Source: The Presidency
Title: SA: Motlanthe: Address by the Deputy President of South Africa, at the Ernst & Young strategic growth forum, Cape Town
Chief Executive Officer of Ernst & Young Africa, Ajen Sita;
Minister and Deputy Minister of Trade and Industry;
Ladies and gentlemen.
I am greatly honoured to address the Ernst and Young Africa Strategic Forum hosted in Cape Town, on the African continent for the first time.
Let me take this opportunity to welcome all of you to our country. I trust that you will find South Africa beautiful and its people warm.
The Africa Attractiveness Survey that Ernst and Young undertook and published in 2011 tells an interesting and largely positive story about the investment prospects for the continent.
In summary, the story being told is that Africa is becoming increasingly attractive to international investors. Perceptions are becoming more distinctly positive over the longer-term horizon.
Further, business leaders are planning new developments and expanding existing ones, demonstrating why Africa’s share of new global Foreign Direct Investment projects has steadily improved over the past decade. In fact, capital investments are set to grow, reaching a forecast of US$150b in 2015.
The Survey shows that Africans themselves (ourselves) are leading the growth in investment across the continent, and display an overwhelming confidence about the growth prospects and investment potential of the continent.
This optimism is underlined by a 21% compound growth rate of African investment by Africans from 2003 to 2010 (and in a diverse range of sectors).
South Africa’s own stock of Foreign Direct Investment in Africa increased more than five-fold between 2005 and 2010 from US$3 billion to US$16.6 billion. I am certain that this is a story that we are all familiar with.
It is now commonplace that Africa’s economic performance over the past decade has outstripped performance in any previous period. Current forecasts are that Africa’s economy will grow at about 5.5% as a continent, this year.
The big question is whether this performance can continue and for how long? Some of us can remember that many African countries boomed briefly in the post-colonial era but slowed down drastically during and after the world economic crises of the mid- and late-1970s. Will this happen again?
To answer this question we have to examine the factors that have contributed to Africa’s strong growth performance in recent years?
Africa is an exporter of natural resources and the price of and demand for natural resources have been strongly driven by growth in China, as well as a few other major developing countries.
Secondly, the quality of macro-economic management has improved enormously in Africa as has the quality of economic leadership in African governments.
Finance ministers and central bankers are top class in many African countries today, and their governments take them seriously.
We have learned from poor African performance in the 1970s and 1980s; we have learned from the crises in Latin America in the 1980s and 1990s; we have learned from the Asian crisis and we are now learning from the European crisis.
We should remember that during the world financial crisis in 2009, when the rich economies of the North were, on average, shrinking at about two percent, sub-Saharan Africa was still growing at about three and a half percent on average.
One of the most important reasons for this sustained growth was that debt levels were low in Africa. The other key macroeconomic variables were within reasonable levels too.
It is true that the debt relief programmes of the past decade helped to some degree. But they were accompanied by outstanding domestic economic management.
We should not forget that a significant part of the African growth story is about rising domestic consumption. This shows that growth is not entirely unbalanced and not purely dependent on resource exports.
Thirdly, contributing to the improved economic performance in Africa is the emergence of accountable and democratic governments. Since the end of the Cold War, democratic and accountable governments have been proliferating.
In the past year we have seen some African countries experience social upheavals because of the need to bring about democracy and political stability.
This is part of a continuing trend in Africa that began to take off in the early 1990s. Accountable governments mean better management, greater transparency, less corruption and greater responsiveness to the needs of ordinary citizens. This is how the foundation for sustainable, long term growth is being built in Africa.
And, yet, Africa still receives less than five percent of foreign investment inflows. It seems that the African growth story has not yet been fully understood.
We are labouring under the burden of our preconceptions. Many investors will view Africa as being a more challenging place to do business in than other emerging market regions; this despite the fact that in the World Bank’s most recent Ease of Doing Business rankings, 14 African countries ranked ahead of Russia, 16 ahead of Brazil and 17 ahead of India.
We hope that this forum will serve to increase the understanding of investors about the countless opportunities that obtain in Africa.
Similarly, Africa is often perceived as being inherently corrupt. While corruption no doubt remains a big challenge in Africa, 13 African countries rank higher than India, and a staggering 35 higher than Russia, in Transparency International’s Corruption Perception Index.
Indeed times are a-changing, and this remarkable turn of events on the question of corruption in Africa should be seen as a positive sign that Africa has turned the corner and from here on Africa can only be on the up and up.
Ladies and gentlemen;
It is worth noting that the policies of the South African government strongly support economic growth in Africa. In practice, our most obvious work in Africa comes in the form of post-conflict reconstruction and peace keeping.
But we also provide a considerable amount of technical assistance through government departments and state owned enterprises.
Our development banks—the Industrial Development Corporation and the Development Bank of Southern Africa—have played significant roles in supporting the development of the economies of numerous sub-Saharan African countries.
South Africa’s infrastructure –our roads, railways, airports and harbours—offer many services to African markets. We are conscious of this and are constantly improving their quality.
As most people here will know, the government of South Africa has committed itself to a further round of investment in the kind of infrastructure that enhances competitiveness for South Africa and the region.
Budgeted and approved public-sector infrastructure projects over the next three years currently total R844.5 billion. The full list of mega-projects under consideration comprises investments worth an estimated R3.2 trillion.
Providing financing for social and economic infrastructure that support development remain a priority for government now and in future years, even while we gradually bring the budget deficit down.
Similarly, development finance institutions and state-owned enterprises continue to expand their contribution to the economy through the financing and development of new infrastructure.
Let us take the energy sector as an example of our long-term commitment to sustainable growth. It is widely known that we are currently building two giant coal- fired power stations which will use modern technology to reduce CO2 emissions
Less well-known are our renewable energy commitments. Our Integrated Resource Plan sets an ambitious target of providing 21 per cent or 18.9 Giga Watts of generation capacity from renewable sources by 2030.
It is envisaged that 9.2GW will be generated from wind, 8.4GW from photovoltaic sources (solar panels) and 1.2GW from concentrated solar power that use mirrors and lenses to concentrate the sun’s rays. Other technologies, such as biogas and small hydroelectric installations, are included in the mix.
Late last year, as the first major step towards renewable energy, government identified 28 preferred independent power producers of renewable energy with a combined potential capacity of 1 416MW.
The Independent System and Market Operator Bill is in its final drafting stages. The bill is intended to ensure that independent power producers have open, competitive access to the electricity grid.
The communications industry is largely driven by the private sector, but here too we have made important reforms. Amendments to regulations in the telecommunications sector have allowed more than 400 companies to gain electronic communications network service licences since March 2009.
Private firms have made large investments in undersea fibre optic cables, helping to expand broadband access. Further interventions directed at local loop unbundling and regulation of interconnection tariffs will confer significant benefits to consumers and the economy in the near future.
Transport is another key sector where we have made huge investment commitments. We have major investments planned or already underway in roads, rail, ports and airports over the three year budgetary cycle period.
The South African National Roads Agency (SANRAL), which is responsible for maintaining and expanding the 16 170km national road network, will spend R25 billion on new roads and infrastructure, and R18 billion on maintenance.
Transnet is planning to invest about R300 billion over the next seven years, of which R107.7 billion is already included in approved plans. These investments focus on the freight rail network, large capacity upgrades on the iron ore and coal export lines, acquiring modern rolling stock and refurbishing existing infrastructure.
The increased capacity will boost general freight and mining exports. The Saldana port’s handling capacity will be expanded to accommodate increased iron ore throughput. Investments in the Richards Bay port will increase bulk export and cargo capacity.
The Passenger Rail Agency of South Africa (PRASA) has begun a long-term project to renew its fleet of rolling stock and upgrade stations nationwide.
The cost of the 20-year programme exceeds R80 billion, with a projected R4 billion to be spent over the Medium Term Expenditure Framework period. These investments will improve reliability and safety for the 2.4 million passengers who travel on the network each work day.
There is evidence of a strong reciprocal relationship between growth in South Africa and growth in other parts of Africa. A few years ago the International Monetary Fund (IMF) investigated the relationship and found that when South Africa grew faster, it had a strong positive impact on the rest of sub-Saharan Africa.
When they looked deeper they found that it was not through trade that South Africa had a positive impact—trade was too small. In fact the impact came from South Africa’s investment activities and provision of services in Africa.
The South African private sector has had a huge impact on African development since the end of isolation in 1994, and it has done so in a range of sectors.
Banking, telecommunications, pay-tv, hotels, the retail sector, business services, construction, mining, farmers and agribusiness—in all these sectors South Africa has invested and raised productivity levels and increased the competitive temperature.
African growth has equally benefited South Africa. Much of our exports of manufactured goods and services go to other African countries. As incomes rise in Africa, the opportunities for companies based in SA will grow enormously.
We in South Africa are not resting on our laurels, being fully aware that African growth has to be driven forward. So we intend to play a central role, with the Southern African Development Community (SADC) being the first building block. In point of fact, SADC initiated a free trade agreement four years ago, in 2008.
The overwhelming majority of SADC have gone pretty much down the road of a free trade area. South Africa is committed to completing this process.
Beyond this, the heads of state of more than half of Africa’s countries gathered in Johannesburg in June last year to commit to what we call a “tripartite free trade” area.
It is tripartite because we are bringing three Free trade areas together. These are SADC, the East African Community and COMESA, which is a free trade area that includes much of Southern, Central, Eastern and North Eastern Africa.
It is our ambition that by June 2014 these 26 countries with a combined population of nearly 600 million people and a total Gross Domestic Product (GDP) approximately US$1.0 trillion will be united in a single free trade area.
However, we are not naive to believe that simply by removing trade tariffs that we will create an integrated regional economy. Non-tariff barriers to trade are more inhibitive of intraregional trade than tariff barriers. There are three main non-tariff barriers.
The first is the lack of integration of systems that allow the movement of people, goods and services across borders. On many borders in Africa there are unnecessary delays due to different certification systems, a lack of coordination between the officials of the different countries across the border, and weak border infrastructure—not enough space, facilities and even border officers.
We all need to make firm commitment to getting our borders to operate more smoothly. Presently, there are some model border crossings in Africa that work very well from which we must learn with the view to implementing the necessary reforms, as a matter of urgency.
The second non-tariff barrier is poor infrastructure. Road, rail or power facilities are sometimes substandard, slowing down transport and worst still, making it cheaper for coastal countries to import items from far across the oceans than purchase them from their neighbours.
The North-South corridor programme is a key initiative of the African Union to address this challenge. There are several other similar infrastructure projects across Africa.
The final non-tariff barrier is the fact that there is not enough industrial diversification amongst African countries. In many cases neighbours produce largely similar products and there is no great reason to trade amongst each other.
The solution here is to strengthen the competitiveness in African economies in a range of industries. To overcome this challenge we need top class education and skills development, microeconomic reforms and even stronger macroeconomic management.
Regions can cooperate to support diversification by building regional value chains. One country may be most competitive in cotton growing, another in textile production and a third in clothing manufacture. Why don’t they trade accordingly instead of every country trying to master all stages of the production process?
If one country specialises in motor car assembly, its neighbours could be enlisted to produce labour intensive components for the production of automobiles. If one country produces bauxite and its neighbour has an abundance of sustainable electricity, why doesn’t the latter country smelt the aluminium?
Over and above this we need to build greater trust. The best way to get there would be to start with a few model programmes of this kind, and eventually we will be able to accept that a regional division of labour need not be a bad thing.
On the contrary, it could spur further economic growth. It probably takes the private sector to get there—it’s probably easier for the private sector to lead the way on regional industrial policies at first, with the support of governments.
Ladies and gentlemen;
On their own, governments would be hard put meeting the objective of effectuating regionally integrated economies. If we look at the recent example of Asia, the building of economic integration was as much the work of business people and intellectuals as it was the work of governments.
In Africa we need civil society to play a more energetic role in driving the agenda of African integration forward.
In this regard, we in South Africa need to work a little harder to raise awareness of the great achievements in Africa. Our intellectuals, our journalists, our trade union leaders and our business people, even our religious leaders— should all be much more involved in driving the African integration agenda.
In conclusion, there is no doubt that Africa is a place replete with possibilities. While a few residually negative perceptions about Africa’s potential somewhat linger on, it is equally clear that much of these perceptions are unfounded and I would hope that this engagement today contributes to a better appreciation of the opportunities which exist in modern Africa. On its part South Africa clearly understands that its growth and development can only happen in the context of an economically flourishing African continent. I therefore call on all of your as investors today to consider Africa as an investment destination of choice.
I thank you.