Speech Delivered by the Deputy Minister of Trade and Industry, Mzwandile Masina at the South Africa Local Content Summit Held at the Westin Hotel, Cape Town 16 September 2014.

Speech Delivered by the Deputy Minister of Trade and Industry, Mzwandile Masina at the South Africa Local Content Summit Held at the Westin Hotel, Cape Town 16 September 2014.

Interface between Mining and Manufacturing in South Africa

• The Manufacturing Sector is critical to SA’s growth trajectory because manufacturing has the highest economic and employment multipliers.
• Building linkages from resources sectors remains an important mechanism for countries to convert their comparative advantage, i.e. resource endowments, into a competitive advantage
• South Africa has developed significant linkages from its mining sector to other sectors in the economy.
•  More-specifically, there is a strong interface between mining and the manufacturing sector in South Africa for instance:
  • Mining sector demand for intermediate inputs rose from R156 billion in 1992 to R198 billion by 2013 in real terms
    o Domestic sourcing as a % of total demand is approximately 81% by 2013.
  • In manufacturing, sub-sectors such as rubber, machinery & equipment, other transport equipment, wood, as well as many other sectors supply a substantial portion of their output to the domestic mining sector
  • Top-10 supplying industries to overall mining sector in SA employed 104 000 workers in 2012 due to their direct supply linkages with the mining sector.
  • However, including the indirect & induced effects, the total number of jobs associated with the mining industry by these top-10 suppliers amounted to 345 000 jobs
  • Out of these supplier industries, the manufacturing sub-sectors employed some 40 000 direct jobs and 145 000 jobs economy-wide through demand for their output by the mining sector.
• Thus the mining sector in the South African context has far reaching consequences for the entire economy. Which implies that South Africa has the know how to develop strong linkages from its resource based sectors.

Oil & Gas Developments in South Africa and the Region

• Recent hydrocarbon discoveries in the Southern African region have seen a significant increase in interest for deep water blocks off South Africa’s coast.
• Some of the largest petroleum companies in the world have recently farmed into South African exploration blocks and are leading these exploration initiatives, including ExxonMobil, Shell, Total and Anadarko, among others.
• According to the Petroleum Agency of South Africa, South Africa has POTENTIALLY 9 billion barrels of oil and 60tcf of gas offshore. However, a lot of uncertainty remains.
•  At an estimated 390tcf South Africa has potentially the 8th largest Shale Gas resource in the world.
• Preliminary economic modelling undertaken by Econometrix estimates that an economically recoverable shale gas reserve of 20tcf, assuming a 25 year production period, could potentially have an annual economic impact of approximately R 80bn on GDP;  annual tax revenues of R 35bn and potential permanent employment of 300 000.
• Further afield there is significant activity off both the east and west coasts of Africa. With significant investments taking place in Mozambique and Tanzania while countries such as Angola and Nigeria continue to play a crucial role in terms of oil & gas activity in the region.

How can benefits be maximised for societies and communities while the industry is evolving?

• It is important that from an industrialisation point of view we do not see the developments in South Africa and our neighbouring countries in isolation from each other – they are all interlinked and represent enormous potential for Southern Africa because:
  • new sources of energy can lower the cost of energy, especially to the manufacturing sector
  • The localisation opportunities, especially because SA has significant historical engineering and mining capital equipment capabilities which must tap into the opportunity
  • Downstream beneficiation in the refining, gas to liquid fuels and petro-chemicals space is an industrial opportunity that cannot be missed and where once again SA has important capabilities.
• The current and potential Oil & Gas resources in the region imply that the region will continue to receive significant investments.
• Whether the impact of these investments are localised to the Oil & Gas sector or felt by the broader economy will depend on our ability to foster and deepen backward, forward and lateral linkages from the various segments of the Oil & Gas value chain.
• Local content policy is one instrument that provides governments with an opportunity to leverage their resource endowments to drive their industrialisation objectives. More specifically if designed properly local content policies have the ability to encourage backward, forward and/or lateral linkages.
• Countries such as Brazil, Angola, Nigeria and most notably Norway have through a process of learning by doing refined their local content policies over time and as a result are developing or have developed fairly deep linkages from their Oil & Gas sectors.
• Countries that have been successful in building deep linkages from their Oil & Gas sectors have generally:
  •  Local content policies should be specific i.e. set clearly defined targets for specific products/ technology along the up- mid- and downstream segments of the value chain. These targets must in turn be informed by robust analysis of what a country’s current industrial capacities are, what are the gaps between these capacities and where a country needs to be in terms of competitiveness and a detailed action plan that clearly maps a way forward for closing these gaps in the short, medium and long term.
  • Recognised the difference between local content and local value add. Where the former relates to any goods or services supplied by domestic firms while the latter relates specifically to actual products manufactured with indigenous labour, materials and supplied into the Oil & Gas value chain.
  • Understood that a countries capacities and capabilities is not a static concept and is thus changing overtime as such local content policies need to evolve in line with a country’s capacities and capabilities.
  • Realised the importance and actively facilitated strong links between the countries scientific community and the Oil &Gas industry. This type of close collaboration is reminiscent of South Africa’s very own mining sector which had strong research links to research organisations like COMRO (Chamber of Mines Research Organisation).
• Our goal should be to move beyond a situation where indigenous African industry plays on the periphery of this sector. More specifically, indigenous industry’s involvement in this sector should not be confined to the provision of consumer goods, such as accommodation, catering, cleaning, human relationships management, stationary etc.
• It is critical that we employ this perspective because as a region we cannot just be exporters of oil & gas while the value-adding, labour intensive, knowledge intensive up and downstream sectors are left out in the cold and we become a region which is not only significantly  dependent upon the export of primary commodities (ores) we also become a region that simply exports gas and oil
• Government is committed to using localisation and procurement to support the manufacturing sector.
• Government has a range of policy instruments to support localisation – Designations; (Competitive Supplier Development Programme) CSDP; 9 (3) of the (Preferential Procurement Policy Framework Act PPPFA) localisation targets in the (Renewable Energy Independent Power Producers) REIPP and the (National Industrial Participation Programme) NIP.
• Developing deep backward, forward and side linkages necessitates significant investments in Research & Development and the upgrading of existing technology. To assist firms in this process the dti has designed incentives such as (Technology and Human Resources for Industry Programme) THRIP, the (Manufacturing Competitiveness Enhancement Programme) MCEP, (Support Programme for Industrial Innovation) SPII and the 12 I Tax Allowance.
• Going forward however, and as mandated by the ruling party, government will continue to ramp up its support for localisation within the parameters of the World Trade Organisation and our trade agreements to; secure better compliance across all the policy instruments; build stronger strategic sourcing and supplier development capabilities in the state; ensure that practices such as import fronting invite sanction
• To facilitate this process we have established a national task team to examine the localisation opportunities emanating from the region’s petroleum resources. This includes examining what capabilities and capacities exist at the moment; how further capabilities can be built and leveraged; work closely with the oil majors and beneficiators to understand and support what beneficiation opportunities exist in the SA context and how these can be supported; better understand and support what economic infrastructure is most needed and ensure that this is factored into the National Presidential Infrastructure Coordinating Council infrastructure plan.
• But we expect (and this has been part of the Presidency led Operation Phakisa deliberations) that Transnet and the Transnet National Ports Authority come to the table to ensure that the product offering (infrastructure; operations; concession and leasing arrangements) at our ports meets the needs of the marine engineering sector as far as is possible. This applies especially but not exclusively to the Port of Saldanha.
• In short we need a plan for the exploration; exploitation and downstream beneficiation of the regions oil and gas resources which maximises the localisation possibilities for the economy. This must be a plan which has the support of all the public stakeholders (inclusive of Transnet and The National Ports Authority) and the private sector players ranging from the oil majors; the beneficiators and processing companies and the up and downstream suppliers and service industries.

Supply chain management: Impact of suppliers’ best practice (B-BBEE rating)

• There is no real overarching best practice
• Supply chain management (SCM) in the procurement context is informed by and made up of a variety of B-BBEE imperatives with an emphasis on ownership requirements and procurement

Emphasis remains on ownership and thus active promotion of local content through public procurement is lacking and large-scale importation of components of public procurement persists:

• this has both micro- and macro-economic consequences –
  • at the micro-economic level, the failure to adequately promote local content in public procurement represents an enormous lost opportunity to resuscitate key sectors of the economy, raise their competitiveness and reposition them as exporting sectors of the future – these include the metal fabrication, capital and transport equipment sectors?
  • at the macro-economic level, high levels of imports have increased the current account deficit, which can lead to balance-of-payments problems and thus threaten the sustainability of the capital expenditure (capex) programme itself
• However, there are a few success stories driven by creative in-house procurement policies
  • the introduction of localisation and supplier development within State-Owned Enterprises (SOEs) has encouraged these entities to introduce new policies, processes and systems, and increase capacity-building to embed local supplier procurement leverage more systematically
• As such, a movement away from an emphasis on ownership to local content, and rather an emphasis on practical development, in both public and private procurement should be explored
• In this way, the promotion of public and private procurement, will raise domestic production and employment in a range of sectors
• Procurement will begin to align B-BBEE with industrial development objectives

How can international companies adhere to local content requirements while maintaining competitiveness?

• Both government and the private sector need to work together to create a win/win situation.
• Role of Government:
  • the revival of technikons and creation of technical skills centres could provide an employment supply pool for international companies
  • international companies could be required to assist with skills education and transfers at such technikons and centres and/or make contributions to training trusts/schemes – relatively inexpensive and such companies have an interest in developing the employment pool
  • government can play more of a co-ordination than compliance role – creation of an environment where local content is incentivised rather than made a statutory imperative
  • such an enabling environment can be created by a phased approach to meeting localisation targets which recognises that there are skills shortages in certain nascent industries (such as the oil & gas industry) – such a phased approach would require relatively low local content targets in the early stages to attract investment, but incrementally higher targets periodically or at key development stages (international companies are thus incentivised to train local communities to meet localisation targets)
  • incentivisation can also occur through tax and fiscal benefits, free flow of capital equipment, stabilisation agreements, tax or other exemptions for the development of infrastructure etc. where such companies meet local content thresholds/targets – in this way, localisation is not fostered as the expense of profitability and competitiveness
  • creating a reporting mechanism for the meeting of localisation could strengthen policy planning
  • ensure the alignment of government policy
• Firms need to think creatively:
  • in an effort to avoid the driving up of costs (capital, wages etc.) it is in the best interests of an international company to promote localisation
  • use of local labour is often less expensive than importing skills – there is thus an incentive to train local communities
  • costs are also attached to the importation of certain capital and service equipment – incentive to produce locally
  • support and development of subsidiary industries automatically create off-take beneficiaries
  • multiplier effect of localisation will drive down energy and manufacturing costs which promotes profitability
  • The sharing of excess capacity in existing infrastructure effectively “costs nothing” whilst creating rapport with local communities and contributing to the multiplier effect by supporting subsidiary industries

Does B-BBEE supersede local content in South Africa?

• B-BBEE does not supersede local content in South Africa
• B-BBEE and local content are rather complementary in nature, overlap in some instances and are distinct from each other in other instances
• Complementary: B-BBEE has a cascading effect; B-BBEE is indirectly driven by local content through an emphasis on ownership and finance
• Overlap: Both B-BBEE and local content policies contribute to the socio-economic development of South African society and are largely designed to drive transformation of South Africa’s economy
• Distinct:  in the mineral rights licensing context, compliance with B-BBEE imperatives are necessary to secure mineral-related licences while compliance with local content directives is, to a large extent, a commercial imperative

Conclusion

• Recent developments in the oil and gas sector have the potential to be translated into socio-economic benefit and economic empowerment through localisation
• The multiplier effect of the localisation and the cascading effect of B-BBEE on the value-adding sectors such as the manufacturing and oil and gas sectors is far-reaching
• To extract maximum benefit from such potential, a movement away from an emphasis on ownership to active promotion of practical development and local content through public and private procurement is needed
• Both government and private sector also have a role to ensure that local content imperatives allow such companies to remain profitable and competitive
• Finally, I trust that this conference will make a major contribution to broadening the understanding of these issues and bring together the stakeholders who must be part of this collaborative effort
• I trust that this conference will make a major contribution to broadening the understanding of these issues and bring together the stakeholders who must be part of this collaborative effort.

I thank you!