Fix basic infrastructure issues before going after localisation

Localisation is not the way in which to rescue South Africa. Instead, basic infrastructure issues need to be addressed and fixed. So says CHRIS HATTINGH.

Continued rolling blackouts (at time of writing, Eskom has resorted to Stage 4 of a potential eight), renewed strike action, and the ongoing decline of Transnet’s ability to move freight have all put paid to the government’s much-hyped Localisation Master Plans. Without cheap and reliable energy supply it is highly unlikely that manufacturing and mining will “re-industrialise” the nation to any significant extent. Instead of localisation plans that will only increase import and export costs and generally disincentivise trade with South Africa, the government should be focusing on fixing basic structural issues – such as the mining licence system – and privatising Eskom and Transnet.

The current global commodities boom will not last forever; in any case, it is an irrational policy to presume that one’s country will always have global events running in its favour. While the fiscus has seen some benefit from the boom, it is nowhere near as much as it should have been, had the country’s ports and rail networks been operating at required efficiency. At present, commodities contribute more than 70% to the country’s total exports. However, if South Africa’s structural infrastructure issues persist, those foreign businesses and manufacturers looking for coal, iron ore, gold, and platinum may well look elsewhere to fulfil their needs.

Speaking at the Mining Indaba in Cape Town on 10 May, President Ramaphosa said that the destruction of the country’s railway system needs urgent attention. The president and the various government departments involved should probably focus on protecting the rail infrastructure that remains, however, instead of trying to play kingmaker by providing subsidies and other protections for businesses, as part of localisation plans that will only lead to higher costs later down the line.

Regarding mining specifically, at last count more than 4 000 mining and exploration licence applications were waiting to be processed at the Department of Mineral Resources and Energy. The Minerals Council indicated that almost R100 billion in projects are currently in limbo because of bureaucratic problems at the department. How any of the proposed industry Master Plans will resolve this backlog is unclear.

On 9 May, the National Union of Metalworkers of South Africa (Numsa) served ArcelorMittal SA with 48 hours’ notice of a strike; the strike is in support of a 10% wage increase demand, with the steel company offering 5%. Numsa is not alone in its strike action: the Association of Mineworkers and Construction Union and the National Union of Mineworkers are currently on a near three-month strike at Sibanye-Stillwater. For as long as unions have the influence and power to hold business and industry hostage, there is little chance that government’s localisation plans will bring about great new capital investments.

According to Transnet’s own latest annual report, rail freight volumes dropped 13,3% and port container throughput was down by 10,5%. These latest drops come after years of businesses and freight companies shifting their preferred method of transport to road – they simply cannot rely on Transnet, and furthermore the rail networks upon which they would have relied in the past may simply no longer exist. With the decline of the railways, there is ever more pressure on the roads. No wonder many of these cannot take the added tonnage, and break down until they barely resemble what one would properly call a “road”.

We can also point to the effect of increased rail tariffs that drive companies to pursue other options. Between 2005 and 2010, rail tariffs increased by more than 191%. It has thus become all the more difficult – and often financially impossible – for exporters to contend with such costs, and they have no choice but to put their materials and goods on trucks.

Localisation plans are not going to solve any of the basic infrastructure issues that have been touched on here. Furthermore, once they are imposed they are likely to increase trade costs across the board, further affecting low-to-middle income consumers who are already struggling as a result of higher inflation, as well as increased fuel and food prices.

If South Africa is to attain meaningful growth anytime soon (much more than the 1.8% projected for the next few years), the government will need to adopt reforms and policies that are focused on paring back its controls. Additional barriers to trade are going to inhibit the flow of goods and services, and impede the growth of organic manufacturing and industrial activity. In the absence of these necessary reforms (which are clearly unlikely to happen), exporters and businesses across value chains need to take stock of the reality that the government is likely to pursue policies that will make their operations yet more difficult… and plan accordingly to ensure that their work can continue.