MICHAEL AVERY: Pouring money into a bottomless hole

Industrial policy is hardly the stuff of gripping dinner table conversation, but when President Cyril Ramaphosa says the government has given R55bn to support the growth of black industrialists over the past 11 years, as he did during his keynote address at the Black Industrialist Conference last week, my ears pricked up.

An average of R5bn a year doesn’t sound like much in the broader scheme of this year’s estimated expenditure of R2.2-trillion, but considering that the Black Industrialist Programme introduced five years ago is a marquee component of our industrial policy, one would expect rigorous analysis of what has been achieved so far. Bang for buck, you know.

All I could find on the department of trade, industry & competition’s website in the first annual Black Industrialist Report published last year, highlighting the direct funding provided by the department, the National Empowerment Fund and the Industrial Development Corporation (IDC) to support black industrialists and entrepreneurs since the programme was launched, was a bunch of so-called case studies, which are really quarter-page profiles of those fortunate enough to be granted access to the scheme.

Over the past five years about R32bn has been invested in nearly 800 black industrialist businesses and black entrepreneurs. Under the heading “Jobs to be supported (created and saved)”, a total of 118,572 is provided. There is no breakdown between jobs created versus jobs saved. If we are generous, and for argument’s sake say this R32bn created 118,572 new jobs, that comes in at a cost of R269,878 per job, which actually benchmarks quite well against a World Bank report on the cost of a job in a US coffee shop coming in at R425,000, or a job in Tunisia for better comparison of R566,000.

The fundamental question for policymakers trying to get more people into work is surely how to use limited public resources most efficiently. Do we allocate them towards active labour market programmes, or do we use them to promote the creation of new businesses or the expansion of existing businesses?

The problem in assessing the success or otherwise of the Black Industrialists Programme is that rigorous cost-benefit analysis is nowhere to be found. Start with a basic calculation of the financial analysis of the industrialist business supported, which generates an internal rate of return for the lender based on future projected cash flows.

Any half-decent cost-benefit analysis would then adjust the financial rate of return to generate an estimate of the social rate of return — defined by the World Bank to mean the fully adjusted economic return to society of a given activity, incorporating appropriate corrections for market failures (correcting historical imbalances, for example).

Between 1960 and 1994 SA’s GDP grew at an average of 3.17% a year. From 1994 to 2007 (the first year of the Industrial Policy Action Plan and our first true industrial policy), GDP growth averaged 3.47% a year. From 2007 to 2020 it grew at 0.89% a year. If you cut off at the end of 2019 and thus remove Covid, the average is 1.83%. The unemployment numbers look no better. So we have had 15 years or so of industrial policy and have at best remained static in that period.

The Black Industrialists Fund is measured only on how much money is dispensed, which has been a lot. The feedback doesn’t seem to include things like return on investment. Given the scale of the interventions in the market, I would expect better quality studies at least indicating why this administration thinks these policies will work. Instead, it seems to mostly be a form of faith healing for the economy.

Our industrial policies are locking us into our local market. They restrict competition and so make us less competitive. This has been solved in countries such as China by huge subsidies and an iron fist if you don’t comply. We have no money to fund our industrial policies and we have no ability to enforce even laws that are an easier sell.

Francis Fukuyama observed in The End of History and the Last Man that: “An industrial policy worked in Taiwan only because the state was able to shield its planning technocrats from political pressures so that they could reinforce the market and make decisions according to criteria of efficiency — in other words, it worked because Taiwan was not governed democratically. An American industrial policy is much less likely to improve its economic competitiveness, precisely because America is more democratic than Taiwan or the Asian [newly industrialised economies]. The planning process would quickly fall prey to pressures from Congress either to protect inefficient industries or to promote ones favoured by special interests.”

This is often the concern raised by critics of interventions like the Black Industrialist Fund, and especially the various sector master plans. The latter are invitation-only affairs and so lock out substantial parts of the market. They are often anticompetitive (to such a degree that the Competition Commission proposed guidelines allowing circumvention of competition rules provided your intention was pure and local. These were published for comment in October last year.)

Are the master plans effectively tested against both the evidence and long-run outcomes? Don’t be silly.

• Avery, a financial journalist and broadcaster, produces BDTV’s Business Watch. Contact him at badger@businesslive.co.za.