Localisation lethargy jeopardising R787bn infrastructure push – Industry Minister

7th April 2009 By: Terence Creamer - Creamer Media Editor

Unless South Africa and its State-owned enterprises (SoEs) started to meet the target of reducing the imported component of the country’s R787-billion, three-year infrastructure projects by 10%, the programmes themselves could become unsustainable, Deputy Trade and Industry Minister Dr Rob Davies argued on Tuesday.

Speaking at the Metal and Engineering Industries Bargaining Council business briefing, Davies argued that, while South Africa had set a specific target of reducing “import leakage” associated with these projects from 40% to 30%, too little was being achieved.

He said that the new administration, which would be assembled following South Africa’s April 22 election, would need to give greater priority to localisation efforts.

Alternatively, South Africa would run the risk that these programmes would place even greater strain on the country’s already-stressed trade balances. This, in turn, could undermine the financial sustainability of the infrastructure programmes, which itself had been held up as South Africa’s main mitigating response to the prevailing economic crisis.

The Minister was particularly critical of those SoEs that had been given the dispensation by government to pursue localisation efforts under the so-called Competitive Supplier Development Programme, or CSDP, adding that shareholder compacts governing the programmes needed to be “sharpened”.

Companies such as Eskom and Transnet had made application to employed the CSDP instead of the National Industrial Participation Programme (NIPP), which insisted on a 30% offset for all contracts, above $10-million, entered into by government and its parastatals.

However, the CSDP, which is being deployed by Eskom and Transnet, set no specific localisation target, but left it up to the utility to negotiate localisation investments and benefits. The programme was conceived at the height of market demand for power and transport equipment and was meant to position South Africa’s SoEs as buyers of choice.

However, conditions had changed as a result of the global economic crisis and Davies felt more could be done to press home what some saw as South Africa’s newfound buyers-market advantage.

“What we are saying now, is that we need to make sure we achieve those targets.

“I, myself, am not terribly happy that we have done this,” Davies lamented, accepting that the Department of Trade and Industry (DTI) had also not played a vigorous enough role in ensuring that opportunities were made visible and that specific sectors and subsectors were given the industrial-policy support to take advantage of the opportunity.

He said that the localisation opportunity was not merely South Africa’s lowest-hanging industrialisation fruit, but was increasingly becoming a macroeconomic imperative, particularly given South Africa’s current-account challenges.

“The point now is, that unless we achieve an import-leakage reduction, the programmes themselves will be in jeopardy.

“Because, if we are experiencing, as we are, declining export earnings from the sale of mineral products; if world trade is declining and we continue to import to sustain these programmes, we are going to contribute to an already significant balance of trade deficit, which is not going to be sustainable.

“So, there is an absolute imperative, I would argue, for us to achieve the [localisation] potential that these programmes offer,” Davies averred.

The DTI was preparing a series of proposals to improve the implementation of the CSDP and to ensure that the NIPP was effectively applied in other sectors.

Davies saw specific opportunities in the metal fabrication and capital equipment milieus, which he described as South Africa’s “sunrise industries”, noting that the infrastructure programme would not end in 2012 and that there was already a pipeline of projects, worth R1,3-trillion, extending the expenditure horizon to 2025.