Plan to boost lo­cal con­tent

Eskom, Transnet and Gov­ern­ment set to help in­dus­try

Finweek English Edition - - Economic trends & analysis - GRETA STEYN

SOUTH AFRICA’S MAS­SIVE IN­FRA­STRUC­TURE spend­ing drive could be more ex­pen­sive and may pro­ceed more slowly than en­vis­aged. In ad­di­tion, the large im­port com­po­nent has the po­ten­tial to worsen this coun­try’s al­ready high cur­rent ac­count deficit.

Pub­lic En­ter­prises Min­is­ter Alec Er­win has drawn up a plan to re­duce the im­ported com­po­nent of the huge cap­i­tal spend­ing pro­jected to take place over the medium term. The main fo­cus of Er­win’s plan is Transnet and Eskom, which are pro­jected to spend a com­bined R133bn be­tween 2005 and 2009.

One of the fac­tors that could push up costs and de­lay Eskom and Transnet’s spend­ing plans is the fact that SA isn’t the only coun­try to un­der­take a mas­sive in­fra­struc­ture spend­ing push. Michael MacDon­ald, chief econ­o­mist of the Steel & En­gi­neer­ing In­dus­tries’ Fed­er­a­tion of SA, says: “Peo­ple may think it’s only Eskom that hasn’t been in­vest­ing in new ca­pac­ity. But that’s also been hap­pen­ing in other coun­tries. Ev­ery­one wants to build ca­pac­ity and is or­der­ing at the same time. There’s a chance that lo­cal de­mands won’t be met in­ter­na­tion­ally.”

Er­win ac­knowl­edges the prob­lem, say­ing global growth in the de­mand for in­fra­struc­ture-re­lated cap­i­tal goods, par­tic­u­larly in South-East Asia, is cre­at­ing a threat to the sus­tain­abil­ity of the State-owned en­ter­prises’ (SOE) cap­i­tal ex­pen­di­ture pro­grammes.

A study by the In­dus­trial De­vel­op­ment Cor­po­ra­tion (IDC), con­ducted be­fore Er­win’s plans were drawn up, showed that R75bn of the R133bn Eskom and Transnet plan to spend be­tween 2005 and 2009 would flow out of SA in the form of im­ports. That amounts to a whop­ping 56% – more than the oft-quoted 40%, be­cause the num­ber in­cludes in­di­rect im­ports.

Ob­vi­ously, the spend­ing won’t be spread evenly ev­ery year. But if it were, one year’s spend­ing would equal about 15% of SA’s cur­rent ac­count deficit for this year. That shows the mag­ni­tude of the prob­lem.

SA’s cur­rent ac­count deficit has been a prob­lem, as it raises the risk that we will run out of for­eign cap­i­tal to fi­nance the short­fall be­tween im­ports and ex­ports. At around 5,5% of gross do­mes­tic prod­uct this year, the deficit is close to the 6% level – that sets off alarm bells.

To ad­dress the prob­lem, Er­win has an­nounced a sup­plier de­vel­op­ment pol­icy, which will see Eskom and Transnet iden­tify po­ten­tial sup­pli­ers and draw up plans to en­able them to pro­duce cap­i­tal goods in SA at com­pet­i­tive prices. He also an­nounced that SOEs should ar­range in­vest­ment in SA by for­eign com­pa­nies from which they buy bulk cap­i­tal goods. Those in­vest­ments would take place in terms of the Na­tional In­dus­trial Par­tic­i­pa­tion Pro­gramme and are sim­i­lar to the defence off­sets that have been ar­ranged in terms of SA’s multi-bil­lion dol­lar arms deal.

What in­cen­tives will be given to busi­ness in SA to make it com­pet­i­tive? The De­part­ment of Pub­lic En­ter­prises is vague about this, say­ing only that the Trade & In­dus­try De­part­ment would use its fi­nance, tech­nol­ogy and pro­duc­tiv­ity pro­grammes to sup­port the de­vel­op­ment of cap­i­tal goods in­dus­tries in SA. So the in­cen­tives will be ac­com­mo­dated within ex­ist­ing pro­grammes and shouldn’t im­ply a mean­ing­ful ex­tra cost to the fis­cus. Whether those ex­ist­ing pro­grammes will be ad­e­quate re­mains to be seen.

A big task lies ahead in get­ting SA’s cap­i­tal goods in­dus­try up and run­ning. Project man­ager Sean Phillips says that in some cases in­dus­trial ca­pac­ity that used to ex­ist has dis­ap­peared com­pletely. In other cases, in­dus­trial ca­pac­ity has re­duced sub­stan­tially.

The IDC iden­ti­fied sev­eral ar­eas where lo­cal spend­ing could take place. Th­ese are: con­struc­tion, par­tic­u­larly civil en­gi­neer­ing (R27bn); metal prod­ucts, ex­clud­ing ma­chin­ery (R11bn); elec­tri­cal ma­chin­ery (R9bn); non-elec­tri­cal ma­chin­ery (R8bn); and trans­port equip­ment (R5,5bn). Specif­i­cally, ex­am­ples in­clude steel tow­ers and poles, trans­form­ers, ca­bles, con­duc­tors, cir­cuit break­ers, iso­la­tors, me­ter­ing pan­els, pro­tec­tion pan­els, tur­bines and parts of lo­co­mo­tives and wag­ons.

How­ever, Er­win’s own fig­ures show the plan’s po­ten­tial isn’t any­thing to write home about. He says the new pol­icy has the po­ten­tial to re­sult in a re­duc­tion of the im­port com­po­nent of the SOEs’ cap­i­tal ex­pen­di­ture by 10%, which would re­sult in an ad­di­tional R6bn of planned ex­pen­di­ture go­ing to SA com­pa­nies over the next five years.

How­ever, he adds: “There will be sub­stan­tial long-term eco­nomic ben­e­fits from in­creas­ing the com­pet­i­tive­ness of lo­cal in­dus­tries sup­ply­ing SOEs.”

The point is that R6bn isn’t much com­pared to di­rect and in­di­rect cap­i­tal goods im­ports of R75bn. How­ever, a pos­i­tive as­pect is that the black eco­nomic em­pow­er­ment re­quire­ments of the sup­pli­ers aren’t ex­pected to be oner­ous.

The other as­pect of the plan – draw­ing in for­eign in­vest­ment akin to the arms deal off­sets – isn’t cause for en­thu­si­asm. As the arms deal showed, off­sets are of­ten fi­nanced by money raised in SA – say, through the IDC – and aren’t real for­eign in­vest­ment. As a strat­egy to man­age the bal­ance of pay­ments, they don’t work.

Capex plans are un­der threat. Alec Er­win

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