Address by the Minister of Public Enterprises, Mr Malusi Gigaba MP, at the Investor conference in Port Alfred, Eastern Cape
25 Apr 2012
Ladies and gentlemen
We are honoured and humbled for the honour you have granted us to address you this morning. We are particularly pleased by this opportunity because it creates a vital opportunity for an exchange of ideas, a cross-pollination, between the national department and local economic planners, among others to test whether there is alignment in our policy thinking.
Given the determination by our government to be actively involved in the economy, and invest in growth enhancing sectors of the economy, we need more of these gatherings so that we can achieve policy and capacity alignment and sharpen our instruments for such intervention.
This is not minute tasks as we have discovered that the one-size-fits-all approach will not be sustainable given the diverse nature of our economy and the social demands it places on it. Collective thinking and wisdom will reap more rewards in building an economy that is inclusive and responsive to the local context while fulfilling the national social transformation imperatives.
The national economy policy frameworks as outlined in the Industrial Policy Action Plan and the New Growth Path seek to improve coordination, strengthen the manufacturing industry, revive the rural economy and allocate resources in a way that stimulates growth of new industries, unlocks economic bottlenecks and decentralises industrial activities to create decent job opportunities and improve the living conditions of our peoples. The manufacturing industry was the backbone of Eastern Cape Economy and it sustained the livelihoods of the population, even though minimally but it created income safety net.
Our economy has experienced de-industrialisation, capital forms of production were introduced living the unskilled and semi-skilled labour unemployed, decline in global demand, liberalisation and other global markets factors which are beyond our economy like movement of capital from manufacturing industry to service industry.
This has severely affected our economy including this province and has forced us to think creatively on what we need to do to revive our economy and effectively extract its comparative advantage in a way that expands economic opportunities for South Africans.
In doing so, we have identified under investment in social and economic infrastructure as an inhibiting factor in strengthening our economic growth and ensure economic development of our communities. This is evident in the growth patterns of the Eastern Cape economy which is mostly attributed to the strong Automotive and Components Sector with a minimal contribution of agricultural products.
However, among the core objectives of the infrastructure roll-out plan announced by the President during the State of the Nation Address, harnessing the agricultural potential of the province will be central to the South-Eastern node, linking the Eastern Cape to the Northern Cape and KwaZulu-Natal, which will also bolster the industrial and export capacity of the province.
The value of infrastructure investment and associated capacity both enables and promotes economic activity by creating intermediary industries. It enables economic activity in that it would be inconceivable to establish any industrial activity without the electricity to power the plant and the logistics infrastructure to move materials to and from the plant. Neither would economic activity and growth be enhanced by lack of broadband capacity and penetration to ease communication.
But at another level, infrastructure investment promotes qualitatively new economic activity. Firstly, companies whose competitiveness depends on having extremely efficient access to global markets, either for the sourcing or sale of goods, will be drawn to invest in areas where this access is provided.
Infrastructure can effectively transform the comparative advantages of a region into competitive advantages against which businesses invest. Secondly, companies that add value to the logistics chain, through activities such as packaging or assembling, will locate themselves close to logistics hubs. The recognition of the catalytic impact of infrastructure has resulted in the explosive global growth of “back of port” industrial development zones.
The success of industrial development will depend on a range of factors, including the quality and efficiency of both the social and economic infrastructure provision, whether the infrastructure feeds into the comparative advantages of a region to build a sustainable competitive industry, the building of economies of scale and cluster synergies.
These factors tend to reinforce one another to create a virtuous circle. For example, each additional container that goes through a container terminal lowers the average logistics cost for all containers going through that terminal ultimately reaching a point where powerful economies of scale operate. An investment in a specialised steel manufacturing plant provides the basis for downstream investments such as ship-building or automotive manufacture or other capital goods.
However, the presence of ship-building and auto-motive manufacture will enable investment in concern about steel manufacturing capacity and the cost of such input as steel. Each new investment in a sector increases the likelihood of an additional specialised parts or services company investing in the sector.
This in turn opens up the likelihood of investment and capability building in proximate sectors such as tractor manufacturing. Hence a vicious cycle is created, where scale creates cost advantages which results in greater scale and where clustering creates dynamic competitive advantages which results in further cluster growth.
However, before this vicious economic circle is reached, there is a hard slog that requires strong political will. It will be necessary to attract strategic anchor industrial investors through offering appropriate infrastructure at special prices in the hope that more investors will follow and push for the establishment of production centres outside the cities to rural towns to stimulate economic transactions and revive rural economies.
At times, it will be necessary to provide additional incentives to the investors to make up for the absence of a supporting cluster and to accept losses on the infrastructure until economies of scale are built. Surviving this hard slog will require a high level of vision, commitment and determination. Let me state unequivocally that we have the will to drive this hard slog and are willing to incur the economic cost.
The Eastern Cape is strategically located equi-distant from Gauteng, Cape-Town and Durban. It is also ideally located as a container trans-shipment hub between the Americas and Asia and, possibly, Europe if the Suez Canal gets congested. The province has some sophisticated manufacturing capabilities, most especially in auto motives, but needs to expand its economic base if the high levels of unemployment are to be substantively reduced. It is only through bold new infrastructure investments, together with skilling our people, that we can create the conditions for investments in qualitatively new anchor industries.
However, we need to be clear as to what industrial sectors should be targeted for economic development, what should be prioritised as strategic anchor investments, what kinds of infrastructure will be required to support this vision and how should these investments be sequenced.
The latter is even more crucial because the intervention would require thorough assessment of the demand in both the domestic and global market, balancing the socio-economic needs of the province and creating sustainable value chain. How do we harness the rural economies and what are the low-hanging fruit to drive economic development – meaning which sectors of the economy require less capital injections and will not derail job creation!
The Port of Ngqura represents the first strategic anchor investment in the Eastern Cape made by the South African government in its entire history. This points both to the historical neglect of the region and the need to focus our attention to address this neglect. We are acutely aware that the Industrial Development Zones (IDZ) existence is based on the existence of the port and the rail and road networks that connect the port with the hinterland and that its success will be ultimately dependent on high levels of strategic coordination with broader logistics investments.
There are clearly a range of possible infrastructure projects that can contribute to the development of the Eastern Cape. Rather than discuss abstract or high level strategic possibilities, I am aware of a range of projects that will enhance the Port Elizabeth and Coega IDZ, as well as the East London IDZ as an economic corridor and development of supply chain of various consumer goods. First and foremost, we need to unlock Ngqura’s potential as a major trans-shipment hub as a matter of urgency.
Major shipping lines have invested in feeder ports in both the West and the East coast of Africa which will create efficient logistics chains between Ngqura and growing African middle class consumer and industrial markets. This will give South Africa a unique competitive advantage in accessing these economies. The Industrial Development Zone will be an ideal location for the establishment of labour-intensive light industries to take advantage of these opportunities.
A second obvious area for development is the relocation of the manganese terminal and tank farm from Port Elizabeth to Ngqura. This will free up prime port land for more appropriate tourism development and higher value added uses. The local economic planners will have to develop a strategy for how effectively to use the freed space for economic output.
The automotive sector needs to build a critical mass to become globally competitive. We need to ensure that State-Owned Companies (SOCs) prioritise the provision of infrastructure to the automotive sector to ensure that an enabling environment is created for the sectors additional growth and development so that the economic spin offs are properly captured in a form of localisation.
It is important that we integrate investments in infrastructure with investments in skills development activities in the province to build, operate and maintain the infrastructure. The SOCs have a range of specialised training capabilities and we recognise the need to ensure that these capabilities are made available to provinces within which the SOCs operate. For the contribution of the SOCs to the Eastern Cape development process to be optimised, we need to take the governance process to a different level.
We have established a forum to enhance coordination between our SOCs and the Province that is overseen personally by our Deputy Minister. The purpose of the forum is to ensure that our respective investment plans support one another, improve the operational provision of infrastructure to the Province and support the build programme.
For the provinces to derive maximum value of this coordinated process, there needs to be an improved planning with critical stakeholders like the business sector, academic institutions and others, in order to improve the quality of social dialogue. So that such economic opportunities do not bypass the youth of this province and women who constitute the majority of the population and also vulnerable to economic fluctuations.
The Presidential Infrastructure Commission developed an Infrastructure Plan with 17 Strategic Integrated Projects (SIPs), covering more than 150 specific infrastructure interventions. These cover all the key platforms: rail, road and port; dams, irrigation systems and sanitation; new energy generation plants, transmission lines and distribution of electricity to households; communication and broadband infrastructure; social infrastructure in the form of hospitals, schools and universities as well as regional infrastructure.
These infrastructure programmes seek to promote the long-term industrialisation of the economy through the use of locally-manufactured components and supplies, improvements in skills development, particularly in critical areas such as engineers, artisans, technicians and technologists. The infrastructure must help the country to integrate African economies so that we can create larger markets and promote deeper intra-regional trade and investment.
This will however require strong partnerships between the three spheres of government and the private sector. Provincial and local governments play major roles in fast tracking infrastructure development because they are closely connected to service delivery to communities.
Lastly, the global financial crisis has presented the South African government and local economic planners with an opportunity of being innovative in local economic initiatives and recognise the role of the social economy and small medium enterprises in building our economy. It is going to be crucial for the Eastern Cape government to set aside resources that enable these sectors to undertake economic transactions and ensure proper access to economic opportunities.
I thank you.
Issued by: Department of Public Enterprises
25 Apr 2012
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