Low-hanging fruit policy reforms for SA trade in 2022

South Africa is still the biggest economy on the African continent and stands poised to fully benefit from increased openness and trade as more and more countries emerge from Covid-19. But protectionist policies such as Localisation stand to undermine the potential of the Africa Continental Free Trade Area (AfCFTA), warns CHRIS HATTINGH.

South Africa stands to benefit from more trade – with the accompanying capital investment and job creation opportunities – if government focuses on eliminating as many tariffs and non-tariff trade barriers (NTBs) as possible, speeds up the move to establish a truly independent Transnet Ports Authority, and allows private sector investment and skills sharing in the areas of ports and rail infrastructure.

South Africa’s short-term priorities should be:

1. Speeding up the establishment of an independent Transnet Ports Authority.
2. Re-establishing robust security at railways, incorporating private and community action groups where appropriate.
3. Abandoning localisation plans.
4. Using political and economic heft and incentives to push the implementation of AfCFTA.

In 2021, South Africa’s ports ranked very poorly in the World Bank and IHS Markit’s Container Port Performance Index. Out of 351 facilities, the Index ranked Ngqura at 315, Cape Town at 347, Port Elizabeth at 348, and Durban at 349.

Inefficient port operations add costs to shipping operations. Ultimately, those costs are passed on to consumers. Throughout 2020 and 2021, pandemic- and government-imposed constraints have steadily increased the costs of shipping containers specifically, and global shipping as a whole (the grounding of the Ever Given which blocked the Suez Canal in 2021 also exacerbated supply chain pressures).

An article from The Economist in December 2021 stated that congestion relief should not be expected anytime soon, while current blockages will take longer to unwind because they’ve been stuck for so long. “Most pundits see little hope of improvement until after Chinese New Year in February. Disruptions may last all of 2022.” This according to Lars Jensen of the consultancy Vespucci Maritime, as cited in the article. “Though rates may have hit a peak, they are unlikely to fall much in the next six months and are set to remain elevated into 2023,” the article continues. “Only then will new vessels ordered in response to high rates start to hit the waves.”

While controlling the causes of tighter shipping may not always be within the South African government’s power, it would benefit from doing all it can to remove its own red tape, as well as other inefficiencies and costs caused by regulation at the ports. By making it easier for ships to dock and unload, one also ensures the flow of more (and hopefully cheaper) goods. With consumers under so much strain, any access to cheaper foods and goods would go far. Lower trade input and component costs can also ease some of the pressure arising from higher inflation, which is something we will probably have to contend with in the immediate future.

Throughout 2021, government has made the right noises regarding upgrading port performance.  Early in the year, it was announced that the ports will be corporatised, easing entry for private concessionaires. Transnet CEO Portia Derby announced a Durban port masterplan, which aims to bring in private investors to the tune of R100 billion. There is also the intention to bring private operators into rail but, of course, this does not necessarily guarantee implementation.

A report compiled by David Williams for the Brenthurst Foundation, Why there are so many trucks on the road and so few trains on the tracks, found that the country’s railway system is approaching total collapse.

Writing for Business Day, meanwhile, Hilary Joffe highlights the deeply negative consequences of Transnet’s general decrepit state: “Based on Transnet’s record for the first 10 months of the year, coal producer Exxaro estimates the industry is likely to export no more than 58.8-million tonnes of coal this year; Thungela Coal CEO July Ndlovu puts the number closer to 55-million. The Richards Bay terminal should be shipping 75-million tonnes.”

She also points out that “the Minerals Council SA estimates the country will this year lose well more than R30bn in export revenue that it could have earned from coal, iron ore and chrome, as a result of Transnet’s ailing infrastructure and operations.”

It remains to be seen whether the proposed Ports Authority would be allowed to operate in a robust and independent manner, taking the necessary but difficult decisions or whether, as with all other state-owned enterprises, board appointees and management and operations would be subject to consistent political interference.

As a more general goal, South Africa should continue working towards making border and port operations as smooth as possible. This does not necessarily require massive spending on ornate plans, but rather pushing out inefficient and corrupt officials. This will cause short-term pain, yes, but with massive upsides for businesses across the region.

A final trade priority for the country would ideally be to abandon – or if that is not possible, then freeze – Localisation plans. There are hints of protectionist policy decision-making all around the world – it is in this context that South Africa’s Localisation plans have emerged.

Ostensibly, Localisation aims to reinvigorate the country’s manufacturing base and bring about ‘reindustrialisation’. Unfortunately, inward-looking policies like this will only serve to drive away skills, capital investment, and job creation in the long-term. Those products designated for priority will receive the necessary subsidies, while tariffs and other duties will be imposed on imported goods and inputs.

Consumers should be free to decide from whom they want to obtain products, and with whom they want to trade. Once government interferes to the extent envisaged by Localisation, the normal rules of supply and demand and price signals become distorted, resulting in massive economic inefficiencies.

Localisation might result in a few short-term wins for those businesses with the necessary political connections, but – despite being protected from competition by subsidies and other shields – even they will ultimately suffer. Further, Localisation will not produce more resilient supply chains through South Africa into the continent or the rest of the world; the only way for these supply chains to grow is through market forces, competition, and price and information signals.

Trade is not simply about the exchange of goods and services; the easier it is for trade to happen, the more countries can indirectly encourage skilled, brave, and entrepreneurial people to try and create value. This brings more intellectual resources to tackle the world’s problems and more capital creation to start businesses and create job opportunities. If the South African government pursues the appropriate policy options, the country could yet push the continent in a direction of easier trade, more growth, and increased prosperity.