Secondary Sector Contributions to the Economy: hearings

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Finance Standing Committee

15 February 2007
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Meeting report

FINANCE PORTFOLIO COMMITTEE
16 February 2007
SECONDARY SECTOR CONTRIBUTIONS TO THE ECONOMY: HEARINGS

Chairperson:
Mr N Nene (ANC)

Documents handed out:
South African Federation of Civil Engineering Contractors Presentation
Steel and Engineering Industries Federation of South Africa Presentation
Trade and Industrial Policy Strategies Presentation: Part1 & Part2

 

Audio Recording of the Meeting

 


SUMMARY
The South African Federation of Civil Engineering Contractors said that total employment for the construction industry was between 450 000 – 500 000 people.
Residential, non-residential and construction works contributed 6.3% of the Gross Domestic Product (GDP).

In examining the relationship between economic growth and infrastructure spend, there were no examples of developing countries that had sustained high economic growth on the basis of a consumption led-boom. Therefore construction would provide the logistical capital input and would create a platform for business to perform at an optimal level.

In terms of the long-term prospects, there was socio-economic stability and continued commitment to investment aided by fiscal health. Efficiency and institutional capacity was still a concern as many Government Departments struggled to spend their budgets.

The Steel and Engineering Industries Federation of South Africa said that that the turnover of the metal and engineering sectors was more than R252 billion in 2006 (up 14% over the R221 billion turnover achieved in 2005). This represented a contribution of around 6% of Gross Domestic Product. While the metal and engineering industries were currently experiencing a severe shortage of skilled workers largely due to the very considerable falloff in apprentice training over many years, the prospects for major growth in overall employment in this sector was very limited.

The export performance of other sectors of the industry was mixed. Including metal producers, only around 20% of all metal industries companies were involved in exports. For some years up to 2000, a relatively weak rand allowed a number of companies in the metal industries to enter the export market, some for the first time. However, as the Rand strengthened considerably around 2000, many of those companies, whose only competitive advantage was the weakness of the currency, had to abandon their export markets.

Capital expenditure plans by the government and private enterprises for the remainder of this decade as well as going into the next decade bode well for the metal and engineering industry.


Trade and Industrial Policy Strategies said that there were no good manufacturing statistics in South Africa, as a manufacturing census had not been conducted in many years. The economy had grown much faster in the 2000 – 2005 period than the 1994 – 1999 period, with manufacturing the main under performer. The structure of the economy was changing and the primary sector was in decline.

There was not much of a pattern in the manufacturing employment figures and they did not actually know what was going on there.

MINUTES
South African Federation of Civil Engineering Contractors (SAFCEC) Presentation
Mr Pierre Blaauw, an economist at SAFCEC, said that according to the Industrial Development Corporation, the multipliers for building and civil work were 1.2040 and 1.1704 respectively for every rand spent. The employment multipliers were 11.87 and 24.17 jobs for building and civil work created for every R1 000 000 spent.

Total employment for the construction industry was between 450 000 – 500 000 people.
Residential, non-residential and construction works contributed 6.3% of the Gross Domestic Product (GDP).

Total annual turnover was between R60 and R70 billion. More than R21.5 billion was spent on materials supplied and more than R12 billion was spent on machinery equipment. Most (92.6%) construction work in the private sector occurred in residential areas, while most (39%) of construction work in infrastructure (harbours and roads for instance) was government-initiated. Investment in total housing and non-residential buildings was expected to increase in 2008 and 2009 after the current downturn as a result of the recent interest rate increases.

In examining the relationship between economic growth and infrastructure spend, no examples of developing countries that have sustained high economic growth on the basis of a consumption led-boom. Therefore construction would provide the logistical capital input and would create a platform for business to perform at an optimal level.

Infrastructure stock as a percentage of GDP had declined over the last few years to the extent where it could be said that there was an “economic infrastructure deficit,” so naturally infrastructure bottlenecks were more common and this made Government’s need to speed up infrastructure development understandable and important. Also the depreciation in the current infrastructure was exceeding new infrastructure development.

An economist, Mr P Perkins from the University of the Witswatersrand, said that, “the capacity for economic infrastructure to reduce costs associated with production and delivery and increase the competitiveness of South African business suggested that there was a positive relationship between expansion in infrastructure and economic growth. In fact neglecting infrastructure investment could compromise long-term economic growth.”

Eskom had informed the construction industry that a huge amount of work was going to be coming their way and they wanted to know if there was enough capacity to handle this. The relationship between the industry and the clients had to improve. A construction company could not read that there was a R2 billion tender for a nuclear plant in a newspaper for instance. There had to be more transparency and better communication because there was competition for resources.

Construction works had started to pick up in line with Government’s wish to see South Africa at the same level as other developing countries.

Infrastructure was not normally an initiator of investment, but was a facilitator. Infrastructure addressed the supply side of the economy, providing the fixed assets needed to expand capacity and lower costs of doing business. Investment however, was the only real contributor to new employment opportunities.

In terms of the long-term prospects, there was socio-economic stability and continued commitment to investment aided by fiscal health. Efficiency and institutional capacity was still a concern as many Government Departments struggled to spend their budgets. The construction industry was geared in a way in which they would work for the most efficient Departments so the institutional capacity at some Departments had to be re-examined.

There were forecasts of vigorous growth rates in the industry. The years of downturns had changed the mindsets of many construction companies. They were wary of expanding in the lean years in case it was not worth it but the sudden increase in infrastructure spending had caught many unawares.

There were also supply chain constraints but people were the key. All of the employee potential had to be developed and invested in. There was also going to be shortages in materials. It was worrying that the Construction Education and Training Authority (CETA) had lost focus and was struggling to find its way back. Around 50% of the labour force did not have access to training because of instability, sub-contracting and temporary labour. Specialists were ageing (and white) and fell mostly in the 50+ age bracket. Construction graduates were also being lured to other more attractive sectors such as accounting and finance. Emerging contractors had a limited lifespan due to a lack of experience and limited access to finance.

Other challenges were in the regulatory environment. There were a large
number of public sector clients: six National Departments; 9 Provincial Departments; 240 local authorities; a number of public corporations and in excess of 120 pieces of legislation. There were also uncoordinated policies which were costly to police.

Discussion
Dr S Van Dyk (DA) asked if it was better to do away with CETA all together and leave the training up to companies.

Mr Blaauw replied that the quality of education and training in the CETA was a problem. The CETA was supposed to create the environment for training, that is, pay other colleges to do the training while it co-ordinated the process. However, some of these colleges were unscrupulous. Some people were trying to get the CETA to work and some companies were doing the training themselves.

Mr B Mnguni (ANC) asked how long it would take for blacks to close the skills gap.

Mr Blaauw replied that a centre of excellence had been built by the industry in Paarl so the results would be seen soon.

Mr D Dlali (ANC) asked why were skills not being transferred to subcontractors?

Mr Blaauw replied that subcontractors were used but companies did not see it as their job to train them as they usually looked for specialist subcontractors. Training was not usually part of the agreements. However, the Charter did score companies on how the extent to which they transferred skills.

Mr Y Bhamjee (ANC) said that since 1994 the industry had not been very open to transformation. Did a monopoly/cartel still exist, especially in terms of the cement industry?

Mr Blaauw replied that the cartel did not exist anymore.

Steel and Engineering Industries Federation of South Africa (SEIFSA) Presentation
Mr Michael McDonald, Head of Economic and Commercial Services, said that the turnover of the metal and engineering sectors was more than R252 billion in 2006 (up 14% over the R221 billion turnover achieved in 2005). This represented a contribution to GDP of around 6% of GDP. The metal and engineering industries represented nearly 30 % of all manufacturing in South Africa both in terms of turnover and employment.

Employment in the metal and engineering industries included approximately 275 000 hourly paid shop floor workers, with an addition 50 000 managerial and support staff. The despatches of carbon steel products to the local market increased by 26.2% during 2006 compared with 2005 while exports of carbon steel products decreased by 30.8% during the corresponding period. Exports of primary steel products declined as a result of the strong local demand, diverting sales from the export to the local market. This trend was expected to continue for some time. Growth in real domestic steel consumption during 2007 was expected to increase at a rate of probably 9.9% with similar increases expected in downstream metal and engineering sectors.

While the metal and engineering industries were currently experiencing a severe shortage of skilled workers largely due to the very considerable falloff in apprentice training over many years, the prospects for major growth in overall employment in this sector was very limited. This would remain the case even if there were major increases in production for either the domestic or export markets.

The current 275000 hourly paid shop floor workers needed to be compared with employment of more than 450 000 workers in 1981. The reasons for this major drop in employment levels were several but were not, as some would surmise, a result of the considerable trade liberalisation following the conclusion of the Uruguay Round of World Trade Organisation international trade negotiations in 1994. Most of the drop in employment levels occurred prior to 1994.

From the mid-80s to early-90s, most sectors of the metal and engineering sectors underwent major technological innovation in order to meet international demands for higher quality products. This was most evident in the automotive component industry. Along with this, technological innovation throughout virtually all of the metal and engineering sectors came a need for higher skilled workers.

In 1981, 69% of the workforce in the South African metal and engineering industries was lower-skilled workers (with 17% skilled and 24% middle-skilled workers). By 2007 this had changed to 30% lower skilled workers with 16% skilled and 53% middle-skilled. It was probable that the percentage of skilled workers would increase if there was a greater availability of artisans. But also, it was expected that the percentage of lower-skilled workers would continue to decrease.

The current overall employment levels had stabilised at between 270 000 and 275000 workers and this was not expected to change to any major extent in the future as this reflected international trends in manufacturing employment. However, over the last twenty years, negotiated wage levels for all levels of workers had increased at a consistently higher rate than inflation.

Most of the primary metal producers of steel, aluminium, copper, ferro alloy and other metal producers were the metal industries' major exporters. Recently however, major increases in domestic demand with limited local capacity of local producers, especially of steel, resulted in some drop-off in exports and a major increase in steel imports. Local producers of primary metal products were internationally competitive and any increase in capacity would be reflected in greatly improved export performance. Increased capacity was currently taking place in a number of metal production sectors.

The export performance of other sectors of the industry was mixed. Including metal producers, only around 20% of all metal industries companies were involved in exports. For some years up to 2000, a relatively weak rand allowed a number of companies in the metal industries to enter the export market, some for the first time.
However, as the rand strengthened considerably around 2000, many of those companies, whose only competitive advantage was the weakness of the currency, had to abandon their export markets.

Overall, the strength of the South African currency had, in recent years, negatively influenced the growth of South African manufactured exports. It was expected that this would remain an inhibiting factor impacting on the growth of local steel consumption in the medium term as well as the ability of downstream meal products manufacturers to export effectively. However, the recent limited weakening of the currency, which was expected to reach the level of around R7.35 to the US Dollar this year, was allowing some previous exporters to return to the export market in a limited way.

Also, it was expected that, over the short to medium term, domestic demand for steel products would be underpinned by stable, but vibrant, domestic economic conditions. In addition, demand for steel products related to the construction industry should be supported by growth in fixed investment as several large projects in the private manufacturing and mining sectors continued. The growth in the demand for steel products would also be driven by the extensive capital expenditure plans announced by the South African government and the mining and chemical industries, as well as preparations for the 2010 World Cup.

Following much deliberation and development, the Department of Trade and Industry (DTI) published a draft, industrial and trade strategy plan along with a number of draft sector development strategies including a Sector Development Strategy for the metals sector. The initial draft strategy focused on action plans for industrial policy and for leveraging infrastructure investment to support industrial growth within a strategic theme of promoting direct investment and growth in a number of strategic industries including the metal and engineering industries as well as the service economy which support it.

SEIFSA strongly supported the current Logistics Development Programme of Government which was specifically aimed at improving rail, road and port infrastructure and which was expected to greatly assist in improving the country's export performance. Providing the necessary infrastructure was put in place, it had been estimated that South Africa could double its current export performance. SEIFSA also supported the stated aim of the DTI to support skills development which was essential for further growth in the metals industries.

Capital expenditure plans by the Government and private enterprises for the remainder of this decade as well as going into the next decade bode well for the metal and engineering industry. The steel off-take from the announced projects should be substantial.

In response to deep concerns expressed by SEIFSA members and affiliated employer associations in respect of cheap and, in some respects, substandard imports from China and India, SEIFSA had been conducting a survey over the last few months in order to attempt to determine the extent to which such imports were undermining the competitiveness of local manufacturing. Following a reasonably good response from SEIFSA members, the results of the survey were currently being analysed.

It appeared that China in particular, but also to a lesser extent India, was seriously undermining local manufacturing. Imports from China were undercutting South African manufacturers' prices by anything between 15% and 50% generally, and was some cases by as much as 100% or more. In a number of instances imports from China did not meet local standards and in some cases did not even meet compulsory safety standards.

Once the survey had been fully analysed, SEIFSA, in addition to publishing the results, would use the information collected to make representations to the Government in order to find more effective means of assisting their members to become more competitive and able to survive in what was becoming an increasingly hostile environment.

The constraints posed by the shortage of artisans continue to hobble many industry initiatives. Faltering steps to address the crisis through bodies such as Jipsa had generated more debate than action to date. SEIFSA had developed a proposal for a Accelerated Skilled Worker Training Project which involved a number of SEIFSA's larger member companies, which already carried out considerable training of artisans, to take on additional apprentices beyond their own company requirements in order to increase the number of apprentices in training by an intake of at least a further 500 trainees per year. ­

However, after approaching the Department of Labour for assistance from the National Skills Development fund, as well as approaches to Jipsa, funding was still forthcoming. It was hoped that an upcoming meeting with the Minister of Labour on this matter would finally enable this project to go forward. SEIFSA had expressed its concern to Government that the decision by the Department of Labour to discontinue both N1 training courses for apprentices from January 2006 and the N2 training courses from January 2008 would seriously inhibit the ability of companies to take on new apprentices.

In view of the fact that the discontinuance of these training courses would serious exacerbate the current skills shortages, further lobbying of Government would be required to revive this training until such time as adequate alternative courses could be developed in consultation with the industry.

Discussion
Mr S Asiya (ANC) asked if the poor quality exports and their bad reception in South Africa affected the country’s relationship with China in any way.

Mr A Moloto (ANC) asked what measures the industry was taking to protect itself from the poor quality goods in China in consultation with Government.

Mr McDonald replied that the rise of China was a problem for everyone. Agreements could be reached with the Chinese Government but individual exporters did not necessarily follow the rules. The solution lay in rethinking the relationship that South Africa wanted to have with China, but no substantive talks had been held at this point. Each South African company had to find areas in which they could do things better than the Chinese, for example finding niche markets and improving service levels.

Dr Van Dyk asked if the current regulatory environment did not affect their businesses.

Mr McDonald replied that the regulatory environment affected small to medium sized enterprises the most. They had to spend more time proportionately than larger ones on time-consuming administration, which lowered their productivity. The Department of Minerals and Energy was doing things to make the situation easier.


Prof B Turok (ANC) asked what the scale of incentives they received from the Government was.

Mr McDonald replied that incentives were available before 1994 but many were against World Trade Organisation and rules so they were scrapped. There were some incentives now but they were not well administered. The Department of Trade and Industry was reviewing all of them.

Mr J Maake (ANC) asked why South Africa had to import steel. Was it because of a limited capacity to mine the local reserves or could the country not convert iron to steel?

Mr McDonald replied that the need to import steel was a result of the industry not anticipating the current boom and a lack of capacity to convert raw materials into the final product. This issue was being addressed but it would take some time.

Trade and Industrial Policy Strategies (TIPS) Presentation
Mr Stephen Hanival, TIPS Director, began by saying that there were no good manufacturing statistics in South Africa as a manufacturing census had not been conducted in many years. As a result, they relied on information from Statistics South Africa.

The economy had grown much faster in the 2000 – 2005 period than the 1994 – 1999 period, with manufacturing the main under performer. The structure of the economy was changing and the primary sector was in decline. The tertiary sector was growing strongly at the expense of manufacturing, agriculture and mining.

In the last five years, more subsectors of the manufacturing sector had been established. The fastest growing one was the leather industry (due to rising needs in the vehicle market in part) as well as the furniture and plastic goods sectors. These were labour intensive sectors so they disagreed with COSATU who claimed that these labour intensive sectors were in decline.

In terms of the growth rates in manufacturing, the highest growth rates were in the smallest contributors to the economy. For example, the footwear and the furniture sectors were the smallest, yet the fastest growing. The larger sectors such as motor vehicles and food were not growing at a fast rate at all (2%). Therefore, there was growth in manufacturing but not enough to get a bigger share of the GDP contribution.

In terms of manufactured exports, there were far more companies exporting their goods between 1955 and 1999. During 2000 – 2005 many sectors were declining and their export rates were negative. This suggested that entire sub sectors were leaving the export market, and once they left it was very hard to get back into it. There were also very few sectors that were growing in exports and they were very capital intensive areas.

Conversely, imports of manufactured goods had increased significantly over the last five years. The machinery sector was worrying because it was a capital intensive area and could be used as a rough indicator of GDP growth. There were no imports of the amount of machinery that South Africa expected if there was going to be high GDP growth in the future.

There was not much of a pattern in the manufacturing employment figures and they did not actually know what was going on there. What was significant was that companies had been forced to compete locally and internationally since 1994 and had “weathered the storm.” Now a restructuring process was under way in response to this. The prospects for manufacturing were positive however. Consumer demand did have an impact on the industry and this could not be discounted.

In conclusion, there was a desperate need for longitudinal manufacturing data. Manufacturing growth was happening but it was soft growth. The real question was how to maximise the current growth potential. The South African economy was very open so there had to be renewed focus on exports. The exchange rate and the rand volatility were important considerations in trying to increase manufacturing growth.

Discussion
Mr Dlali asked how the biofuels programme was going to affect he price of food such as soya beans.

Mr Hanival said that China had a huge biofuel industry and the rate at which it was buying up soya bean fields was worrying. South Africa needed to look at closely at its plantings to make sure that the biofuels strategy did not affect food security or the food price.

The meeting was adjourned.


 

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