Stretc­ing to ca­paciry

Con­straints that could snap the growth cy­cle

Finweek English Edition - - Front page - GRETA STEYN

Con­straints that could snap the growth cy­cle

SOUTH AFRICA’S ECON­OMY is ex­pand­ing at such a rate that it’s burst­ing at the seams. That’s ev­i­dent from the broad range of short­ages and con­straints that the econ­omy faces. In ad­di­tion, sup­ply shocks – both glob­ally and lo­cally – are adding to the prob­lem, cre­at­ing headaches for eco­nomic pol­i­cy­mak­ers.

The short­ages that have emerged in the SA econ­omy in­clude ma­jor ones, such as elec­tric­ity and skills. But there are oth­ers that have been less head­line catch­ing: ce­ment,

steel, fuel, milk and car­bon diox­ide for cold drinks.

While not all of the short­ages are the di­rect re­sult of strong eco­nomic growth, most of them could con­strain the econ­omy’s growth po­ten­tial. Those is­sues could stand in the way of reach­ing Gov­ern­ment’s 6% eco­nomic growth tar­get by 2010 and sus­tain­ing it at that level.

One of the con­straints the econ­omy faces is its trans­port in­fra­struc­ture. That’s been brought into fo­cus by, among oth­ers things, the ex­plo­sive growth in mo­tor ve­hi­cle sales, which has put strain on the coun­try’s road net­work.

Over the past two years, around 1,3m new mo­tor ve­hi­cles have been bought, with ve­hi­cle sales in Gaut­eng ac­count­ing

for nearly 40% of na­tional sales. That’s placed some key roads – such as the N1 be­tween Jo­han­nes­burg and Pre­to­ria – un­der in­creas­ing strain. A graph in the Bud­get Re­view show­ing the in­crease in traf­fic vol­umes be­tween N1’s Buc­cleuch and Al­lan­dale in­ter­changes at peak morn­ing hours showed .an in­crease of around 900 ve­hi­cles/hour

be­tween 1998 and 2006. In an ef­fort to tackle that par­tic­u­lar prob­lem, Gov­ern­ment has de­cided to build the R20bn Gau­train be­tween Jo­han­nes­burg and Pre­to­ria. The Gau­train forms part of the pub­lic sec­tor’s R416bn in­fra­struc­ture spend­ing pro­gramme. The pro­gramme, de­signed to al­le­vi­ate se­ri­ous bot­tle-

necks as well as add to the coun­try’s so­cial in­fra­struc­ture, is one of the key as­pects of As­gisa – the lat­ter be­ing SA’s eco­nomic growth pro­gramme, the Ac­cel­er­ated & Shared Growth Ini­tia­tive of SA.

Trou­ble is, the mas­sive in­fra­struc­ture spend­ing drive is dif­fi­cult to im­ple­ment with­out run­ning into short­ages. Ce­ment and steel stand out in that re­gard. And Ed­u­ca­tion Min­is­ter Naledi Pan­dor has com­plained that there isn’t enough ce­ment to build the schools she plans to. Ce­ment sales in SA are up 16% for the year to date com­pared with last year.

Naudé Klop­per, ex­ec­u­tive di­rec­tor of the As­so­ci­a­tion of Ce­men­ti­tious Ma­te­rial Pro­duc­ers of SA, says SA’s ce­ment pro­duc­tion ca­pac­ity isn’t enough to meet cur­rent de­mand. “No­body fore­saw that the econ­omy would boom quite the way it did,” says Klop­per.

The ce­ment in­dus­try has re­sponded to the short­age in two ways: first, by im­port­ing and, sec­ond, by in­creas­ing ca­pac­ity. Klop­per says the first new in­crease in pro­duc­tion ca­pac­ity will come on line with about 700 000t at year-end 2007.

Be­tween now and 2011, ex­tra ca­pac­ity to pro­duce 6,6m t of ce­ment will come on stream, made up mostly of brown­fields ex­pan­sions at ex­ist­ing fac­ul­ties. More than R7bn will be in­vested in new ca­pac­ity. As new pro­duc­tion ca­pac­ity comes on line, im­ports will be phased out. Last year SA im­ported 700 000t of ce­ment.

Says Klop­per: “Ce­ment im­ports have cost an arm and a leg. But con­sumers haven’t had to pay for the ad­di­tional cost. Pro­duc­ers have car­ried the bur­den.”

The most head­line catch­ing short­age that SA has ex­pe­ri­enced – and is likely to ex­pe­ri­ence in the near fu­ture – is power. Elec­tric­ity black­outs ear­lier this year caused a furore among busi­ness­peo­ple, with some an­a­lysts claim­ing hun­dreds of mil­lions of rand were be­ing lost in pro­duc­tion. Fi­nance Min­is­ter Trevor Manuel said at the time that was non­sense.

But Jo­han­nes­burg busi­ness fo­rum mem­ber Mike Schüssler says: “We told Pres­i­dent Thabo Mbeki at the re­cent im­bizo that we can’t see how the man­u­fac­tur­ing sec­tor can grow ro­bustly in the near fu­ture if we’re to face five years of elec­tric­ity short­ages.”

Schüssler says some in­dus­try an­a­lysts even ex­pect cur­rent pe­ri­odic black­outs to last for

longer than five years.

Some an­a­lysts have blamed the stronger than ex­pected eco­nomic growth rate for the power out­ages. Eskom has it­self men­tioned that as one fac­tor among many. How­ever, power ex­pert Pro­fes­sor An­ton Eber­hard says Eskom’s fore­casts for growth have been re­mark­ably ac­cu­rate. He says the real rea­son for the sup­ply short­age is that Gov­ern­ment pre­vented Eskom from build­ing new gen­er­at­ing plant be­tween 2001 and 2004.

What­ever the rea­sons, the fact is that power out­ages rep­re­sent a real – if dif­fi­cult to quan­tify – con­straint on SA’s near-term eco­nomic growth. The ques­tion is whether Eskom’s planned in­vest­ment in new gen­er­a­tion ca­pac­ity will be enough to en­able SA’s econ­omy to grow at a sus­tained pace of 6% from 2010.

Eskom re­cently an­nounced an in­crease in its cap­i­tal ex­pen­di­ture plans to R150bn from a pre­vi­ous R97bn. The R150bn cov­ers the pe­riod from 2007/2008 to 2011/2012. Eskom spokesman Fani Zulu says one of the rea­sons for the up­ward re­vi­sion in Eskom’s spend­ing was a higher gross do­mes­tic prod­uct growth as­sump­tion.

Says Zulu: “The in­crease in cap­i­tal ex­pen­di­ture is driven sub­stan­tially by a change in as­sump­tions from 2,3% to 4% in elec­tric­ity de­mand growth. The up­ward re­vi­sion of the elec­tric­ity de­mand growth is re­quired to align to Gov­ern­ment’s tar­get of 6% eco­nomic growth be­tween 2010 and 2014. Eskom’s de­ci­sion to change its growth as­sump­tions was re­in­forced by the GDP growth in fourth quar­ter 2006, which ac­cel­er­ated to 5,6% on a quar­ter-on­quar­ter, sea­son­ally ad­justed and an­nu­alised ba­sis.”

An­other rea­son for the higher ex­pen­di­ture es­ti­mate is that costs have in­creased. Zulu says that one rea­son is that global costs are due to es­ca­late on the back of an in­crease in de­mand world­wide for new elec­tric­ity gen­er­at­ing ca­pac­ity.

With­out mas­sive in­vest­ment in new power ca­pac­ity, SA’s econ­omy won’t be able to meet its growth tar­gets. But one of the spin-offs of Eskom’s huge in­vest­ment drive is that elec­tric­ity prices are set to soar. This fis­cal year the price of elec­tric­ity is in­creas­ing by 5,9%.

How­ever, Eskom feels that the planned in­crease of 6,2% for the 2008/2009 fis­cal year is far too low. Zulu says Eskom is propos­ing an in­crease of the CPIX rate plus 13%. He says the rea­sons for that pro­posal are the in­creased cap­i­tal ex­pen­di­ture pro­gramme and the sharp rise in the price of coal. The cost of coal for SA con­sump­tion has in­creased by 18,2% since Oc­to­ber 2005.

An­other short­age that’s re­ceived much at­ten­tion is the skills short­age. To deal with that is­sue, Deputy Pres­i­dent Phumzile Mlam­boNgcuka has spear­headed the es­tab­lish­ment of the Joint Ini­tia­tive for Pri­or­ity Skills Ac­qui­si­tion – Jipsa. Labour, busi­ness and Gov­ern­ment are rep­re­sented on Jipsa.

Mlambo-Ngcuka re­cently gave a brief­ing on what Jipsa had achieved since its in­cep­tion in March 2006. Its plans in­clude in­creas­ing the bud­get for train­ing en­gi­neer­ing grad­u­ates. The stake­hold­ers are also con­sid­er­ing ad­dress­ing the gap through other means, such as over­seas schol­ar­ships and im­port­ing skills. There’s also a de­tailed plan to in­crease the num­ber of ar­ti­sans by 150%/year to pro­duce 50 000 by 2010.

The Cen­tre for De­vel­op­ment & En­ter­prise (CDE), an eco­nomic think­tank, has con­ducted a lot of re­search on SA’s skills short­age. The CDE re­port says it’s a myth that the skills short­age is a short­term emer­gency. “De­vel­op­ing and re­tain­ing our own hu­man cap­i­tal will be a long-term process.”

CDE di­rec­tor Ann Bern­stein says: “In or­der to con­front the full re­al­ity of our skills cri­sis, we have to face the fact that SA ed­u­ca­tion and train­ing is in deep trou­ble. Fix­ing that will take a gen­er­a­tion. What no­body in the cur­rent dis­cus­sion on the skills short­age wants to deal with is what do we do in the mean­time?

“Ev­ery Gov­ern­ment pol­icy and strat­egy – black eco­nomic em­pow­er­ment, lo­cal gov­ern­ment, em­ploy­ment eq­uity – as­sumes that there are suf­fi­cient trained peo­ple to fill the jobs and man­age the com­pli­cated pro­cesses re­quired.”

Bern­stein says for­eign im­ports are the quick­est way to ex­pand the skills base and de­velop SA’s own hu­man cap­i­tal.

Apart from th­ese big, eye-catch­ing short­ages other, smaller, is­sues have also de­vel­oped. For ex­am­ple, there’s the short­age of car­bon diox­ide to aer­ate cool drinks, which has al­ready raised prices. There’s also a short­age of milk, due in part to cat­tle be­ing slaugh­tered for meat amid drought con­di­tions.

Such sup­ply shocks con­trib­ute to in­fla­tion in a small way but they will com­bine with the oil price shock and other food prices to keep SA’s CPIX rate close to 6%.

Stan­dard Bank econ­o­mist Goolam Bal­lim says you have to dis­tin­guish be­tween short­term, cycli­cal short­ages and struc­tural is­sues, such as the skills short­age. “The short-term prob­lems will have an ef­fect, but that will be tem­po­rary. But the jury is still out on is­sues such as the skills short­age. That’s why I’m only cau­tiously op­ti­mistic that we’ll be able to achieve 6% growth on av­er­age.”

The SA econ­omy faces short­ages and con­straints that will put pres­sure on in­fla­tion and the bal­ance of pay­ments. That sit­u­a­tion may threaten the coun­try’s abil­ity to reach its 6% growth tar­get on a sus­tained ba­sis.

GROWTH POW­ERS AHEAD

Source: Re­serve Bank

No one fore­saw the boom.

Naudé Klop­per

BAL­ANCE OF PAY­MENTS UN­DER PRES­SURE

Source: Re­serve Bank

Fani Zulu and Phumzile Mlambo-Ngcuka

Mlambo-Ngcuka says the num­ber of ar­ti­sans will be in­creased by 150%.

Ex­pects five years of elec­tric­ity short­ages. Mike Schüssler

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