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6 February 2006

A catalyst for accelerated and shared growth (ASGISA)

The three spheres of government have been working together for some months and in consultation with partners to elaborate on the specific interventions that will elaborate on the Accelerated and Shared Growth Initiative of South Africa – ASGISA - whose ultimate objective is to halve unemployment and poverty by 2014. As the President said “ASGISA is not intended to cover all elements of a comprehensive development plan, rather it consists of a limited set of interventions that are intended to serve as catalysts to Accelerated and Shared Growth Development” (State of the Nation Address 2006). ASGISA is not a new policy nor does it replace the Growth Employment and Redistribution (GEAR) strategy and it is not an industrial policy. Most of the interventions are built on the micro-economic reforms and agreements reached at Growth and Development Summit. It takes advantage of a stable macro-economic environment, an economy that is growing at 4% plus in the past two years. Between 2005 and 2009 we seek an annual growth rate that averages 4,5% or higher. Between 2010 and 2014 we will seek a growth rate of at least 6% of GDP.

Our recent growth although welcome has been unbalanced and based on strong commodity prices, strong capital inflows and strong domestic consumer demand, which has increased imports and strengthened the currency way beyond desirable levels; yet levels of unemployment are still too high and growth has not been adequately shared. The divide between the First and Second Economy has meant that those who live in the Second Economy have less benefits.

We seek to take advantage of the growth in order to share the benefits and base it on a more sustainable basis beyond commodity prices/consumption and capital in-flows.

The high business confidence offers an opportunity to create a healthy and a growing private sector in the First Economy, which can address the challenges of the Second Economy. “Years of freedom have been very good for business and I believe that should have convinced the investor community by now, that it is to its own interest and as part of national effort it has to invest in the expansion of that freedom especially by actively and consciously contributing towards the achievement of the goal of halving poverty and unemployment by 2014,” the President said in his State of the Nation Address 2006.

Hence our emphasis on partnerships not only with business but also with labour, civil society and other members of society is important for ASGISA. Much consultation has taken place and will be on-going so as to build on the emerging consensus on what should be done to accelerate and share growth and seek response to some of the issues that have been raised through during the consultations some which even though legitimate do not fall within the limited mandate of ASGISA.

ASGISA responds to binding constraints, which are:

* The volatility and level of the currency
* The cost, efficiency and capacity of national logistics system
* Shortage of suitably skilled labour amplified by the cost effects on labour of apartheid spatial patterns
* Barriers to entry, limits to competition and limited new investment opportunities
* Regulatory environment and the burden on small and medium businesses
* Deficiencies in state organisation, capacity and leadership.

A modelling and growth accounting exercise has been undertaken by a range of economists in the private and public sector support the premises and potential of ASGISA, but only if the interventions are well targeted and efficiently managed. A team of local and international economists from Harvard, MIT, SOAS and LSE have been tasked with testing our assumptions and plans in order to present us with new options if any, which will inform the evolution of ASGISA over 2006-2007.

The response to binding constraints is a combination of systematic initiatives, optimising on public expenditure improving an environment to do business in South Africa and removing bottlenecks in the main within government. In addition there is a range of projects especially in the Second Economy which are targeted to urban and rural youth and women as well as limited policy initiatives, wide ranging policy proposal or comprehensive economic review will need a different process.

The initiative as indicated is not a sum total of all governments’ responses to issues of poverty and unemployment; it is selected interventions, which are as follows:

* Infrastructure
* Sector strategies
* Education and skills
* Interventions in the Second Economy
* Public Administration issues
* Macro-economic.

Further consultation with partners will seek to gain their active involvement in the different aspects and implementation of ASGISA on areas of strong agreement.

Infrastructure

Overall government expenditure for infrastructure spending totals some R370 billion over the current Medium Term Expenditure Framework (MTEF). This is unprecedented increased public expenditure which will boost the much needed fixed investments.

Of this, about 40% will be spent by Public Enterprises, mostly Eskom (R84 bn covering generation, transmission, distribution and others) and Transnet (R47 bn, of which R40 bn is “core” i.e. harbours, ports, railway and petroleum pipeline), Airports Company South Africa (ACSA) (R5,2 bn which includes airport improvement and Dube Trade Port), water infrastructure (R19,7 bn), 2010 infrastructure, which will include building or improving the 10 stadiums to be used, and investment in the environs and access to the stadiums, information and communications technology (ICT) infrastructure which includes the strategy to rapidly grow South Africa’s broadband network; implementation of a plan to reduce telephony costs more rapidly; the completion of a submarine cable project that will provide competitive and reliable international access, especially to Africa and Asia, and the provision of subsidies to encourage the establishment of call centres and labour intensive business in poor areas.

In addition to the general infrastructure programmes, provinces were asked to propose special projects that would have a major impact on accelerating and sharing growth. A set of projects has been selected for finalisation of implementation plans. These projects are selected for their impact on employment, poverty eradication and economic growth including sustainability and possibility to leverage private sector funding. Further work on ASGISA will incorporate local government initiatives.

One of the intentions of the Infrastructure Investment Programme is to address the maintenance backlog out of which skills will be needed and sustainable new jobs could be created for artisans. A framework for Infrastructure Maintenance Plan is being developed along these lines.

Sector strategies

Sectors that are competitive and able to meet both the growth and sharing objectives of ASGISA have been identified. This process will further benefit from the broader industrial strategy that is being finalised. While all are priority and strategic, the sectors with highest potential for impact within a short time and where extensive work has been done and therefore implementation is immediate are Tourism and Business Process Outsourcing (BPO) sectors. Those priority sectors where work is not as advanced are work in progress.

* BPO and Tourism: these are top priority and immediate. Implementation will start in first half of 2006.

* Other priority sectors under consideration are: biofuels, chemicals, metals and metallurgy, agriculture, agro-processing, creative industries, wood pulp and paper, clothing and textile and durable consumer goods. These will be announced when more work has been done.

With BPO, South Africa has attracted about 5000 of such jobs from the rest of the world so far. The sector has the potential for 100 000 additional direct and indirect jobs by 2009. Challenges that are being addressed to achieve the above include marketing, skills/training, telecoms costs and regulatory challenges. A tailor-made incentive environment for BPO is being finalised. Government and business have a joint project, supported by the Business Trust, led by the Minister of Trade and Industry and Chair of Standard Bank to remove obstacles and refine incentives to achieve this goal. The Minister of Trade and Industry will elaborate more on BPO.

Tourism

The other immediate priority sector is Tourism. This sector has already grown rapidly in South Africa but is ready for a second phase of growth that could take its contribution to GDP from about 8% to about 12%, and increase employment by up to 400 000 people by 2014. Key issues are: marketing, air access, safety, and skills development. This industry also entails a strong government/private sector partnership, which was established during the 1st phase of growth. The Minister of Tourism and Environmental Affairs will elaborate more on the Tourism sector.

For both BPO and tourism a detailed business plans that both government and the private sector are contributing to.

There are several cross cutting industrial policy challenges being addressed too, including: inadequate competition and import parity pricing; capacity for trade negotiations; a more coordinated Africa development strategy; better incentives for private research and development (R&D) investment; and better use of broad-based black economic empowerment (BBBEE) to encourage industry transformation, beyond the transfer of equity.

Education and skills development

For both the public infrastructure and the private investment programmes, the single greatest impediment is the shortage of skills – including professional skills such as engineers and scientists, managers and financial personnel, project managers; and skilled technical employees such as information technology (IT) specialists and artisans.

Key measures to address the skills challenge in the educational sphere will focus on the a) quality of education, b) adult basic education and training (ABET), further education and training (FET) and artesenal skills, which the Minister of Education will elaborate. Scarce and priority skills include high skills and artisans.

In the context of ASGISA, the focus will be on priority and scarce skills which including artisans. A new institution that will be established in the month of March is the Joint Initiative for Priority Skills Acquisition (JIPSA). This structure is led by a committee of relevant Ministers, business leaders, trade unionists and education and training providers or experts. Its job will be to confirm the urgently needed skills and find quick and effective solutions. Solutions may include special training programmes, bringing retirees or South Africans who are working outside South Africa, and drawing in new immigrants when necessary. Programmes for placements of personnel and unemployed graduates are. JIPSA will have an initial timetable of 18 months placement of skills for local government is already advanced. Plans for private sector placement in infrastructure project management are also advanced and will ensure women’s involvement.

Second Economy intervention

Inequalities are entrenched in the structure of the South African economy and a systematic policy intervention will be elaborated outside ASGISA, which will only consider more urgent interventions.

Without interventions directly addressed at reducing South Africa’s historical inequalities, growth is unsustainable. The intention is to create sustainable bridges between First and Second Economy to enable growth and graduation to a sustainable economy; unlock dead assets/asset poverty in poor people’s hands e.g. livestock, housing, land, etc; promote local economic development and local content; growth co-operatives with a link to First Economy markets; and the need to address the “missing housing stock” valued between R50 000 and R150 000.

All priority sectors will have to provide a bridge to the Second Economy. Tourism, BPO, Creative Arts, Agriculture, Clothing and Textiles are sectors which are easily responsive to the Second Economy. A link is in the business plans with the Second Economy are being made. Infrastructure is crucial for such linkages.

There are several other interventions designed to support small, medium and micro-enterprises (SMMEs). Nafcoc’s commitment to establish 100 000 new SMEs per year is laudable, and government will support Nafcoc’s efforts. A key challenge is to address the gap in loans between R10 000 and R250 000. One such effort is a new partnership between Khula and business partners in a R150 million fund for business loans of this size; we will be launching tomorrow, which has a stronger focus on women. We also plan to accelerate the roll out of the Apex and Mafisa programmes of loans under R10 000.

For the next stage of business development venture funding is key, and government is trying to establish new venture funds for SMMEs. The R1 bn programme recently announced by the IDC and the National Empowerment Fund’s venture fund will make a considerable impact on the growth of small businesses.

The other intervention is in the area of Preferential Procurement. For Public Enterprises, the State Owned Enterprise Procurement Forum is codifying and spreading best practices for Affirmative Procurement, which will have a dedicated Supplier Development Programme. For the government, the Department of Trade and Industry (DTI) is developing a procedure through which 10 products will be set aside for Procurement through Smaller Black Owned Businesses.

A further key, small business initiative will be to pursue the recommendations made to Cabinet on the regulatory environment for small businesses. These recommendations include: that the Minister of Labour will lead a review of labour laws’ impact on small businesses; that the reforms in tax administration affecting small businesses will continue; that the DTI and the Department of Provincial and Local Government (DPLG) will prepare recommendations on how to improve the regulatory environment for small businesses in municipalities; and that sector departments will review the impact of their laws and regulations on small businesses. In respect of municipalities, the ASGISA process has also mandated DPLG, in consultation with the DTI, to improve the capacity of local government to support local economic development.

Another key, Second Economy intervention is the Expanded Public Works Programme (EPWP). This programme will be expanded beyond its original targets in terms of ASGISA. The relevance of training provided will be given greater attention. EPWP mandate has been extended to a larger number of roads and some larger road projects. This will entail about R4,5 bn additional funds over the coming MTEF period, about 63 000 more people maintaining roads, and about 100 000 additional people in jobs averaging six months in roads building. In addition, 1000 more small black contractors will be developed. New access roads will have a significant impact on conditions and opportunities in some poor and rural areas.

We are convinced that to achieve ASGISA’s goal of halving unemployment and poverty by 2014, we will have to work more closely with women and the youth. On women the focus will be on human resource training: ensuring they have access to finance across the board; fast tracking them out of the 2nd economy; ensure their significant participation beyond SMMEs and to improve their access to basic services; increase their participation in expanded public works programme.

On the youth front, one of the interventions is to target unemployed graduates for jobs or learnerships, which will also be part of the Second Economy outside ASGISA. We support the Umsobomvu Youth Fund initiative to register unemployment graduates on their database. In this regard we wish to thank many companies that last December pledged to employ some of these graduates. As President Mbeki, said in his State of the Nation Address: we shall ensure that the focus on youth development is intensified in all spheres of government. Among other things during the next financial year, we will set 100 new Youth Advisory Centres, enrol at least 10 000 young people in the National Youth Service, we will enrol 5 000 volunteers to act as mentors to vulnerable children. 70% of our population is below 35% years.

We will also expand the reach of our business support system to young people and intensify the Youth Co-operative Programme. We will closely monitor the impact of our programmes on youth skills training and business empowerment as an integral part of our National Effort.

In relation to the Second Economy you will notice that much focus is on women and youth in the rural and urban areas and on programme interventions that can be up-scaled to achieve mass impact. Cooperatives, land reform and productive use of land, and housing stock problems of the range between R50 000 and R150 000 will receive special attention.

Follow-up on already agreed initiatives which are meant to benefit the Second Economy will be prioritised. BEE charters, GDS, offset agreements will be followed up by relevant departments.

Macro-economy issues

ASGISA responses to macro environment are limited as it is focused on micro initiatives. The National Treasury, the South African Reserve Bank (SARB) will engage on issues identified in the binding constraints.

A key challenge is to improve budgeting in government, particularly at a macro level where we tend to underestimate revenue and over estimate expenditure, which results in the budget appearing more expansionary than it is which in turn sends misleading signals to other players in the economic arena. A further area where macro economic policies or implementation will be improved is in expenditure management, particularly in government capital investment, where several agencies’ budgets are considerably under-spent and some run out of funds before the end of the financial year. One of the key activities will be the review of the functioning of the Development Finance Institutions to ensure that they are effectively employed in our developmental efforts. One innovation to be introduced in 2006 is a development of a new capital expenditure management information system by the National Treasury.

Governing and institutional interventions

ASGISA will push for government to implement and respond better to the public. A key role of ASGISA is better management and response by government as against thorough going policy reforms.

All spheres of government, State Owned Entities and social partners will be engaged.

On Local Government and Service Delivery we are focusing on addressing the skills problems identified in Project Consolidate.

The skills interventions include the urgent deployment of experienced professionals and managers to local governments to improve project development implementation and maintenance capabilities. The project managed by the Development Bank of Southern Africa will deploy an estimated total of 150 expert staff, with the first 90 to be deployed in May 2006. The project will also include skills transfer to new graduates. The Development Bank of South Africa (DBSA) is compiling as database of “retired experts” for this and further deployments.

For ASGISA implementation, it has been decided in Cabinet that the Cabinet Committee for Investment and Employment would now have ASGISA as a standing item for regular reports and problem solving at its monthly meetings.

The ASGISA task team includes Ministers, Premiers and SALGA representatives and is chaired by the Deputy President.

Issued by: The Presidency
6 February 2006