Plan to boost local content
Eskom, Transnet and Government set to help industry
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