholders, comparing with international norms and standards, and also taking into account the bigger picture — the effect on the industrial base and the developmental potential of the economy. 

• Stuart is an associate of the Trade Law Centre.