Manufacturing fighting to survive in SA, MPs told

Manufactured goods industries struggling with rising costs.

Manufacturing Circle, CEO, Bruce Strong, told parliament that with electricity costs increasing 170% in five years but other BRICS countries decreasing such as Brazil by 28%, the SA purchasing managers index was at a three year low with a volatile rand exchange rate bring uncertainty to any investment plans. Electricity charges had to have a more gradual cost increase trajectory, he said, or there was serious trouble ahead.

Worse, municipal charges had no relation to Eskom charges and this had to be attended to, Strong added.

His statements came in hearings on the department of trade’s (DTI) industrial policy action plan (IPAP) and Strong added his voice to that of MPs that the National Energy Regulator of South Africa (NERSA) should interrogate Eskom price increases more harshly; that municipal mark-ups should be investigated and that electricity discounts had to be considered if manufacturers were to survive.

On the first day, much of the debate surrounding the progress report by DTI on IPAP progress to date. The debate  surrounded not only the usual discourse on tariffs, government departmental policy on preferential procurement (PPPFA) but on re-orientating South African exports away from traditional markets to high growth countries.

A noticeable shift to open discussion on South Africa’s port and harbour problems was very much discernible, other than the expected focus on electricity charges.

DTI’s acting deputy DDG for industrial development, Garth Strachan, told parliamentarians that the need to maintain lower port handling fees was at the moment much countered by high financing costs of port infrastructure development, particularly in the area of rail. Transnet could not disassociate its charges from the urgent need to re-equip in areas of dockside upgrading and rail facilities.

He admitted that South African port charges were amongst the highest in the world, well above global norms particularly on manufactured goods but nevertheless port pricing on iron ore and coal was below the global average. Transnet was deeply involved in increasing flow with new rolling stock which fact was welcomed by opposition members

DTI in their presentation pointed specifically to the renewable energy independent power producer procurement (REIPPP) programme where two rounds of renewable energy generation bids had been awarded with minimum levels of local content ranging from 25% to 45%.

“Green industry achievements included the IDC approval of funding of solar water heater manufacturing and the launch of the energy efficiency programme, DTI said.

Clothing, textiles, leather and footwear, canned vegetables, set top boxes and pharmaceutical products had been the subject of PPPFA revision, it was noted, and new designations for school and office furniture and cables and other capital equipment was in the pipeline. Strachan said the industrial participation programme (NIPP) was just about to be re-formulated which would “help the shift to direct offsets in key IPAP sectors” now that the NIPP policy review had been completed.

On financing, Strachan said IDC was also going to lower the cost of funding for businesses, by sourcing an additional R2 billion from the UIF for funding more labour intensive businesses and so far, IDC had claimed that jobs created or saved through funding approvals from 2009 to this year was well over 111,000.

Looking ahead with the protracted recession and slow demand for South Africa’s exports, the challenge was the exchange rate overvaluation and volatility with high relative real interest rates. Strachan said that the “user pay” principle for funding electricity build programmes was inducing massive economic shocks to the manufacturing sector.

There was also the challenge of pricing by monopolies in primary industry and supply of intermediate inputs into manufacturing. In response to questioning on breaking this control up, Strachan responded by stating that the role of large companies in manufacturing in terms of demand and supply in a relatively small to medium economy was significant and that small enterprises in most cases benefitted from the value chain.

This was bearing in mind that the capital costs of such projects were so huge that it was an unlikely small and medium businesses would proliferate under these conditions.

Over the following two days, hearings on the IPAP were conducted and interesting comment was received from the Manufacturing Circle, made up of a number of South Africa’s major medium to large manufacturing companies from a wide range of industries, some of them exporters.

Bruce Strong, CEO of Manufacturing Circle told parliamentarians that for a sector that employed some 1.7m people and accounted for 15% of GDP it was not good that the sector was stagnant and had lost 300 000 jobs because of the recession.

Municipal electricity charges did not reflect the Eskom’s price increases and it was required that NERSA had to be more aggressive on Eskom price increases. Control was required on municipal electricity price increases in particular. Generally he said, the resources of independent regulators had to be upgraded and a benchmarking analysis of their abilities looked at.

Strong called for a national “fiscal review” on the funding of public infrastructure projects. His circle of companies had responded to various of DTI’s incentive programmes but no successful application by manufacturers to the jobs fund had been reported.

There was a crisis in manufacturing, Strong said.

The Competition Commission in their submission, added IPAP did not seem to support the establishment of a sufficient number of small and medium businesses and the problem as they saw it was that “large firms or monopolies ‘owned’ their customers and spawned low levels of investment as there was no need to invest because there was no rivalry.  MPs added the point that legislated monopolies seemed to be shutting down the economy.

DTI responded  that indeed the “ bunched up” escalation in electricity price increases was hurting the manufacturing sector. But the emphasis on the supply side and Eskom’s build programme that had led to the original Multi Year Price Determinations of a 27% increase, with municipal customers being subjected to tariff loading had led to triple digit non-tariff surcharges.

Some municipalities appeared to be using electricity tariffs to generate revenue, Strachan said and Strong noted that places in Mpumalanga that were served by Eskom had electricity 20% cheaper than those served by the majors. MPs added the point that in some cases, for example Johannesburg and Tshwane, a charge of 700% above Eskom’s prices was made.

DTI recommended that an intra-governmental task team examine the impact of escalating electricity tariff increases; short term measures be applied to vulnerable sectors; there was a need for one national set of tariffs; there should be single digit price increases; carbon taxes be approached with caution in the current climate; and companies be supported in recapitalising with energy efficient technologies.

MPs commented at this stage that it appeared that radical responses were needed to be done or IPAP would become a welfare system for failed businesses and pointed again to “ridiculous” electricity surcharges imposed by some by municipalities. Such a discourse by DTI was needed.

DTI’s main platform however on the issue of a deteriorating situation was the economic situation resulting from the global recession, rather pointing to the fact that although government automotive investment programmes had been successful, the production of cars had been seriously affected by the international failing markets. Exports to the European Union remained negatively affected and there had been an increase in vehicle imports at the same time.

Strachan said that 80% of the bodies of medium and heavy commercial vehicles now have to be assembled in South Africa, with the drive train and engines to be shortly included.   DTI was extending investment support for the assembly of semi knocked down vehicles, he said, and was working with IDC on finance programmes trucks and buses but the market was, nevertheless, small.

The department said the clothing and textiles sector accounted for 120 000 jobs and 11% of manufacturing employment. The sector had a turnover of R35bn which was 2.8% of GDP and there were 2 000 active companies in the sector. While the production in clothing had declined, there had been an increase in the production of footwear.

DTI pointed to the fact that many of the MPs questions and answers in the business hearings were outside of DTI”s function or core business but it could see the danger it posed and recalled that there had been the stalled REDs initiative to secure efficient distribution of electricity.

Looking ahead, Strachan said shale gas whilst not in DTI’s sphere, it seemed quite obvious that the east and west coasts of Africa contained enormous opportunities for the oil and gas industries and also South Africa had a competitive advantage because of its mining history. South Africa should focus on localization and the lifting of constraints at ports accordingly, it was noted.

Strachan noted that there was an opportunity for Saldanha to be an oil and gas hub but progress had been slow. If shale gas became a reality it would double the potential of Saldanha.

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