When facing economic headwinds, change tackComment on this story
South Africa’s new political leaders are establishing themselves in one of the most fragile economic settings in the country’s recent history. But we are not without solutions – provided that the government and business change tack by collaborating in their delivery.
Low growth, subdued projections, large current account and budget deficits, talk of a recession and ratings downgrades count among the formidable challenges that face South Africa’s fifth administration, particularly Finance Minister Nhlanhla Nene.
By the minister’s own admission, we have almost reached rock bottom[i]. The impact of our misfortune is far-reaching and even extends beyond national borders. On June 5, Standard Bank pegged sub-Saharan African growth at 6.1 percent for the year – a figure that falls to 5.4 percent when South Africa is included[ii].
In March Nene’s forerunner, Pravin Gordhan, confirmed that South Africa’s private sector generated 70 percent of its gross domestic product (GDP). For this reason, he said, the responsibility of driving the economy should be that of business, with the state playing a facilitating role[iii] – a statement that infers collaboration and goes to the heart of how growth can be restored. Nene recently reinforced this message by announcing that “the private sector and government must work together to grow South Africa’s prosperity”[iv].
South Africa’s economic situation is such that no single stakeholder – whether the public or private sector – could return the country to robust growth, alone.
For a collaborative approach to work, each party must also be explicit about how best to achieve this and be prepared for robust engagement rather than skirting the issues.
The government’s requirement of business is clear. It needs enterprises to grow so as to generate more private sector jobs, profits and tax revenues for development and inclusive expansion.
To achieve it, business requires the government to take up its facilitating role to establish a business-friendly environment in which firms can more easily innovate, extend operations and absorb a higher percentage of the labour force.
Investor certainty, labour market reform and a clear message that South Africa is “open for business” with consistent policies and is proactive about enabling and encouraging foreign direct investment have been lacking.
This needs to change urgently. In the words of President Jacob Zuma “radical transformation” is indeed needed.
Pragmatic ways in which the government can more effectively facilitate growth include:
- By some estimates, South Africa’s energy constraints shave 0.5 percentage points off GDP growth annually – a loss we can ill afford. New investments in power provisioning cannot be allowed to slide as has been the case with the Medupi coal-fired station in Limpopo, which is more than three years behind schedule and billions of rand over budget.
Fortunately, some production is expected soon and, once South Africa’s energy output increases, growth will pick up. According to the International Monetary Foundation, we should experience 3.6 percent growth in 2015 on the back of increased power supply.
- The next area for collaborative resolution by the public and private sectors will be sustainability. South Africa is already among the world’s dirtiest power producers and Medupi will worsen our position in this ranking.
Encouragingly, Eskom is finally investing in renewable energy and constructing its first wind farm to generate up to 100 megawatts of clean power.[v] South Africa’s energy security should also be significantly improved by making the southern regions of the country gas-based –particularly the Western Cape with its focus on the green economy. This would then free Medupi to symbiotically power growth in the north, benefiting the whole country.
- An effective solution to crime and corruption: 46 percent of privately held businesses were negatively affected by crime in 2012[vi]. When asked how threats to personal security affected operations, 52 percent of the executives surveyed cited increased security costs, 21 percent decreased motivation, and 19 percent decreased productivity.
South Africa’s rampant corruption is equally damaging and a clear stance by the government on how it will address this issue – and by visibly and effectively doing so – will demonstrate, to local and global markets, that South Africa is “open for business”.
- A burning issue is the need for fast and effective deployments of the government’s progressive infrastructure plans. Connectedness is pivotal to enterprise growth and spans four distinct areas: flights, broadband, public transport and migration policy. In the case of flights, the national government should seriously consider introducing an “open skies” policy.
Being able to connect directly to Africa and other global cities is essential to help drive growth. Similarly, broadband needs to be cheap, ubiquitous and fast because, according to the World Economic Forum, good broadband internet access can add between 0.25 percentage points and 1.4 percentage points to economic growth rates.
The Western Cape government’s partnership with communications network operator Neotel and the State Information Technology Agency will provide fibre-optic broadband services to more than 2 000 government sites and the infrastructure roll-out of 384 wi-fi hotspots to cover almost every ward in the province.[vii]
This is an important enabling project. Being globally oriented and connected will empower firms and bring us more in line with facilities already at the disposal of our key competitors.
Keeping South Africa’s cities moving via comprehensive, safe, reliable and efficient public transport systems should be expedited for the purposes of economic growth and social cohesion.
An open migration policy, targeted at addressing talent requirements at regional level, is needed so that businesses can attract the rare skills required for innovation and growth, but also for capacity building and skills densification.
Migration policies must align with the economic realities and incentives of both, migrants and employers. The world has moved on from the industrial economy of the 1930s and 40s when the emphasis was on machinery and processes.
Today, the focus is firmly on the knowledge economy. At international level it is centred around innovation and creativity, and the rise of what is called “the creative class”. To be at the forefront of this economy, you need a world-class city and country that has a ready supply of intellectual capital. Companies in the knowledge economy need easy access to such talent. This means attracting, and retaining, engineers, research scientists, actuaries, computer specialists, writers, and other scarce skills. Our visa regime needs to reflect this reality.
Home Affairs is a crucial ministry, playing a part in securing our borders and in the provision of national security. Part of national security is, however, also related to national prosperity. Increasing the barriers to attracting skills is counter-intuitive and anathema to creating a prosperous South Africa.
- Above all, the government can help by establishing greater investor certainty. With the need for rhetoric diminished, the government could transform the business environment by eliminating inconsistencies between restrictive new laws and the goals of the National Development Plan (NDP), as is the case with the Mineral and Petroleum Resources Development Act, for example.
A stable, predictable economic environment would not only unlock the long-term growth plans of local firms, but also attract more multinational corporations in pursuit of continental markets. With greater certainty, this would become an even more compelling investment case across the business landscape.
Twenty years ago, South Africa achieved a peaceful transition to democracy through collaboration. The public and private sectors now need to collaborate again – this time to enable a transition to growth despite the headwinds. The NDP sets the long-term vision – now is the time to act to ensure its effective and consistent execution.
[i] “South Africa’s new finance minister downbeat on growth prospect”, June 8 www.ft.com
[ii] “SA at risk of a ratings downgrade, analysts warn”, June 6, www.moneyweb.co.za
[iii] “Gordhan issues call to private sector”, March 3, www.iol.co.za
[iv] “Nene: Business, govt must work together”, June 24 www.fin24.com
[v] The Africa Report.com: Country Profile 2014: South Africa, www.theafricareport.com
[vi] Grant Thornton’s IBR tracker
[vii] “Western Cape sees broadbrand as vital to economy – analyst”, June 24 www.bdlive.co.za
* Chris Whelan is the chief executive of Accelerate Cape Town.