COUNTRY PRIVATE SECTOR DIAGNOSTIC CREATING MARKETS IN SOUTH AFRICA Boosting Private Investment to Unlock South Africa’s Growth Potential COUNTRY PRIVATE SECTOR DIAGNOSTIC CREATING MARKETS IN SOUTH AFRICA Boosting Private Investment to Unlock South Africa’s Growth Potential COUNTRY PRIVATE SECTOR DIAGNOSTIC CREATING MARKETS IN SOUTH AFRICA Boosting Private Investment to Unlock South Africa’s growth potential About IFC IFC—a sister organization of the World Bank and member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. We work with more than 2,000 businesses worldwide, using our capital, expertise, and influence to create markets and opportunities in the toughest areas of the world. In fiscal year 2018, we delivered more than $23 billion in long-term financing for developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity. For more information, visit www.ifc.org © International Finance Corporation 2019. All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 www.ifc.org The material in this report was prepared in consultation with government officials and private sector in South Africa and is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. The findings, interpretations, views, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the Executive Directors of the International Finance Corporation or of the International Bank for Reconstruction and Development (the World Bank) or the governments they represent. This publication uses U.S. spelling. All mentions of dollars refer to U.S. dollars, unless otherwise indicated. Photos: Cover, Sunshine Seeds/Shutterstock; p2, michaeljung/Shutterstock; p14, Chris Troch/Shutterstock; p30, Leonard Hugo/Shutterstock; and p48, Martin Maritz/Shutterstock. i CONTENTS CONTENTS Acknowledgements iv Abbreviations vi EXECUTIVE SUMMARY 1 01 SOUTH AFRICA’S PRIVATE SECTOR: CONTEXT AND CROSS-CUTTING CHALLENGES 15 1.1 State of the private sector 16 1.2. Cross-cutting constraints 19 02 ENABLING SECTORS: DRIVERS OF LONG-TERM COMPETITIVENESS AND ECONOMIC INCLUSION 29 2.1. Education and skills 29 2.2. Infrastructure 36 2.2.1. Energy 37 2.2.2. Transportation 40 2.2.3. Water 42 2.2.4. Leveraging capital markets to address the infrastructure gaps 44 03 DEEP DIVES 49 3.1. Agriculture and agribusiness deep dive 49 3.2. Automotive manufacturing deep dive 70 3.3. Information and Communication Technologies deep dive 91 APPENDIXES 104 Appendix A: Sector scan 105 Appendix B: Review of South Africa’s land markets 106 Appendix C: Review of South Africa’s health sector 108 Appendix D: Review of the South Africa’s mining sector 111 Appendix E: Review of South Africa’s tourism sector 114 Appendix F: South African listed firms that operate in the Agriculture and Agribusiness space have been performing well in recent years 118 Appendix G: Relevance of core constraints for citrus and yellow maize 119 Appendix H: Automotive manufacturing is spread across three provinces 123 Appendix I: South Africa’s global market share increased in vehicles but declined for components 124 Appendix J: Automotive exports are concentrated in parts with low value added 126 Appendix K: South Africa’s labor cost is higher relative to comparator economies 127 Appendix L: Firms in the automotive industry are less likely to invest in R&D 128 Appendix M: The costs of obtaining electricity differ significantly by location 129 Notes 130 References 133 SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC ii BOXES of all DUOs 26 1 The role of South Africa’s MSMEs and 11 Total spending on tertiary education in large firms in job creation: What can we 2014 as a percent of GDP, South Africa learn from recent studies 17 versus comparator countries 32 2 Five priority constraints identified in the 12 ADvTECH five-year financial trends 35 recent SCD 20 13 Public ownership and SOE 3 An overview of concentration and governance index 36 conglomeration across South African 14 Distribution of financial assets in markets Africa’s Competition Law 25 financial intermediaries in South Africa 44 4 Recent amendments to South Africa’s 15 Agribusiness confidence index 50 Competition Law 27 16 Production has increased as employment 5 Increasing access to quality and has declined 52 affordable higher education - 17 Employment in food, beverages, and The case of ADvTech 34 tobacco (1993–2017) 52 6 Competition restrictions in other 18 Balance of trade, food, and agriculture energy sectors 39 products 54 7 The growth of the citrus sector - a South 19 Public and private sector engagement African success story 52 opportunities in citrus sector 66 8 Despite structural challenges, yellow 20 Investment considerations for maize has growth potential for yellow maize 67 subsistence and emerging farmers 53 21 Most markets on the African continent 9 Producers have moved into soybean are small 71 production to reduce exposure to shocks 57 22 Share in total world motor vehicle 10 Spotlight on Gauteng Automotive production, 2017 72 Industry Development Center (AIDC) 83 23 Exports of cars increased while exports 11 Automotive R&D in Turkey 85 of components declined over the 12 Interview with a component supplier 86 past decade 73 13 Where the world is headed 93 24 The EU and the US account for over half 14 Potential alternatives 100 of the automotive exports 74 25 SA achieved the most impressive export FIGURES growth to the EU 74 1 SACCI Business Confidence Index, 26 Master plan vision, objectives, and pillars 76 2010–19 16 27 South Africa’s domestic market is 2 High growth in firms tend to be larger relatively small 78 than other firms 17 28 First degrees awarded in selected 3 Share of medium-and high-tech products engineering fields, 2013–16 79 in total exports 19 29 Training to workers in the automotive 4 TFP growth within sectors 19 related industries 81 5 The restrictiveness of South Africa’s 30 Breakdown of local content within Product Market Regulations 23 component supply to six of 6 Electricity, Communications and South Africa’s seven OEMs, Transport Regulations: South January–March, 2017 82 Africa Versus Peers, 2008 and 2013 24 31 OEMs in South Africa account for 7 South Africa Energy, Transport, disproportionate share of value addition 82 Communication Regulation: 32 ICT contribution to GDP 91 Score Components 24 33 ICT as a percentage of service exports 91 8 Number of SOEs present in 34 The digital economy 92 specific sectors 24 35 Mobile phone and internet adoption (2014) 93 9 Proportion of firms that consider 36 Network performance 94 themselves as operating in a 37 Spectrum 94 market with few competitors 25 38 Network coverage 94 10 Average number of total (direct 39 Other enabling infrastructure 94 and indirect) domestic subsidiaries 40 Fixed broadband penetration and growth 95 iii CONTENTS 41 Cheapest 1GB mobile broadband product Q2 2017 (US$) 97 TABLES 42 South African data pricing over time 98 1 Summary of ADPD 75 43 Sector Skills by MICT SETA 99 2 Summary of key ADPD amendments 77 44 Sector prioritisation 105 3 Average salaries in the automotive industry 79 45 SA doubled its global market share in 4 Many of the top ten skills required commercial vehicles over the past decade 124 by the industry can be acquired 46 Global market share for passenger through vocational training 80 vehicles increased by 86 percent during 5 South African suppliers improved their the past decade 124 performance on many indicators 84 47 Global market share in components 6 Comparative performance of SA declined by over a third during the suppliers relative to other emerging past decade 125 markets, 2017 84 48 Top automotive component exports by 7 South Africa has the highest export value - 2017 (R million) 126 costs relative to comparator economies 87 49 Annual average wages in the 8 R&D expenditure and intensity by manufacturing sector - global comparison 127 sector (medium and large firms) 128 50 A firm pays four times more to connect to the grid in Cape Town than in Johannesburg 129 51 A firm in Johannesburg pays nearly two-thirds more for monthly consumption than a firm in Cape Town 129 SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC iv ACKNOWLEDGEMENTS The South Africa Country Private Sector Diagnostic (Senior PSD Specialist, GMTIA), Jemima Harlley (CPSD) was prepared by a joint World Bank-IFC (Program Assistant, AFCS1), Armando Heilbron team under the guidance of Mona Haddad (Director, (Senior PSD Specialist, GMTCI), Chris Heymans CCEDR), Saleem Karimjee (Chief Investment Officer, (Senior Water Supply and Sanitation Specialist, CAFSO), Dahlia Khalifa (Practice Manager, GMTIC), GWA01), Senior Water Supply and Sanitation Paul Noumba Um (Country Director, AFCS1) and Specialist, GWA01), Basisipho Jack (Intern, GMTIC), Kevin Warui Njiraini (Director, CAFSO). During the Sheirin Iravantchi (Financial Sector Specialist, GFCFI), production of the report, the team benefited from Natasha Kapil (Senior Innovation Specialist, GFCEE), the insights and time of business and government Amina Khaled El Zayat (Senior PSD Specialist, leaders, entrepreneurs, and academic experts. These GMTIA), Uzma Khalil (Senior Financial Sector engagements greatly enhanced our understanding Specialist, GFCAS), Barbara Kotschwar (Senior PSD of South Africa’s private sector. The diagnostic was Specialist, GMTCI), Barry Maher (Senior Financial produced as part of the South Africa Prosperity Sector Specialist, GFCAS), Thulani Matsebula (Senior Program which is supported by the United Kingdom. Health Economist, GHN01), Ayanda Mokgolo (Financial Sector Specialist, GFCAS), Ajai Nair (Senior The CPSD core team was led by John Gabriel Financial Sector Specialist, GFCAS), Yoko Nagashima Goddard (Lead Economist and Co-Task Manager, (Senior Education Specialist, GED13), Hermione GFCAS) and included David Bridgman (Lead PSD Nevill (Senior Operations Officer, GFCA1), Sara Specialist, GMTIA), Kobina Daniel (Senior PSD Nyman (Senior Economist, GMTCI), Ellen Olafsen Specialist, GMTIA), Stephan Dreyhaupt (Principal (Senior Private Sector Specialist, GFCAS), Duncan Economist and Co-Task Manager, CCECE), Jakob Pringle (Agriculture Consultant, GMTIC), Clara Engel (Economist, GMTRI), Wayde Flowerday Alexandra Stinshoff (Consultant, GMTIC), Nicholas (Private Sector Specialist, GMTIC), Rajeev Gopal Tandi (Senior Water Resource Management Specialist, (Senior Country Officer, CAFE4), Marek Hanusch GWARG), Frederic Verdol (Senior Energy Specialist, (Senior Country Economist, MTI), Thuli Mathobela GEE08), Justine White (Senior Private Sector Specialist, (Program Assistant, AFCS1), Tlhalefang Moeletsi GFCAS). Valuable suggestions were provided by Paul (Consultant, GMTIC) and Anna Reva (PSD Specialist, Brenton (Lead Economist, GMTRI), Thomas Farole GFCAS). The team is thankful to Natasha Joseph and (Lead Economist, GPSJB), and Jean Christophe Maur David Lawrence for insightful edits to this report. (Senior Economist, GFCAC), who were peer reviewers for the report, as well as colleagues who provided The extended team that contributed to the report feedback during the review meetings. includes: Swee Ee Ang (Senior Financial Sector Specialist, GFCLT), Carli Bunding-Venter (Urban The IFC Investment team that participated in the Economist, GSU13), Sebastien Dessus (EFI Program production of the CPSD includes: Ubong Awah Leader, AFCS1), Wim Douw (Senior PSD Specialist, (Senior FSD Specialist, GFCA2), Sacha Backes GMTCI), Aki Ilari Enkenberg (Senior ICT Specialist, (Senior Investment Officer, Mining, CNGMI), GDD09), Catiana Garcia-Kilroy (Lead Financial Hans Balyamujura (Principal Investment Officer, Sector Specialist, GFCLT), Peter Goodman (Senior CF3S6), Sandra Boumah (Senior Investment Officer, Agriculture Specialist, GFA13), Raymond Neville FIG Africa, GF3S6), Marcel Bruhwiler (Principal Greig (Consultant, CASEW), Cemile Hacibeyoglu Investment Officer, Infrastructure Africa, CN3S6), v ACKNOWLEDGEMENTS Lenore Rosa Celia Cairncross (Operations Officer, Ken Osei (Principal Investment Officer, H&E, CAS Green Building, CBDGB), Natalia Donde Tourism, Retail—Africa, CM3H6), Olaf Schmidt (Investment Officer, H&E, Tourism, Retail—Africa, (Manager, H&E, Tourism, Retail—Africa,CM3H6), CM3H6), Chijioke Egejuru (Investment Officer, Selcuk Tanatar (Head, SBS, CAS, CTTSC), Haran Telecom, Media & Technology, CTTTT), Sanjay Sivam (Principal Investment Officer, Oil & Gas, Kalpage (Senior Financial Specialist, FIG Advisory CNGEN), Rostan Schwab (Senior Investment Africa, CF3A6), Mark Lewis (Senior Industry Officer, TMT Fintech, CFGFT), Henri Rachid Specialist, Global Agriculture, CMGAF), Zano Sfeir (Senior Investment Officer, Manufacturing, Mataruka (Senior Investment Officer, Agribusiness & CMGMF), Daniel Shepherd (Principal Operations Forestry, CM3A6), Paul Mukasa (Senior Investment Officer, CNGPL), Kristina Turilova (Program Lead, Officer, Manufacturing—Africa, CM3M6), Bassem SBS, CAS, CTTSC), Stephan Vermaak (Principal Nehme (Investment Officer, Oil & Gas, CN3S6), Investment Officer, Mining, CNGMI). SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC vi ABBREVIATIONS 4IR Fourth Industrial Revolution GoSA Government of South Africa AEMFC African Exploration & Mining GVC Global Value Chain Finance Corporation HCV Heavy Commercial Vehicle AGOA African Growth and Opportunity Act HDI Human Development Index AIDC Automotive Industry Development Center HGF High Growth Firm AIS Automotive Investment Scheme ICASA Independent Communications APAP Agricultural Policy Action Plan Authority of South Africa APDP Automotive Production ICT Information and Development Program Communications Technology ASCCI Automotive Supply Chain IFC International Finance Corporation Competitiveness Initiative IMASA Institute for Market Agents ASEAN Association of Southeast Asian Nations IPP Independent Power Producer BAIC Beijing Automobile IPAP Industrial Policy Action Plan International Corporation JSC Johannesburg Stock Exchange BBBEE Broad-Based Black Economic Empowerment JV Joint Venture BCI Business Confidence Index LCV Light Commercial Vehicle BRICS Brazil, Russia, India, China, and M&A Mergers & Acquisitions South Africa MCI Mobile Connectivity Index CCSA Competition Commission of South Africa MCV Medium Commercial Vehicle CEF Central Energy Fund MERSETA Manufacturing, Engineering CGA Citrus Growers Association and Related Services Sector CPF Country Partnership Framework Education and Training Authority CPSD Country Private Sector Diagnostic MIC Middle-Income Country DAFF Department of Agriculture, Forestry MICT SETA Media, Information and and Fisheries Communication Technologies DE4A Digital Economy for Africa Sector Educationand DFI Development Finance Institution Training Authority DST Department of Science and Technology MIDP Motor Industry DTI Department of Trade and Industry Development Program DTPS Department of Telecommunications MNO Mobile Network Operator and Postal Services MSME Micro, Small, and Medium Enterprise DWS Department of Water and Sanitation MTEF Medium-Term EITI Extractive Industry Transparency Initiative Expenditure Framework EME Exempt Micro Enterprise MVA Manufacturing Value Added EPA Economic Partnership Agreement MVNO Mobile Virtual Network Operator EU European Union NAACAM National Association of Automotive FAO Food and Agricultural Organization Component and Allied Manufacturers FDI Foreign Direct Investment NAAMSA National Association of Automobile FSCA Financial Sector Conduct Authority Manufacturers of South Africa GAP Good Agricultural Practice NAFTA North American Free Trade Agreement GDP Gross Domestic Product NDP National Development Plan vii ABBREVIATIONS NERSA National Energy Regulator of SCD Systematic Country Diagnostic South Africa SEZ Special Economic Zone NFPM National Fresh SKD Semi-Knockdown Produce Markets SME Small and Medium Enterprise NGP New Growth Path SOE State-Owned Enterprise NW&SMP National Water and Sanitation SSA Sub-Saharan Africa Master Plan STEM Science, Technology, Engineering, OECD Organisation for Economic and Mathematics Co-operation and Development TBCSA Tourism Business Council of OEM Original Equipment Manufacturer South Africa PA Prudential Authority TFP Total Factor Productivity PI Production Incentive TVET Technical and Vocational PICC Presidential Infrastructure Education and Training Coordinating Committee UPFS Uniform Patient Fee Schedule PPBEC Perishable Produce Export USF Universal Service Fund Certification Agency VAA Vehicle Assembly Allowance PPP Public-Private Partnership VALA Volume Assembly Localization Allowance PPP Purchase Power Parity WAS Water Administration System PMR Product Market Regulation WDI World Development Indicators PSET Post-School Education and Training WDR World Development Report R&D Research and Development WEF World Economic Forum REIPPP Renewable Energy Independent Power WOAN Wholesale Open Access Network Producer Procurement Programme WTO World Trade Organization SAA South African Airways SAAM South African Automotive Master Plan SABS South African Bureau of Standards All dollar amounts are U.S. dollars unless otherwise SADC Southern African Development Community indicated. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 1 EXECUTIVE SUMMARY Addressing the constraints for private sector Country context and state of the private sector: development at national and sectoral levels is a priority for the government of South Africa. Faster job creation and wage growth are of paramount It is also a critical element in the current importance to support inclusion in South Africa and administration’s plan to scale-up investment over reverse the negative trends in many social and labor five years, and thereby stimulate job creation and indicators. Between 2009 and 2017, South Africa’s promote inclusive growth. Since taking office in growth rate averaged 1.6 percent. Job creation and 2018, President Cyril Ramaphosa has underlined wage growth have been insufficient. Since 2008, 3.5 the importance of investment to turn around the million people have entered the labor force whereas 1.6 economy. Consequently, government has committed million additional jobs have been created. This has put to passing the necessary reforms to attract $100 pressure on the unemployment rate, which reached 26.7 billion in foreign direct investment (FDI) into percent in 2017. Unemployment, in turn, contributes South Africa as a way to complement domestic to high poverty and inequality, making it more difficult investment. Steps taken to date have focused on to overcome the legacy of exclusion under apartheid. the governance of state-owned enterprises (SOEs), South Africa is among the most unequal countries in which play a leading role in the infrastructure space, the world with a Gini coefficient of 0.63. consultations and approval of key sector-specific industrial policies and regulations, and initial This will require policies that can support measures to ease the cost of doing business. competitiveness, higher productivity, and deeper integration into global value chains. Exports and The Country Private Sector Diagnostic (CPSD) inward FDI have lagged in comparison to middle- contributes to this effort by identifying policy income economies, a consequence of the decline in the actions and interventions in key sectors of the country’s competitiveness at the global level. While economy where short-to-medium term reforms South Africa continues to have a strong manufacturing could unlock investment and jobs. It follows a base, it is losing market share in several of its core standardized methodology developed by IFC that export products, both because it is being outcompeted has been rolled out globally. In its review of South by more dynamic economies in East Asia and owing to Africa’s cross-cutting constraints and enabling its own supply-side and institutional constraints. The sectors, the report puts a special focus on the low GDP growth has been associated with negative gaps in skills, the need for better infrastructure, growth in total factor productivity (TFP), in strong and opportunities to address the country’s contrast to the high TFP growth rates of BRICS developmental challenges using private sector countries since the early 1990s. solutions. The report also lays out options to strengthen competitiveness in the agriculture and What factors can explain weak performance of South agribusiness, automotive, and ICT sectors. It is Africa’s private sector and the economy at large? our hope that the findings and recommendations As argued in the literature on the middle-income will be of interest to policymakers, the private trap, countries that have reached a middle-income sector, and other multilateral and bilateral status often find it difficult to progress to the next financing institutions. level and experience growth stagnation. Many low- 2 EXECUTIVE SUMMARY SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 3 to-medium income economies have created jobs • Availability of skills. The level of available skills through rapid industrialization, focusing on growing is insufficient to support technology upgrades a labor-intensive manufacturing base with strong and the growth of new industries. New industries linkages across regional and global value chains. such as ICT record a strong deficit of qualified Although most of South Africa’s population is low- professionals—nine out of 10 skills in the highest skilled, relatively high wages, an inadequate logistics demand in South Africa are in IT-related fields. infrastructure, the regulatory burden on private In this context, training solutions are urgently companies and policy uncertainty make it difficult needed to prepare the workforce for jobs that to compete with low-cost manufacturing destinations are in high demand. Recent relaxations on visa and build a more export-oriented economy. In fact, requirements to skilled immigrants could also many of South Africa’s labor-intensive industries, help in increasing skills supply in South Africa. such as textiles and apparel, have experienced major contractions since the opening of the economy in • Business environment and investment policy. the 1990s and the sharp real depreciation in the South Africa ranks at 82 in the Ease of Doing exchange rate has not led to a supply response, in Business rankings (World Bank. 2018d. “Doing large part due to these structural constraints. Business Report”, Washington DC: World Bank), trailing behind OECD and many reform-oriented Weaknesses in human capital, infrastructure, and developing countries. New firms and MSMEs are the business environment are key factors that disproportionately affected by costs and delays constrain private investment and growth in South for regular business procedures. As in other Africa. Indeed, 25 years after the end of apartheid, developing economies, the growth of MSMEs is the country still struggles with poor education also held back by access to finance gaps, despite outcomes—student performance is well below South Africa’s well-developed and sophisticated that of many middle-income economies and skilled financial system. A final element is South Africa’s workers are in short supply. In infrastructure, key framework for investment promotion, which will sectors are dominated by SOEs that are not able to need to be improved to meet the $100 billion provide the scale of investment or quality of services FDI target. Currently, investors must deal with (at competitive prices) needed by innovative, export- many entities with overlapping roles, making oriented companies. Although South Africa has a it difficult for the private sector to find the more business friendly investment climate than information and resources needed to develop most countries in the region, it is not on par with an investment project. that in high growth economies and firms report red tape among the main constraints to growth. • Regulatory obstacles to competition. Government Lastly, innovation—a key condition for productivity interventions that restrict entry, facilitate growth, is extremely low with private research collusion, or create an unlevel playing field & development (R&D) accounting for only 0.3 perpetuate legacy competition issues resulting percent of GDP (World Bank 2017a). These factors from the large, often vertically integrated firms make it difficult to move to higher-value activities and conglomerates in key productive sectors. This in agriculture, manufacturing, and services that are can lead to anticompetitive outcomes and the needed to boost growth in South Africa. exclusion of emerging entrepreneurs. Hindering regulations and policies have been recognized as the second-most important constraint after skills Cross-cutting constraints deficit among start-ups.¹ • Limited integration into regional and global Following the overall country context, the report value chains and weak connectivity. South reviews the state of the private sector and cross- African retail chains have spread across Southern cutting constraints that were identified in the recent Africa and further afield; however, most World Bank Group Systematic Country Diagnostic manufacturing companies have achieved only (An Incomplete Transition, World Bank Group limited integration into regional and global value 2018a). Removing these inhibitors to investment chains and their growth is therefore limited by will be central for achieving the government’s long- domestic demand. The high cost of trade logistics term goals: constrains South Africa’s access to markets and 4 EXECUTIVE SUMMARY overall competitiveness. The infrastructure have the potential to play a bigger role in reversing investment needs far exceed the government’s the bimodal education system that is linked to the fiscal resources, exacerbated by financing and history of exclusion and driving competitiveness, capacity constraints of SOEs that are responsible but legal and administrative barriers limit their for key transport and logistics services. participation. One consequence of the complex oversight and approval system is that the process In recent years, these constraints have been for modernizing the curriculum and opening new compounded by policy uncertainty, governance programs is lengthy and cumbersome. TVETs can challenges confronting the public sector and SOEs, play a particularly important role and will need and increasing institutional weaknesses. These have support to develop public-private partnerships and been seen as inhibitors to investment and a major deepen their collaboration with companies. factor that could put the country’s investment grade credit rating at risk. In infrastructure, serious supply constraints in energy and water and inefficiencies in transport logistics impair competitiveness and inclusion. Over the Key findings from the enabling past year, the state-owned energy utility, Eskom, sectors and sector deep dives reintroduced load-shedding in response to a supply- demand gap, and the investment gap has widened due to its fragile balance sheet and increasing debt. Enabling sectors Several large generation plants are at the end of their lifespan, posing short-term risks. Like energy, water In view of their importance in long term infrastructure in South Africa has limited private competitiveness and driving inclusion in South sector participation and suffers from insufficient Africa, the section on enabling sectors reviews investment. Critical water shortages are expected policy options to mobilize private investment and by 2030. South Africa’s WEF ranking for transport private sector solutions in education and skills, infrastructure declined from 49 to 64 over the as well as in key subsectors of infrastructure. last decade. Underinvestment is evidenced in rail There are many untapped opportunities where networks, which have not been updated or extended private sector and capital markets could play a to support non-mining activities. positive role to fill financing gaps, improve the cost-effectiveness of current delivery models, and Several government initiatives are underway to mitigate capacity constraints in the public sector. strengthen the national infrastructure policy This reinforces the need for developing a systematic framework, with a focus on better and faster Maximizing Finance for Development (MFD) implementation, and crowding-in resources from agenda with strong support from Development DFIs and the private sector. Efforts to improve Finance Institutions (DFIs). coordination and introduce a more efficient budgetary and implementation process include the Presidential In education and skills, South Africa ranks poorly Infrastructure Coordinating Committee (PICC), the in the quality of learning and human development Strategic Integrated Projects (SIPs), and the Budget indicators, and despite the efforts to boost skills Facility for Infrastructure (BFI). In the 2018 Economic development, many workers lack critical skills. Stimulus and Recovery Plan, the government In the World Bank Human Capital Index, South announced the establishment of the South Africa Africa ranks 126 out of 157 countries for which Infrastructure Fund to consolidate these initiatives data is available. It ranked below lower-income and transform the “approach to the rollout, building neighbors Namibia, Malawi, Zimbabwe, Eswatini, and implementation of infrastructure projects.” The and Botswana, and far below expectations based role of SOEs and how best to complement their efforts on its income level. One of the results is that South with greater private sector participation stands out as African labor markets are characterized by critical the major issue going forward. skills shortages and skills premiums. Ultimately, this has resulted in relatively high labor costs and Domestic capital markets have an important role impaired competitiveness. to play to finance infrastructure through long- term (LT) local currency financing. With combined Affordable quality private education institutions assets of R 6 trillion (over $400 billion) held by SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 5 local institutional investors, South Africa is a clear traditional export markets and gradually reduce candidate for accessing long-term, local-currency dependence on natural resource exports. capital to help finance the country’s development needs and reduce the overall exposure to foreign- Effective implementation of key industrial policies, currency risk for sovereign and project sponsors. including the tenth Industrial Policy Action Plan At present, institutional investors allocate a very (IPAP) will enable investment in areas that can have small fraction of their investments to infrastructure a positive impact on inclusion. IPAP was launched assets, with most infrastructure financing conducted in May 2018 and emphasizes stronger interventions through project finance funded through bank loans, to support transformation led by the flagship Black or funded directly on the balance sheets of SOEs Industrialists Scheme. The IPAP prioritizes 12 and municipalities. The issue is how to scale up the sectors, including automotive, agroprocessing and investments of institutional investors in infrastructure ICT, the sectors covered in the deep dives. The IPAP in a sustainable manner, given the long-term nature also outlines a stronger drive on exports growth, of many of their liabilities. focusing on existing lead firms and dynamic national export champions and new, especially black-owned Sector deep dives entrants. Key challenges for implementation will be to more clearly assess underlying market failures, The core of this CPSD analysis is the identification of ensure transparency in award procedures, limit opportunities for market creation as well as potential for discretionality, and strengthen ex-post monitoring increasing development impact of investment. To that so that public funds are used effectively. end, three deep dives were conducted to put a lens on sector-specific opportunities for scaling-up investment Another important agenda has to do with enlarging and leveraging private sector solutions, with a focus on market access, specifically by growing regional identifying policy options that can be implemented in value chains within the Africa region. While small the short to medium term. A sector scan was undertaken and difficult to access today relative to traditional to guide the deep dive selection (summary in Annex export markets in OECD, the African neighborhood 1). This was complemented by in-depth consultations could hold the biggest opportunity for future growth. with entrepreneurs and leading companies, business Major investments have been made by South African associations, financial institutions, think tanks, and the companies in agriculture, agribusiness, and food retail IFC investment team at the WBG. The three sectors across Southern Africa, and deepening these regional covered—agriculture and agribusiness, automotive, and value chains will be key to boosting long-term trade. ICT—are vital and dynamic, economically important, In automotive, EU and U.S. markets are increasingly and have dense backward and forward linkages to the saturated, and assembly operations are being set up rest of the economy. With the right policies, these sectors in Kenya, Nigeria, and Rwanda which could provide have the potential to make a much stronger impact opportunities for South African component suppliers. on inclusion; and the findings provide pointers that Regional opportunities can be leveraged through are relevant for other sectors. The Annexes provide a trade diplomacy—including through SADC and summary of opportunities in other sectors that were the Continental Free Trade Area—and programs to briefly reviewed for the CPSD (tourism, health, mining). facilitate deeper regional value chains. Common issues that emerge from the three deep Agriculture and agribusiness dives are the need for long-term policy certainty to attract investment, stronger national and Agriculture and agribusiness are an important source subnational capacity to implement key sectoral of jobs and incomes, especially in the country’s rural policies, and the need for more effective support areas. They are also important for food security both programs. Many opportunities exist to leverage at home and in many countries across the region existing strengths through public-private to which South Africa exports food: exports of partnerships, blended finance initiatives, supplier agricultural goods increased from $4.4 to over $10.6 development programs, and skills development billion over the past decade. programs, among others. Such initiatives can improve the provision of human capital and Despite positive trends, the sector is vulnerable. address skills shortages. In the long-term, this More effective support to emerging farmers and can help to mitigate emerging vulnerabilities for provision of public goods is needed to increase the 6 EXECUTIVE SUMMARY sector’s impact. Agriculture remains highly dualistic: Challenges for future growth include South production is driven by a small number of large Africa’s small domestic market, limited capacity capital-intensive commercial farms, while smaller of suppliers, and no regional value chains in close farms face low economies of scale and inadequate proximity. The resulting lack of economies of access to financing. Critical skills are lacking among scale discourages the growth of the components emerging farmers, while the sector intensifies in industry. As with other knowledge intensive knowledge and technology. Sector governance industries, the automotive industry is grappling is also fragmented, with policy mandates spread with skills shortages. Furthermore, rigid wage across numerous ministries and departments with setting mechanisms also contribute to the relatively overlapping responsibilities and declining capacity high labor cost. Going forward, it will be important to meet their objectives. to avoid fragmentation of the government’s support programs by evaluating and scaling up Policy uncertainty around land and water rights the most successful initiatives. Skills and supplier poses a downside risk to investment. Growing development programs can also be funded by the impatience with the pace of resolving South Africa’s planned Venture Capital Fund. racially skewed land ownership has led the National Assembly to review Section 25 of the Constitution Many of the obstacles faced by the automotive to potentially enable expropriation without industry and the manufacturing industry at large are compensation. There is wide consensus on the need external to manufacturing firms. Indeed, to compete for land reform, but uncertainty about the form it with firms from advanced and rapidly growing Asian will take and its outcome. economies, firms need to rely on complementary assets like infrastructure and education. In South Automotive Africa, these sectors are dominated by SOEs and suffer from a shortfall of investment. Although The automotive industry is the leading manufacturing the problem is observed in many middle-income industry in South Africa. Like other industries, it countries, it is more pronounced in South Africa, initially developed under strong protectionism but particularly in technical and vocational education, has successfully integrated with the global economy. transport, and energy infrastructure. Lastly and While South Africa accounts for only 0.6 percent critically important for long-term growth, a targeted of global automotive production, the country is trade diplomacy is needed to expand exports to fast- Africa’s leading automotive producer. This industry growing markets, particularly in Sub-Saharan Africa, performed better than most other manufacturing and to maintain exports to the United States and the industries when it comes to investment, output European Union. and exports. It accounts for 30.1 percent of manufacturing output, 13.9 percent of total exports, Information and Communications Technologies and 8.6 percent of formal jobs when linkages with other industries are taken into consideration The NDP acknowledges the ICT sector as an enabler (Econometrix 2017). The presence of major original for “the development of a dynamic and connected equipment manufacturers (OEMs) and supportive information society and a vibrant knowledge government policies have played an important role economy that is more inclusive and prosperous” in developing the industry. by 2030. The Department of Trade and Industry has identified ICT and electronics among the 12 Overall the industry outlook is positive. The newly IPAP priority sectors in South Africa that have the developed Automotive Master Plan 2020–2035 highest growth and investment potential. Already, provides the much-needed policy certainty to the investment into ICT is growing. It is currently close industry. The plan aims to increase production to 3 percent of GDP. The sector now contributes volumes and strengthen domestic value addition. approximately 17 percent of all service exports The OEMs are making significant investments and there are vibrant entrepreneurial ecosystems in training and collectively spent R 1.5 billion emerging in several cities. in training and development between 2015 and 2017. Some of the government’s investments in However, policy constraints impede the development the supplier development programs are starting of South Africa’s ICT sector. Relatively high Internet to bear fruit. costs and slow speeds constrain the growth of SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 7 the ICT industry and contribute to the slow Conclusion development of spillover applications. This makes it more difficult and costlier for citizens, especially the poorest communities, to access e-government, The government’s goal to attract $100 billion FDI education, and e-health services. The long delay and the outreach to global and local businesses have in deciding on the mechanism for assigning high- created a more positive environment for investors, demand spectrum is a key policy constraint. Moving but policy uncertainty remains an obstacle. Some of ahead with the release of the spectrum will catalyze the announced reforms since President Ramaphosa private investment into telecom networks, enabling took office have been implemented, but many upgrading to 4G and eventually 5G, encouraging more are still needed. The political economy is further entry and competition into the broadband complex, and at times hinders much-needed reforms. segment, and laying the foundation for the Fourth Ultimately, policy uncertainty could continue to put Industrial Revolution (4IR). a damper on South Africa’s investment climate in the medium term. While the outlook for ICT is positive, urgent action is needed to unlock the potential of the digital economy Against this backdrop, the CPSD provides policy to enhance productivity, incomes and well-being in options and outlines possible World Bank and the long-term. Recent setbacks on the approval of IFC interventions to unlock barriers to private the Electronic Communications Amendment Bill investment and leverage private sector solutions to mean that more time will be needed to create an improve the delivery of public services (see table environment that encourages investment by current of recommendations below and details in the full incumbents with high levels of capacity and attracts report). In the context of the Country Partnership new entrants that can bring new business models Framework (CPF) dialogue, the report can be a useful and technologies on the market. Several policy engagement tool for stakeholders—the government, options exist to facilitate the transition away from the private sector, and other DFIs—to select priorities infrastructure-based competition towards a new and policy directions. By relying on private sector paradigm of services-based competition. The decision solutions and crowding-in investment, South Africa needs to take account of the comprehensive studies could break the spiral of stagnation and move to a carried out by DTPS, CNRS, and the private sector, higher equilibrium and an economy that delivers on but also consider how best to tap the strengths of the the jobs targets in the NDP. A resurgence as a regional vibrant digital ecosystem in South Africa. Solving the economic powerhouse would help to unlock South shortage of digital skills at different levels will require Africa’s potential so that it can realize the economic a mix of public and private initiatives, leveraging on and social promises of the 1994 transition. good practices that already exist in the country. 8 EXECUTIVE SUMMARY Key recommendations Factors affecting Policy options World Bank Group private investment outlined in the report role Cross-cutting constraints2 Business environment and investment Reform regulations in lagging areas Advisory support to streamline policy: Red tape increases costs, delays (for example, property registration) and regulations at national and day-to-day operations, and is not strengthen local capacity for implementation. subnational levels; address policy, conducive to new firm creation. There Fast-track digital platforms to speed up key institutional legal and regulatory are constraints in access to finance for business procedures. barriers to FDI generation; scale MSMEs. The framework for investment Develop credit scorecard innovations for platforms under the Digital Economy promotion is inadequate. MSMEs and adopt digital technology to reduce for Africa program; and support collateral requirements. financial inclusion initiatives. Develop a movable collateral registry to include a wider range of asset types. Empower a streamlined national level investment promotion agency that has the capacity to achieve sub-national coordination. Rationalize investment incentive framework to ensure competitive incentives that are automatic, transparent, and less discretionary. Limited integration into global value Raise efficiency in ports and cargo rail Advisory support to design supply chains and weak connectivity: South through regulation and partnerships with chain programs and for PPPs in Africa’s conglomerates face trade the private sector. ports and cargo rail. and logistics costs to integrate into Foster supply chain development and global value chains; MSMEs struggle localization. to integrate into supplier networks of (See the enabling sectors and deep dives for large firms. the key sector-specific policy options). Regulatory obstacles to competition: Establish a database of government Advisory support to Some government interventions incentives and a framework for their design competition authorities. perpetuate legacy competition issues in and implementation. selected enabling and productive sectors. Assess the role and mandate of industry associations to minimize anticompetitive outcomes. Build capacity for regulators and policy makers to embed competition principles. Enabling sectors: Education and skills Enrolment and completion rates are Explore alternative ways to optimize Advisory support to reform TVET low. Participation of the private sector resources allocation to higher education curriculum, strengthen management, is relatively low due to legal and institutions such as performance improve governance, and develop administrative barriers. Raising quality of contracts, research contracts, and framework regulations to encourage TVET education is challenging. Education encouraging fundraising. greater private sector participation. infrastructure investment is backlogged. Reform the compliance framework Potential IFC investment in private for private institutions by reducing higher education institutions and SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 9 Factors affecting Policy options World Bank Group private investment outlined in the report role the number of regulatory bodies and student accommodation. relaxing stringent regulations. Encourage TVETs to partner with industry, to increase relevance to firm needs, and mobilize resources. Increase investment into education infrastructure through reforms to PPP framework. Infrastructure Energy: Significant short-term supply Continue to strengthen the governance Advisory support to support cost risks result from technical vulnerabilities and management of Eskom. minimization mechanisms for and limited generation capacity. New Bring in more IPPs and encourage Eskom, embedded generation and power connections are inefficient. embedded generation to leverage the mobilization of a broad base of Eskom’s balance sheet is fragile, and decreasing cost of renewable energy long-term domestic and institutional its payments are in arrears. There is (for example, in solar and wind) and investors in IPPs, building on the also a greater risk for anti-competitive diversify the energy mix. REIPPP program. outcomes due to the presence of Improve payments through net IFC investment into renewable dominant firms and the high degree of metering and smart meters. energy and embedded generation. vertical integration. Publication of refinancing guidelines for REIPPP program. Transportation: Infrastructure is Improve governance of SOEs such as Advisory support to reform the deteriorating due to underinvestment, Transnet and South African Airways (SAA). governance of SOEs, improve pro- poor management of SOEs, and Introduce pro-competition rules and a competition rules in segments where barriers to private participation. framework for competitive neutrality SOEs operate, ensure competitive Sector regulation is also restrictive of between private firms and SOEs where neutrality between public and private competition, especially in rail and air both compete in the same market. firms, and foster PPPs. transport. Regulatory and financial In the longer term, consider how SOE advantages are granted to SOEs activities can be refocused to sectors through government bailouts, and where the private sector is unable to regulatory functions. operate efficiently. Water: Multiple institutions are involved Reform the governance system to Advisory support to introduce in the sector, resulting in a complex increase efficiency. international best practices for and inefficient water supply chain. A Continue to strengthen efficiency of reducing non-revenue water, supply deficit is expected because of water use. reforming the framework for technical and institutional factors and Strengthen the framework for trading governance, trading water rights, underinvestment. High levels of non- water rights. supporting more PPPs. revenue water. Diversify the use of water by bringing in Possible IFC investment in municipal more ground water and desalination. water infrastructure projects. Foster more PPPs. 10 EXECUTIVE SUMMARY Factors affecting Policy options World Bank Group private investment outlined in the report role Capital markets for infrastructure Address regulatory constraints Advisory support to modernize finance: Challenges include limited preventing new entrants in the the Financial Markets Act, provide competition, high costs, regulatory domestic capital markets. upstream support to ensure a viable limits to adopting new technologies, Upstream policy reform to deliver and bankable project pipeline, identify lack of viable project pipelines, infrastructure projects that are pilot transactions, create capital limited vehicles for co-investing, and “market ready.” market solutions to enable refinance opportunities confined to equity (local Create opportunities for long- for IPPs, and mobilize a broader base banks dominate debt financing). term domestic and international of long-term domestic and institutional institutional investors. investors into PPPs. Potential IFC demonstration transaction co-investing with domestic and international long-term institutional investors. Deep dives: Agriculture and agribusiness Governance framework: Policy is Increase space for PPPs in trade- Advisory support to support an spread across numerous ministries related services (trade information, agriculture sector public expenditure and departments with overlapping certifications, veterinary services). review (including land reform spending), responsibilities, while capabilities to Improve access to key export markets expertise to move towards PPP models meet mandates are declining. (especially EU but also emerging in key trade-related services, develop Efforts to monitor and evaluate past export destinations). Address non- new trade agreements for key export support programs (especially in terms of tariff barriers within the Southern markets (especially in Asia), analyze the land reform and redistribution) are limited. African Development Community impact of trade barriers within SADC (SADC) region. region, and support multi-country harmonization of standards. World Bank lending for capacity building and financial support for producer organizations to provide support services (entry, exporting). Access to finance for emerging Support development of agriculture Advisory support on agricultural farmers: Subsistence and emerging insurance. insurance markets, especially in the farmers remain largely excluded from Increase efforts to bring commercial context of increased climate risks, and agricultural finance and insurance banks into lending to emerging for an agriculture finance diagnostic products. The lack of credit results farmers, for example, by providing to understand the demand and supply in low investment, dampening yields risk guarantees and facilitating side constraints. and productivity. Increasing levels of access to collateral. World Bank lending to scale-up the Land financial inclusion have not led to a Bank project supporting blended finance deepening of the relationship between initiatives for emerging farmers. emerging farmers and agricultural Potential IFC investments to direct financial service providers. Most funding to key players in chosen emerging farmers lack collateral sectors to strengthen out-grower and the capacity to develop bankable programs and risk sharing facilities business plans. with South African banks. Skills among emerging farmers: Enable greater skills transfers from Advisory support to assess existing Agricultural colleges remain in poor larger commercial to emerging mentoring programs for emerging shape. In some core areas there farmers through mentorship. farmers to determine interventions that SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 11 Factors affecting Policy options World Bank Group private investment outlined in the report role are gaps leading to a shortage of lead to retention and skills transfer. agriculturalists, agricultural engineers, Potential World Bank lending to support and veterinarians. skills programs in key deficit areas through extension programs, universities and TVETs, including potential direct funding to agricultural colleges. Land and water rights: Lack of secure Bring certainty to investors by Advisory support to assess the land and water rights deter investment finalizing the amendments to land effectiveness of past restitution and and limit scope for credit. reform and the framework for how redistribution programs, conduct a this will be applied. comprehensive land audit, and support Consider performing a comprehensive exchange and lesson learning from land audit to improve shared other countries’ land reform processes. understanding of redistribution to date. Climate change and water scarcity: Increase preparation for El Nino by Advisory support to develop a Climate Growing demand is likely to lead to more strengthening government insurance Smart agriculture strategy, develop intense competition for natural resources, for disasters. risk management techniques to help increased greenhouse gas emissions, Explore the potential to expand emerging farmers access credit, further deforestation, and land degradation. access to agriculture insurance to conduct analytical work for an audit Substantial spatial misallocations emerging farmers which can act as on water rights linked to restituted or exacerbate water insecurity. collateral for loans. redistributed land. Develop a comprehensive approach Potential World Bank lending to to risk management. develop improved and more water- Investing in improved water-efficient efficient irrigation. irrigation systems. Barriers to competition: Industry Assess the role and mandate of Advisory support to the Competition associations can perform valid roles in industry associations and consider Authorities’ enforcement and advocacy a market but can also serve as fora for how to minimize the potential for work in the sector; embed competition information exchange and therefore anticompetitive outcomes. principles in key value chains in facilitate collusion. The involvement Ensure effective implementation of the market framework for National of associations and large incumbents new provisions of the Competition Law Fresh Produce Markets and in the in channeling government support to tackle anticompetitive behavior by retail sector; implementation of the to emerging farmers may lead to associations or abuse of dominance Competition Law (including clear and conflicts of interest. The imbalance by large buyers. predictable regulations and guidelines); of market power between small Advocate with large buyers to to rationalize the role of industry suppliers and large buyers (such as encourage fair dealing with small associations in the market; analyze the retailers and processors) reduces suppliers (for example, through codes impact of existing tariff formulas for incomes for small suppliers. of conduct). wheat, sugar, and maize on consumer Build mechanisms and capacity for prices and market contestability. regulators and policy makers (such as SABS, ITAC, DAFF, dti) to embed competition principles in standards, market rules, and public policies. Establish a pro-competition framework for the design and award of government support programs. 12 EXECUTIVE SUMMARY Factors affecting Policy options World Bank Group private investment outlined in the report role Automotive Size of the domestic market and Assess the impact and cost-benefits of Advisory support to develop regional regional integration: The domestic the Automotive Masterplan to ensure value chains and cross-border trade market is small and imports account that it can meet volume and localization in components. for a significant share. There is no targets. regional value chain. Enable expansion of exports to the Africa region through trade negotiations; university-industry collaboration to adapt vehicles to African roads. Trade diplomacy with the United States and the EU to maintain South Africa’s exports in its current markets. Skills and supplier development: Skills Improve merSETA’s outreach and the Advisory support to upgrade TVETs, are in short supply in the engineering, impact of training to suppliers. assess and strengthen supplier management and select artisanal Evaluate and scale-up good practices in development programs and localization professions. TVET institutions suffer existing supplier development programs. potential, share expertise in structuring, from outdated curriculum with poor Continue ASCCI’s initiatives to localize management and deployment of the links to industry needs. Capabilities are certain parts based on the interest of planned Venture Capital Fund. weak in component manufacturing. OEMs and availability of local expertise. Potential IFC investment in private Incorporate skills and supplier TVET schools, instruments for development programs into the short-term and long-term financing activities eligible for support from the needs of suppliers, equity finance planned Venture Capital Fund. for existing and new JVs/M&As; Capex for expansion, modernization, greenfield investment, corporate finance, and working capital; support establishment of pooled funds and blended finance facilities. R&D and metrology: Firms in the Create incentives for industry- Advisory support to support industry- automotive industry are less likely to university collaboration, with a focus university collaboration programs, R&D invest in R&D than other manufacturing on MSMEs. incentives policy, strengthen public firms. Domestic suppliers incur high Incentivize universities to offer testing metrology institution. costs of testing abroad due to lack services to component manufacturers. of accredited metrology institutions. Strengthen the capacity of the Bureau R&D tax incentives prioritize new to of Standards. the world innovation and involve a long Reform R&D tax incentives to encourage application process. OEMs and domestic suppliers to invest in innovation. Investment climate: Deficiencies exist Reduce the costs of obtaining Advisory support to improve the in the investment climate, including electricity connection and improve investment climate at the local red tape, unreliable electricity supply, reliability of supply. level, upgrade SEZs based on local and high trade logistics costs, and Improve trade logistics by introducing practices, improve interconnectivity scope to strengthen the design electronic single window and further of customs systems; and improve of support programs to minimize harmonization of documents and the design of support programs to market distortions. procedures. minimize market distortions. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 13 Factors affecting Policy options World Bank Group private investment outlined in the report role Information and communication technologies: Gaps in infrastructure development: Different regulatory approaches Advisory support on the regulatory Policy uncertainty holds back would encourage better use of environment and implementation based investment needed to upgrade existing fiber infrastructure, for on WBG experience in other countries. networks and deters entry by new example, facilities sharing regulation. Potential IFC investment to mobile companies. Coverage issues affect Programs to get coverage at decent network operators (MNOs) with deployment of services in some rural speeds in areas of economic exclusion funding needs at their various areas and townships. could be implemented, for example, in subsidiaries, potential acquisitions or townships using the Universal Service deployment in both the wholesale and Fund (USF). retail broadband markets, acquisition of towers in the market, selectively support data center operators in South Africa that need funding for expansion projects into the rest of Africa. Price of data and quality of service: Clarify the policy direction and Advisory support on methods for Gaps in the legal and regulatory develop a plan on the assignment spectrum assignment in light of the framework have been a critical of high-demand spectrum to give WBG’s experience in countries such as bottleneck, and a major reason for certainty to the industry. Mexico; review the regulatory options the limited availability of high-demand Accelerate the digital migration by for accelerating digital access and spectrum to upgrade broadband providing a policy directive on the promoting competition. networks to 4G and 5G. process. Strengthen the independence and capacity of ICASA, the regulator responsible for ICT, and implement pro-competition provisions in the ECA Bill. Explore regulatory approaches to promote data affordability for example, through more innovative use of the USF. Digital skills: Low basic literacy Promote digital literacy at schools, Advisory support to conduct a Digital and numeracy skills among a large and continue to attract students into Economy for Africa (DE4A) diagnostic segment of students hold back digital STEM subjects. to identify interventions in areas such skills. Inadequate and insufficient Foster PPPs as a tool to deliver digital as digital financial services, digital skills, digital programs and curriculums skills that are directly needed within and digital platforms; scale up XLAfrica, which are not aligned with labor the private sector. a pan-African accelerator for digital market/industry needs. Reform TVET system (programs, startups, and mLab on digital skills; curriculums, labs/workshops, Potential IFC investment to increase professional development of investment in digital skills PPPs, instructors) to better align with scaling up state of the art rapid skills industry needs. development models, for example, Explore possibility of PPPs for through competitive processes and development of Digital Skills at basic blended finance. education and TVET institutions. 14 SOUTH AFRICA’S PRIVATE SECTOR: CONTEXT AND CROSS-CUTTING CHALLENGES SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 15 01 SOUTH AFRICA’S PRIVATE SECTOR: CONTEXT AND CROSS-CUTTING CHALLENGES The purpose of this Country Private Sector Diagnostic Africa has been outperformed by other BRICS (Brazil, (CPSD) is to assess opportunities and constraints holding Russia, India, China, and South Africa) and Sub- back private sector investment and growth in South Saharan African countries and, worryingly, recent Africa. It draws on analysis of the main cross-cutting growth projections have been revised downward. constraints to private sector competitiveness and growth, The South African economy is expected to grow at existing research, and stakeholder consultations. The 1.3 percent in 2019 and 1.7 percent in 2020. Growth CPSD also reviews the opportunities for leveraging is expected to accelerate in 2020, but under the private investment and solutions in key enabling sectors assumption that structural reforms gather momentum, as well as in productive sectors that could play a key role policy uncertainty fades, and FDI commitments in South Africa’s growth. These deep dives into agriculture materialize. Global threats to the country’s economic and agribusiness, automotive, and information and outlook are expected from a slowdown in global communication technologies help to identify sector- growth, trade disputes, the normalization of U.S. specific obstacles that hamper private sector investment monetary policy, changes in investor appetite, and and growth, and unpack the implications of the cross- weak commodity prices. cutting constraints in the economy. The deterioration of South Africa’s macroeconomic This section of the CPSD takes stock of private sector environment was accompanied by falling private in South Africa and outlines the main cross-cutting investment4 and particularly inward FDI. The constraints facing businesses. It is based on a review SACCI Business Confidence Index (BCI) reflects the of recent experience of private sector development market-related business climate, identifying economic in the country—including the findings from the 2018 developments that have a bearing on the business Systematic Country Diagnostic (SCD). Because of its mood and potential for private sector growth in South relevance to current policy debates, and the fact that Africa. While new leadership in government in 2018 the country’s business environment and integration has created a more positive mood, a clear downward into value chains were analyzed in detail in several trend in business confidence has been visible over the World Bank Group publications,3 this section last decade (Figure 1).5 Between 2013 and 2017, FDI provides a more in-depth review of the regulatory inflows declined by 37 percent CAGR. In 2017, FDI obstacles to competition. inflow to developing economies increased by 2 percent, but declined by 41 percent in South Africa. Recent data At the macro-level, South Africa’s economy has lagged from SARB showed an uptick in FDI to $4.9 billion in terms of growth. Growth per capita averaged 1.1 in 2018, which represents a five-year high, but it’s too percent between 1994 and 2000, 2.9 percent between early to understand whether the country has turned the 2001 and 2008, and has stagnated since 2009. South corner or whether this is a temporary effect. 16 SOUTH AFRICA’S PRIVATE SECTOR: CONTEXT AND CROSS-CUTTING CHALLENGES FIGURE 1 SACCI BUSINESS CONFIDENCE INDEX, 2010-19 140 120 100 80 60 40 20 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: SACCI. Weak GDP growth and stagnating investment upgrade, and export into new markets. These include have impaired job creation efforts, exacerbating strong, independent institutions, such as the judiciary, the country’s unemployment challenge. Since competition authorities, and the Central Bank; a deep 2008, 3.5 million people have entered the labor and diversified financial sector; and universities that force. However, with 1.6 million additional jobs rank among the top 500 globally (World Bank, created, the result has been a continued increase 2018a). Recent political developments also give hope in the unemployment rate. In 2018, the narrow for optimism. unemployment rate was 26.7 percent with 6.1 million people unemployed (36.7 percent—over In addition, South Africa’s private sector is more one-third of the labor force—if discouraged diversified than that of many other developing workers are included). This led to many of South economies. Based on a recent analysis of tax data, African job seekers being discouraged. Historically 28 percent of formal firms are in manufacturing, 37 disadvantaged groups (blacks, youth, and women) percent in services (construction, hotels, restaurants, are more acutely affected by unemployment. 6 transport, storage, communication, utilities and For instance, ratio of female to male labor force other services), and 18 percent in commerce; yet participation is 0.7. there is economic activity across all sectors. South Africa has been a highly-industrialized economy High levels of unemployment increase people’s for many years and today it continues to have a vulnerability to poverty as well as inequality. This larger share of firms in manufacturing compared to makes it harder to overcome the legacy of exclusion Vietnam, Peru, Moldova and Bangladesh—countries and inequality that stems from South Africa’s for which similar data are available. history of apartheid. South Africa’s poverty rate fell significantly since 1994; however, poverty remains The services sector has been the main driver of high for an upper middle-income country with more employment, but as noted already, the economy than half (55 percent) of the population being poor has not created enough jobs. Services account for at the national upper bound poverty line of R 992 per most of the new job creation (Aterido et al., 2017). person per month (in 2015 prices). Moreover, with a Within the service sector, tourism has been one of the Gini coefficient of 0.63, South Africa is one of the most leading subsectors in job creation--recent trends and unequal countries in the world (World Bank, 2018b). opportunities in this sector are presented in Annex 5. However, this has not been enough to absorb 1.1. State of the private sector South Africa’s large pool of unskilled workers— notwithstanding job creation that has come from South Africa has several of the essential conditions large and high-growth firms in diverse sectors (see necessary to attract investment at the levels of the Box 3 below). Recent evidence, such as Kerr et al. mid-2000s, and for its businesses to grow, invest, (2014), indicate that job creation and destruction SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 17 rates in South Africa are similar to those in OECD labor market, although there are country-specific countries and this suggests fewer rigidities in the aspects that can be hard to capture.7 BOX 1 THE ROLE OF SOUTH AFRICA’S MSMEs AND LARGE FIRMS IN JOB CREATION: WHAT CAN WE LEARN FROM RECENT STUDIES Comparative studies show that large firms account for the large South African firms are better net job creators bulk of job creation in developing countries (such as Ayyagari, than smaller firms. Demirguc-Kunt, and Maksimovic 2014). This is also the case in South Africa—recent studies suggest that large, old firms A subset of large firms—high-growth firms (HGFs)— account for a big share of current employment, in part because is a major driver of job creation in many countries of the market structure prior to 1994. Recent research sheds including in South Africa. According to the OECD, a HGF some light on South Africa’s employment profile and the is a firm that (a) initially possesses 10 or more employees relationship to firm size: or that has at least four times national per capita income in annual revenues, and (b) experiences average annualized • Up to 56 percent of South African jobs are concentrated employment or revenue growth of greater than 20 percent in the top 1,000 large companies (Small Business over a three-year period. A World Bank (2019a) flagship study Institute 2018). on HFGs shows that for nine emerging markets, HGFs make • The share of people working in firms with fewer than up about 20 percent (or fewer) of firms in manufacturing and 50 workers has been declining since 2000 (Rankin services yet create as much as 80 percent of all new jobs. In et. al. 2013). South Africa, HGFs constitute 12 percent of firm distribution • Since 2008, the proportion of employment among but account for 32 percent of total jobs (World Bank, 2019a). firms with fewer than 10 workers, and those with Moreover, as illustrated in Figure 2 below, HGFs tend to be between 10 to 49 workers has been declining (ibid). larger than other firms. In a seminal paper that uses the new • Between 2005 and 2011, there was net job destruction SARS-NT firm-level panel dataset, Mamburu (2017) finds that in all size categories of firms with less than 500 size has a positive impact on the likelihood of a firm being high- employees (ibid). growth. Kreuser and Newan (2018) find that size is correlated • Kerr et al. (2014) provides empirical evidence that with growth for South Africa’s manufacturing firms. FIGURE 2 HIGH GROWTH IN FIRMS TEND TO BE LARGER THAN OTHER FIRMS 587 Average number of workers 600 437 400 378 327 335 306 196 200 135 129 127 140 123 115 112 101 106 121 72 85 85 95 57 59 60 51 52 61 0 Brazil Côte Ethiopia Hungary Mexico South Tunisia Turkey United d’Ivoire Africa States All Firms HGFs-OECD HGFs-Birch Source: World Bank. 2018. 18 SOUTH AFRICA’S PRIVATE SECTOR: CONTEXT AND CROSS-CUTTING CHALLENGES Without significant improvement in the business provides resilience against shocks that MSMEs environment facing MSMEs (for example, the cost of cannot easily gain starting a business and constraints in access to finance), • More likely that large firms can survive during there are reasons as to why large firms including HGFs fluctuations and benefit from periods of growth will likely continue to be the main source of employment (Maburu, 2018). in South Africa for some time to come: • Networks—for instance, in Thailand, firms that are more connected with others through direct ownership, • Global linkages—a firm’s exporting status, share of holding companies or subsidiaries are more likely to exports, FDI inflows and imports of technology— experience high growth (World Bank 2018). increase the likelihood of a firm being high growth. • Finally, both large firms and HGFs tend to have better • Diversification and participation in capital markets access to skills and finance. The history of industrial support, protections, and question is how to achieve this, and how firms state control has shaped market structures in key can be encouraged to compete and innovate. This agricultural and manufacturing markets in South Africa. points in part to the need for strong enforcement of These were historically tightly protected oligopolies or competition law, which is discussed below. monopolies, sometimes under state control. Despite the privatization of a number of these state-controlled The role of manufacturing, which developed under enterprises or boards in the late 1990s, without consistent strong protectionism, has declined with the opening complementary measures to open these markets to of the economy.9 With few exceptions, such as the trade and competition, the structures of these markets automotive industry, manufacturing industries remained in place. In some cases, the behavior of firms recorded losses in market share in their core export in these markets has reflected previous regulatory products. The loss of global competitiveness in conditions.8 Moreover, a number of markets appear to manufacturing has meant that more South African have privately “re-regulated” following deregulation. The firms have turned to the domestic economy and less strong role currently played by industry associations in technologically advanced export markets in the rest of South Africa, which in some cases is supported by sector Sub-Saharan Africa, with the SADC region replacing regulation, has partly facilitated this. the EU as the largest export destination. The effects of state support are most pronounced The upshot of these trends is that minerals and metals in South Africa’s heavy industries. Examples of continue to dominate South Africa’s exports. Minerals private firms that inherited their dominant market and metals account for the bulk of the export basket, positions from former state-owned enterprises exist which exacerbates the volatility of exports and output in steel, iron, non-ferrous metals, basic chemicals, and leaves the country vulnerable to volatility of and petroleum production. These industries are global commodity prices. A bright spot on the export particularly important for competitiveness because outlook is medium and high-tech exports, as the share they provide inputs for the automotive, construction, of total exports increased between 2006 and 2016— and agricultural sectors. Where firms reach efficient this is also reflected in South Africa’s performance on scale, this could reduce average costs overall. The measures of export sophistication.10 SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 19 FIGURE 3 SHARE OF MEDIUM-AND HIGH-TECH PRODUCTS IN TOTAL EXPORTS South Africa - 2006 Ecuador - 2016 Colombia - 2006 Chile - 2016 Medium High Brazil 2006 0% 10% 20% 30% 40% Source: World Bank (2018a) Systematic Country Diagnostics background notes. A key vulnerability for South Africa’s private sector is than between sectors. Figure 4 shows TFP trends by the negative growth in total factor productivity (TFP) sector. TFP growth in manufacturing has decelerated and limited innovation recorded over the last decade. significantly in recent years, although these sectors World Bank estimates indicate that TFP declines cost have fared better than the primary, other secondary, the equivalent of 0.7 percentage points of foregone and tertiary sectors. Mining, footwear and textiles, GDP growth every year on average between 2008 fiber and rubber products, electricity and water and 2016. This contrasts with India and China, which supply, construction, transport, and non-financial managed to sustain high TFP growth since the early private services recorded large drops in TFP levels 1990s (though South Africa’s experience in this since 2008 (World Bank 2017.11 One major factor regard mirrors that of Brazil). The TFP decline was behind this is the low and declining levels of private driven primarily by productivity losses within, rather R&D and innovation. FIGURE 4 TFP GROWTH WITHIN SECTORS 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% Low-Tech Med-Low Tech Med-High Tech High Tech Primary Other Tertiary Manufacturing Manufacturing Manufacturing Manufacturing Secondary 1994-2007 2008-2016 Source: World Bank 2017. 1.2. Cross-cutting constraints country that undermine investor confidence. The section goes into more depth on the issues of the Building on the recently completed SCD report regulatory obstacles to competition. The review (see Box 2 below), this section outlines cross- of the challenges and opportunities in the areas of cutting constraints specific to achieving the education and skills, and in infrastructure sectors, government’s job and investment targets, as are presented in more detail in the next section on well as broader concerns with governance in the enabling sectors. 20 SOUTH AFRICA’S PRIVATE SECTOR: CONTEXT AND CROSS-CUTTING CHALLENGES BOX 2 FIVE PRIORITY CONSTRAINTS IDENTIFIED IN THE RECENT SCD 1. Insufficient skills. Skills are critical for both labor 3. Low competition and integration into global and supply and demand. They raise the productivity of regional value chains is a major deterrent to growth workers and entrepreneurs, help firms expand their and job creation, and it keeps prices high, especially production at competitive prices, and raise aggregate for the poor. demand in the economy for more goods and services. Producing what is required involves hiring more 4. Limited or expensive spatial connectivity and workers, both low- and high-skilled. under-serviced historically disadvantaged settlements continues to reflect the legacy of 2. The skewed distribution of land and productive separate development. assets and weak property rights. South Africa’s historical, highly skewed distribution of land and 5. Climate change is imposing considerable costs on productive assets is a source of inequality and social South Africa, a water insecure country with high reliance fragility—and it fuels the contestation of resources. on carbon-based production. The low-carbon transition Property rights are weak for the poor in townships, will put pressure especially on communities depending informal settlements, and rural areas (tenure security), on carbon-intensive industry. while property rights are coming under pressure for investors in agriculture and mining. Policy uncertainty decline from 65.11 in 2016 to 64.89 in 2018. Specifically, the report ranks South Africa at 107 out of 190 countries Despite the reforms that the new administration for the efficiency of registering property. It takes seven has undertaken, policy uncertainty and weaknesses procedures and 23 days to register property at an average in policy implementation continue to be cross- cost of 7.6 percent of the value of the property. There cutting constraints that deter investment. Lengthy are also inefficiencies in land administration and land deliberations around land reforms, the application markets have low volumes of transactions and large of BBBEE legislation, and changes in regulation of variations in prices across the country12 —Annex 2 mining activities through the Mining Charter, have reviews key issues confronting land markets. been cited by analysts, the private sector, and rating agencies as inhibitors to economic activity. Uncertainty around sector-specific policies is critically important. Access to finance for MSMEs The deep dives give indications of the relevant areas where private sector is looking for clear policy Building small businesses that contribute to the directions to maintain and scale-up investment. economy and create jobs is one of South Africa’s biggest development opportunities. However, the MSME sector has been relatively stagnant over Business environment the last ten years. The number of MSMEs grew by only 14 percent between 2008 and 2017, and only South Africa’s business climate adds substantial red 14 percent of the country’s small businesses are tape to day-to-day operations and is not conducive to formalized. The National Development Plan (NDP) the establishment of new firms. The country ranks 82 sets out the importance of MSMEs as a priority in the Ease of Doing Business rankings at the global segment for development, given their employment- level (World Bank. 2018d. “Doing Business Report”, generating potential. However, access to finance Washington DC: World Bank), far behind its position remains one of the most frequently cited obstacles ten years ago. The pace of business environment reform to growth, with related issues pertaining to technical has stagnated. The distance to frontier score (which skills, access to markets, and the broader investment compares a country’s performance on Doing Business environment strongly affecting MSMEs’ ability to indicators with global best practices) has seen a slight secure equity or debt funding. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 21 Recent findings from the 2017 IFC MSME Finance high administration costs. A digital approach can Gap Report13 indicate there is an estimated unmet lower these costs but requires banks to have reliable $30.3 billion formal MSME finance demand in South and consistent information to accurately score firms. Africa. Current finance supply to formal MSMEs However, MSMEs in South Africa do not typically is $41.5 billion. IFC estimates the total demand keep good-quality financial records. The FinScope from the formal sector to be $71.8 billion. The gap Small Business Survey indicates that only 46 percent between supply and demand accounts for 10 percent of small businesses keep financial records, and that a of GDP. Moreover, an additional $24.2 billion complete absence of record keeping is more prevalent potential demand for finance is estimated among among micro and informal firms. When information informal enterprises. is collected, it relates to sales rather than cash flow or net income, making it difficult for banks to accurately Causes of the MSME financing gap include: (a) supply measure risk. and demand-side issues, including macroeconomic conditions, a lack of MSME expertise at banks, and Similarly, the capital market typically serves negative perceptions among MSMEs on borrowing, the needs of large firms, although this is slowly (b) limited access to collateral, and (c) a skewed changing. This is chiefly because of the high proportion of asset ownership across racial groups transaction costs of issuing equity or debt securities, because of apartheid’s policy and economic legacies. along with complex listing and regulatory According to the World Bank Enterprise Survey, the requirements. However, recent developments are most popular tool banks use is securing loans with beginning to change debt access in South Africa. collateral: 70 percent of MSME loans in 2007 were The Johannesburg Stock Exchange introduced the secured with collateral valued at over 100 percent Alternative Exchange (AltX) in 2003. This was an of the loan amount. A new round of the Enterprise attempt to encourage MSMEs to raise capital with Survey will be collected in 2019 which will present relaxed listing requirements and to migrate to the a more accurate picture of the business environment JSE’s main board once they were ready. By April and access to finance constraints facing MSMEs. A 2018, 44 firms were listed on the AltX market significant aggravator of this issue is banks’ preference segment of the JSE for a combined market cap of for immovable assets, such as property, which they just under R 12 billion—equivalent to around 0.1 prefer because the legal and registry framework percent of the JSE’s market capitalization. makes property less risky. Information asymmetry is also an issue. Banks price MSME finance as high risk Potential avenues for expanding access to finance in the absence of better information, and only high- and markets include: (a) developing credit scorecard risk small businesses are willing to pay this price. innovations for MSMEs to help reduce collateral requirements, and (b) developing a movable collateral According to the World Bank Enterprise Survey, the registry to include a wider range of asset types that most popular tool banks use is securing loans with are more prevalent among MSME borrowers. The collateral: 70 percent of MSME loans in 2007 were coverage of credit bureau reporting could also be secured with collateral valued at over 100 percent improved to cover individuals’ lending activities for of the loan amount. A new round of the Enterprise business purposes. The coverage of trade credit and Survey will be collected in 2019 which will present other data sources should also be improved. Banks a more accurate picture of the business environment would need to increasingly adopt digital technology to and access to finance constraints facing MSMEs. A reach and increase both formal and informal MSMEs. significant aggravator of this issue is banks’ preference Moreover, the enabling environment for MSMEs can for immovable assets, such as property, which they be improved through improving data collection, prefer because the legal and registry framework policies, and policy coordination in South Africa. makes property less risky. Information asymmetry is also an issue. Banks price MSME finance as high risk The coverage of credit bureau reporting could also be in the absence of better information, and only high- improved to cover individuals’ lending activities for risk small businesses are willing to pay this price. business purposes. The coverage of trade credit and other data sources should also be improved. Banks New digital technologies such as automated credit would need to increasingly adopt digital technology to scoring can partially address this issue by allowing reach and increase both formal and informal MSMEs. for economies of scale to be reached through volume. Moreover, the enabling environment for MSMEs can Screening and processing MSME loans incur relatively be improved through improving data collection, 22 SOUTH AFRICA’S PRIVATE SECTOR: CONTEXT AND CROSS-CUTTING CHALLENGES policies, and policy coordination in South Africa. region, but have limited integration into global value chains. Leading FDI firms, meanwhile, have limited backward linkages to domestic suppliers. These Investment policy and promotion factors have combined to reduce the responsiveness framework of many South African firms’ exports to the rand’s depreciation (World Bank, 2018a) and limited South Africa’s framework for investment promotion diversification out of minerals and metals into higher would need to be enhanced to meet the $100 billion value-added manufactures and act as a further drag FDI target. Investors have to deal with roughly 30 on productivity. As such, trade and industrial policy government entities with overlapping roles, making it can inadvertently support uncompetitive firms and difficult to navigate South Africa’s investment climate hurt competitiveness throughout the value chain. and find the information and resources needed to develop an investment project. Ranked at 20 in 2016, South Africa is ahead of the region and at the top of the upper middle-income To turn the tide on FDI, the regulatory and country group on the Logistics Performance Index. institutional frameworks for investors must be However, the cost of trade logistics, including inland improved and IPAs must improve their services. handling, remains higher than peers. Port costs InvestSA, the national investment promotion went down significantly since 2012 but were still agency (IPA), could play a stronger role in the FDI 88 percent higher than global average in 2016–17. agenda to effectively connect public and private Furthermore, South Africa’s port tariffs continue to sectors, and address key constraints affecting favor the transport of minerals over manufactured investment in South Africa (FDI in particular). It goods. This makes the country a less attractive could also foster discussion, decision making, and destination for efficiency-seeking FDI. The next implementation of solutions to make South Africa section discusses the constraints and opportunities better at attracting, retaining, and expanding FDI. for private investment in the transport sector, in the Four key recommendations based on recent WBG broader context of the infrastructure agenda. The work are to strengthen the following: ICT deep dive at the end of the report will review the issues surrounding internet connectivity. • The institutional positioning, autonomy, and mandate of InvestSA and provincial IPAs • South Africa’s and InvestSA’s strategic focus and Regulatory obstacles to leadership of the national FDI strategic process competition • The institutional capacity to deliver investor services, including relevant investor service The structure of economic ownership across South programs catering to the needs of strategic African markets has been perceived as perpetuating segments while building the capacity and systems the legacy of exclusion. Three main structural of IPAs characteristics can limit opportunities to enter markets • Coordination between national and subnational for MSMEs or previously excluded entrepreneurs— investment promotion entities on issues including concentration within markets, vertical integration, investment mandates, investment referral and conglomerate structures. First, concentration systems, and foreign investor networks within markets and the presence of dominant firms, particularly in industries that provide key inputs to downstream businesses, has the potential to raise Limited integration into global costs for all downstream firms. Second, the degree value chains of vertical integration has been perceived to reduce opportunities for new businesses to form linkages with South Africa’s conglomerates have developed some existing firms and to raise barriers to entry. Lastly, manufacturing and retail networks within the conglomerate structures are perceived as indicative SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 23 of the concentration of wealth in the economy. creating a conducive domestic environment for new Economies of scope could provide advantages that entry and competitive markets in South Africa: MSMEs and new firms find difficult to match. • Embedding competition principles in market Large firms often enjoy advantages in the market in rules/regulations (including sectoral regulation, comparison to MSMEs. The top 1 percent of largest public procurement frameworks, as well as trade firms (by employment) in South Africa account for and investment policies) around 50 per cent of employment and 60 per cent of • Allowing private firms to compete on a level revenue (World Bank 2017), and from that vantage playing field with State Owned Enterprises point are important contributors to job creation (SOEs) in markets where both operate, and and growth. While large employment size does not • Ensuring investment incentives and industrial necessarily translate into market power (or a lack of policy schemes are awarded transparently, in a competition) in output markets, the concentration of way that includes new and small firms, and do employment in a few large firms can also be reflective not create undue advantages for some players of the concentration of market share in some output markets. Having better access to export markets has South Africa performs relatively poorly in helped larger firms as domestic demand contracted, comparison to its peers in terms of restrictions whereas newer entrants and MSMEs that depend to competition stemming from state control. on the domestic market find it hard to grow due to According to the OECD’s Product Market weak economic conditions. But there are also cases Regulation (PMR) methodology, which measures where government interventions have perpetuated the restrictiveness of certain areas of regulation the legacy of large (sometimes vertically integrated) to competition, South Africa performs around firms that form conglomerates. These can be seen in the mid to low end of its peer countries [lower important upstream sectors and some manufacturing score indicates lower restrictiveness], although it and agribusiness industries. falls above the OECD average. However, on the state control component of overall restrictiveness In this context, South African policymakers should South Africa performs relatively worse than peers. ensure that government interventions in markets are This includes aspects such as the scope of SOE aligned with competition principles to allow firms to involvement in the economy, direct government enter, expand and compete on a level playing field. control of enterprises, price controls, and the use Broadly, the following would go a long way towards of command and control regulations. FIGURE 5 THE RESTRICTIVENESS OF SOUTH AFRICA’S PRODUCT MARKET REGULATIONS 3.5 3 2.5 2 20% 1.5 33% 1 0.5 47% 0 bia Sa u Ni ador Co Avg ut ua Ru a an a ilip . Co aica Ja es ca il Se ya on l ia Ho ina Ec as r t Ar ndia ina ia Do R ia Ph Rep Ind ga do yp El Per c nic nd az es liv ss fri pin Ri n ur So rag lom ne Ch nt Eg ua Br Ke mi wa m Bo I nd CD lv hA sta ge ca OE State control Barriers to entrepreneurship Barriers to trade and investment Source: OECD PMR Database, 2013 is most recent year available. 24 SOUTH AFRICA’S PRIVATE SECTOR: CONTEXT AND CROSS-CUTTING CHALLENGES FIGURE 6 ELECTRICITY, COMMUNICATIONS AND FIGURE 7 SOUTH AFRICA ENERGY, TRANSPORT, TRANSPORT REGULATIONS: SOUTH AFRICA VERSUS COMMUNICATION REGULATION: SCORE PEERS, 2008 AND 2013 COMPONENTS 5 7.00 Score [0:6 (most restrictive)] 6.00 6.00 4 5.00 4.75 5.00 4.17 Score [0:6] 3 3.91 4.00 2 3.00 1.97 2.00 1 1.00 0.75 0 0.00 g ile CD il LA Avg Ke g a M ia Tu o So Ch y ut ile ca il s y st s s ad rke ne cit Ga om Av OE Braz Av ny ic Ra Ind Po fri Ch Ro ex rli tri lec p5 C hA Ai c Ele Te To 2008 2013 Source: OECD Sectoral Regulation Database. 2013. Note: Data not available for Russia. Kenya, LAC countries provide indicators for electricity, telecoms, and air transport only. The participation of SOEs in commercial activities where government involvement is common—and in almost 180 domestic markets is likely to shape sometimes necessary—such as electricity transmission competition dynamics—particularly in markets where and rail infrastructure. However, around 57 percent of private sector participation is viable and where SOEs are these 180 markets lack a clear economic rationale for highly vertically integrated.14 Of 27 sectors examined SOE involvement based on the existence of a market under the PMR, South Africa has SOEs present in 17, failure. These include manufacturing, travel agencies, higher than OECD average and some African peers, but storage, and wholesale trading. South African SOEs in the mid-range of BRICS peers.15 However, an analysis are also deeply vertically integrated along 47 supply of South Africa’s 22 major primary SOEs found these chains. The Central Energy Fund (CEF) and Transnet entities have 82 subsidiaries between them, operating in are both present in 10 markets of separate supply chains almost 180 domestic markets.16 These include sectors in addition to further markets along other chains. FIGURE 8 NUMBER OF SOEs PRESENT IN SPECIFIC SECTORS 25 20 15 10 5 0 zil Na gal Ke a me a hK a ilip a Ind ines Sa sia ca s sta a Se da So Tun n Ho ador ca Ja ile ica an u lo . ge ia ina CD Ch a Ru a ia Rw ia Co Rep Ni dura ric in bi Ca ny o ut isi Ph ore Co ragu nic er Ar mb ss Ind a Ri an ro Ch El ne ma OE ne mi nt P Br Af p lv o n th u So mi Do BRICS countries Africa region Asia region Latin America region OECD average Source: OECD Product Market Regulation database, and OECD-World Bank Group Product Market Regulation database. South African figures are as at 2013. Other countries are various latest available years. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 25 Anticompetitive effects are caused not only by the interest create an environment where SOEs have presence of SOEs per se, but also by regulatory fewer incentives to compete (or increase their or financial advantages that can create an unlevel productivity), while private firms may be less able playing field between the public and private sectors. to compete. This affects their capacity to innovate The PMR indicators show that sector regulation and become competitive. In some cases, SOEs also in energy, transport, and communications—all play a regulatory role for the markets in which they industries that remain either wholly or substantially are present, which can create a conflict of interest. under state control—are relatively restrictive of Recent examples of preferential treatment in the competition in South Africa. Preferential treatment transportation and energy sectors are discussed through government bailouts or conflicts of below in the section on enabling sectors. BOX 3 AN OVERVIEW OF CONCENTRATION AND CONGLOMERATION ACROSS SOUTH AFRICAN MARKETS17 Corporate ownership appears to be skewed towards considerably more subsidiary firms than in comparator having one or a few firms operating within specific countries— an indicator of conglomerate structure and markets, across markets (conglomerates), and along vertical integration. The average number of total domestic value chains (vertical integration). The proportion of subsidiaries per chain of subsidiary firms in South Africa firms that consider themselves as operating in a monopoly is around one—almost twice as high as the next highest market is relatively high in South Africa compared to peers. comparators of Kenya and Egypt (Figure 10). Moreover, The proportion that consider themselves as operating in a wave of domestic mergers and acquisition (M&As) a market with more than two competitors, meanwhile, is was seen in South Africa post-apartheid as the economy relatively low (Figure 9). While few South African firms responded to joining the global economy. The number of have at least one subsidiary, those that do tend to own M&As in South Africa has remained high since then. FIGURE 9 PROPORTION OF FIRMS THAT CONSIDER THEMSELVES AS OPERATING IN A MARKET WITH FEW COMPETITORS 100% 80% 60% 40% 20% 0% ) ) ) ) ) ) ) ) ) ) ) 9) ) ) ) 12 14 13 14 16 15 15 10 10 12 10 07 10 10 h A 200 (20 (20 20 (20 20 (20 (20 (20 (20 (20 20 (20 (20 (20 y( t( r( ( ina ria ia ia es ia ico ia So razil ca ina ile yp do ke Ind es mb ss pin fri Ch ge ex Ch Eg nt ua r Ru Tu on B lo Ni ge M ilip Ec Ind Co Ar ut Ph Monopoly Duopoly Oligopoly (3-6) More than 6 Source: Authors calculations using Enterprise Survey data for most recent years available. 26 SOUTH AFRICA’S PRIVATE SECTOR: CONTEXT AND CROSS-CUTTING CHALLENGES FIGURE 10 AVERAGE NUMBER OF TOTAL (DIRECT AND INDIRECT) DOMESTIC SUBSIDIARIES OF ALL DUOs 14.0 12.7 12.0 10.0 8.0 6.7 6.1 6.0 4.7 5.1 4.2 4.0 3.4 2.1 2.1 2.0 1.3 0.0 ina r ia ria es ia ico t ya ca do yp mb es pin n fri ge ex nt Eg ua Ke on A lo ge Ni M ilip Ec Ind th Co Ar Ph u So Source: Nyman and Koschorke, 2019 (forthcoming). Note: The analysis here uses data from the Orbis corporate ownership database provided by Bureau van Dijk Electronic Publishing (BvD). The information used here is based on the ownership structures as at August 12, 2017. If firms have incentives to behave in a pro- 27 percent lower between the largest and smallest competition way, these structural features of South categories). 18 Vertical integration can reduce costs Africa’s economy can yield benefits. For example, along the value chain, which encourages investment. in South African manufacturing industries, larger In addition, firms that are part of a conglomerate are firms appear to charge lower markups. Scale more likely to benefit from economies of scope which can lower costs of production and allow those can lower costs. These benefits can be passed on firms to compete in global markets. In fact, recent to South African consumers and local downstream firm-level analysis for South Africa shows that larger businesses— provided market policies encourage firms (in terms of employment) charge significantly those large firms to compete—either among each lower markups than smaller firms on average after other or with international competitors, in both export controlling for various firm level characteristics (up to markets and domestically. The design of industrial policy incentive programs can 100 percent of these programs are non-transparent.20 result in an unlevel playing field. Analysis shows that In response to the lack of transparency, a consulting there is a lack of transparency of incentive programs, industry that specializes in advising companies on which can raise the complexity of navigating the applying for incentive programs has developed in incentive landscape and disadvantage smaller South Africa. The fees for this advice are likely to be firms. Of 134 active incentive programs (made up prohibitive for smaller firms.21 of tax benefits, tax rebates/refunds, and grants) reviewed in 2017,19 most had at least one of three The lack of a framework for the design of incentives characteristics which could unintentionally raise means the underlying rationale is not always clear. the chance of anticompetitive market distortions. While the Department of Trade and Industry (dti) These characteristics are: lack of transparency; is the coordinator of South Africa’s industrial discriminatory characteristics unrelated to the specific policies, the 134 incentive programs under review policy objective of the program; or some form of were managed by a total of 13 government agencies. discretion in selection criteria. Depending on the There is no clear framework to ensure that the criteria used to assess transparency, between 44 and schemes addressed a market failure and there is SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 27 no centralized inventory of available incentives the difficulties inherent in proving such excessive and multiple agencies manage incentives schemes. pricing cases. Below we provide background on However, there is no clear framework to ensure recent amendments to South Africa’s competition that the schemes addressed a market failure. law that in part aim to facilitate tackling abuse of dominance cases. In antitrust enforcement, several findings of cartelistic behavior have been made against firms Despite such ex-post enforcement action against that were historically state-owned or state-protected. these firms, market rules continue to protect the For example, the Competition Commission found position of such firms. Several cases illustrate how that such companies had engaged in cartels market rules enable formerly state-owned firms to or collusion in several industries that supply remain dominant and limit smaller players’ entry- critical intermediate products, and this led to Box 6 below provides a case in the energy sector. divestments and settlements involving large fines. There are also examples, such as in the steel sector, The Competition Commission has also attempted where the government agreed to impose duties to use “abuse of dominance” provisions in the on imports and this sparked complaints from competition law to discourage excessive pricing downstream users regarding their lack of access by these firms—including through “Import Parity to lower priced imports, while benefiting large Pricing” practices– but with mixed success, given incumbent companies. BOX 4 RECENT AMENDMENTS TO SOUTH AFRICA’S COMPETITION LAW South Africa has a relatively strong competition structure (including imposition of structural remedies) law framework in place. Recent amendments to the and to grant the minister enhanced powers in the Competition Law intend to allow the Competition market inquiry process. Commission to more directly target issues such as • Changing abuse of dominance provisions to make market structure and concentration. The following it easier for the Competition Commission to pursue are the key areas of the amendments: abuse of dominance cases, particularly in relation to anticompetitive behavior that put MSMEs and historically • Changes to merger review, which includes disadvantaged individuals at a competitive disadvantage. increasing the scope of ministerial involvement, • Allowing for more stringent sanctions, for example, elevating the public interest inquiry to the same increasing the maximum fine for a repeat offence. level as the competition inquiry, and adding a National Security review providing for an assessment Several of the amendments will require a clear of mergers with a foreign acquiring firm based on implementation framework to avoid raising impacts on national security by an executive body. uncertainty for firms. Amendments such as the national • Increased flexibility in the granting of security review for acquisitions by foreign firms, the exemptions to include conduct that promotes possibility of structural remedies following a market inquiry, transformation (for example, entry by MSMEs and and the undermining of the authorities’ independence from historically disadvantaged individuals). the Minister for Economic Development could all bring • Expanding the scope and remit of market uncertainty to both existing firms and new investors. This inquiries, which would allow the Competition could ultimately reduce investment in the economy and Commission to take remedial actions based on market thus have counterproductive. Both competition enforcement and implementing that in formal manufacturing industries, firms that pro-competition regulation are critical agendas face greater competition (proxied by lower markups) that could have significant effects on productivity have significantly higher productivity growth, employ growth, jobs, and welfare. Recent firm-level analysis more people, and have higher employment growth for formal manufacturing firms in South Africa finds on average.22 Meanwhile, a simulated scenario in 28 SOUTH AFRICA’S PRIVATE SECTOR: CONTEXT AND CROSS-CUTTING CHALLENGES which South Africa reduces regulatory restrictiveness to tackle cartels in four sectors—wheat, maize, in professional services suggests that growth in value poultry, and pharmaceuticals—poverty stood to added in industries which use professional services fall by 0.4 percentage points under conservative intensively would, all other things being equal, be assumptions (World Bank 2016). Based on this, between $1.4–$1.6 billion. This is equivalent to an the poverty impact per rand spent on antitrust additional 0.4–0.5 percentage points of GDP growth. enforcement was around 38 times higher than the Following enforcement action in South Africa impact of cash transfers. In Summary Factors affecting Policy options outlined in the report World Bank Group role private investment Cross-cutting constraints Business environment and investment Reform regulations in lagging areas (for Advisory support to policy: Red tape increases costs, causes example, property registration, getting streamline regulations at delays to day-to-day operations, and is electricity) and strengthen capacity for national and subnational not conducive new firm creation. There implementation at the local level. levels; address policy, are constraints in access to finance Fast-track digital platforms to speed up key institutional legal and for MSMEs. Inadequate framework for business procedures. regulatory barriers to FDI investment promotion. Develop credit scorecard innovations for generation; scale platforms MSMEs and adopt digital technology to reduce under the Digital Economy for collateral requirements. Africa program; and support Develop a movable collateral registry to include financial inclusion initiatives. a wider range of asset types. Empower a streamlined national level investment promotion agency that has the capacity to achieve sub-national coordination. Rationalize investment incentive framework to ensure competitive incentives that are automatic, transparent, and less discretionary. Limited integration into global value Raise efficiency in ports and cargo rail Advisory support to design chains and weak connectivity: South through regulation and partnerships with supply chain programs and for Africa’s conglomerates face trade the private sector. PPPs in ports and cargo rail. and logistics costs to integrate into Foster supply chain development and localization. global value chains; MSMEs struggle to integrate into supplier networks of large firms. Regulatory obstacles to competition: Establish a database of government incentives and Advisory support to Some government interventions perpetuate a framework for their design and implementation. competition authorities. legacy competition issues in selected Assess the role and mandate of industry upstream and productive sectors. associations to minimize anticompetitive outcomes. Build capacity for regulators and policy makers to embed competition principles. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 29 02 ENABLING SECTORS: DRIVERS OF LONG-TERM COMPETITIVENESS AND ECONOMIC INCLUSION Growth theory studies have provided substantial objectives and the World Bank Group’s twin goal evidence that the drivers of long-term competitiveness agenda, as outlined by the World Bank (2018a). in emerging countries include infrastructure, human capital development, political institutions and 2.1. Education and skills macroeconomic fundamentals.23 In South Africa, through the research on the SCD and complementary Overview research in the area, it is clear that there are two major factors that are impairing competitiveness, (a) the deficit Human development in South Africa lags many in skills and overall human capital development, and middle-income countries and even countries in (b) the infrastructure backlog which impacts the cost the region with lower levels of income. According of doing business in general and cost of trade logistics to the World Bank Human Capital Index, South in particular. Resolving these two issues would enable Africa ranks 126 out of 157 countries for which South Africa to attract more efficiency seeking FDI, data is available. 24 South Africa ranked below rather than resource and marketing seeking FDI. This neighbors Namibia, Malawi, Zimbabwe, Eswatini would also enable South Africa to participate more and Botswana, and far below expectations based meaningfully in regional and global value chains. on its income level (World Bank, forthcoming). These issues are not only important in driving long- The significant investments made in education since term competitiveness but will also play a critical role 1994 have not managed to raise enrolment rates in fostering inclusion. Indeed, South Africa finds itself to the desired levels. In 2016, around 14 million in a challenging situation of declining competitiveness learners were enrolled for basic education with an and signs of a middle-income trap, and a legacy of enrolment rate of 83.6 percent for the population apartheid excluding large shares of the population aged between 5 and 14. That places it significantly from fully participating in and benefitting from behind the global average of 89 percent and the mainstream economic activities. South Africa’s OECD average of 98.7 percent (World Bank policymakers must therefore find a pragmatic balance Development Indicators 2018; OECD 2018). At between improving productivity and innovation, the tertiary level, enrolment has increased by over upgrading, accessing new markets, and attracting 80 percent since 1994 (Taylor and Schindler 2016). efficiency seeking FDI on the one hand, and creating In 2015, around 2.2 million students enrolled in opportunities for the historically marginalized on the Post-School Education and Training (PSET), an other. Private investment is needed to close backlogs enrolment rate of 19 percent (World Bank, 2019b). that have resulted from public underinvestment; This is substantially behind the average global however, major barriers stand in the way. Reforms tertiary education enrolment rate of 36.7 percent in these sectors are critical for South Africa’s NDP and China’s tertiary enrolment rate, which at 42 30 ENABLING SECTORS: DRIVERS OF LONG-TERM COMPETITIVENESS AND ECONOMIC INCLUSION SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 31 percent is more than twice that of South Africa Performance and key challenges (World Bank Development Indicators 2018). Early and Basic Education South Africa’s weak outcomes on education are also a result of the poor quality of learning. On average, Only a small fraction of South Africa’s children has learners complete 9.3 years of pre-primary, primary access to early education.28 In 2016, approximately and secondary school by age 18. However, when 1.5 million children could access early childhood years of schooling are adjusted for quality of learning, development (ECD) services, with an enrolment this is only equivalent to 5.1 years compared to 5.3 rate of 75 percent among six-year-olds compared to for Botswana, 5.4 for Malawi, and 5.8 for Namibia 98 percent in OECD countries (OECD 2018). The (World Bank 2019). situation is even more dire for younger children. For instance, in OECD countries 95 percent of all five- Combined with an enterprise sector that is capital- year-old children are in school, compared to just 39 and skills-intensive, the lag in education has led to percent in South Africa (OECD 2018). Government a critical skills shortage in the labor market just aims to provide a subsidy to all children accessing as the country faces record-high unemployment ECD services in registered centers. Over the MTEF levels. Economic growth over the past two decades, period, R 1.1 billion is allocated to ensure that an while modest, has largely been driven by skills- estimated 113,889 more children receive the subsidy intensive sectors (DHET 2016). Demand for skilled (Education Year Book 2018). The lack of investment workers is high. The labor market, however, has in the early years can result in the need for remedial a surplus of low-skilled workers primarily made help later in life: by then, it will be costlier and less up of historically disadvantaged population groups effective (Kotze 2015). that find it hard to take advantage of available economic opportunities. Indeed, only 6 percent Investments in basic education have mainly come of South Africans between ages 25 and 64 have from government with good results in terms of tertiary education qualifications, in comparison expanded access. The South African government to 42 percent in OECD countries (OECD 2018). spends 6 percent of GDP on education (17 percent The World Economic Forum (WEF, 2017) reports of government expenditure), comparable with OECD that 9 percent of firms identify a lack of skills as a countries. In 2014, South Africa spent $9,200 per constraint to business. student in basic education, which compares well with the OECD average of $9,600. This has enabled This acute skills shortage—and the associated South Africa to expand no fee schools; consequently, premium on the top end of the skills distribution— basic education enrolment has improved significantly is one of South Africa’s major constraints to since 1994. The number of learners who completed competitiveness. The WEF (2018) ranks South primary basic education increased from 8.3 million Africa 84 out of 140 countries for the overall skills to 12.4 million between 1996 and 2016. There index with the ease of finding skilled employees are 24,000 public schools in South Africa; total at 50.3 out of 100 (77 out of 140 counties.) As a enrolment in these schools accounts for 95 percent result, South Africa has a skills premium. Overall, of all enrolment (IRR 2018). Around 88 percent of the average return to an additional year of schooling schools and 66 percent of learners benefit from the in South Africa is the second highest in the world no-fee funding policy. Parents who cannot afford to after Rwanda.25 Tertiary graduates in South Africa pay or who can only afford a smaller amount are earn twice as much as workers who only completed granted an exemption or reduction in fees. high school (Stats SA 2010, Monthly Earnings Survey) and experience low unemployment of just Despite these investments, there are severe backlogs 1.9 percent.26 Analysis of LinkedIn data shows that in infrastructure and resource provision. At a basic South African firms depend heavily on importing education level, these backlogs include teacher foreign skills. shortages and inadequate sanitation facilities. The World Economic Forum (WEF 2018) Global The rest of the section unpacks these issues with a Competitiveness Report ranks South Africa 107 out focus on tertiary education. A more comprehensive of 140 countries for the pupil-to-teacher ratio in review of the issues has been published recently by primary schools. With regards to sanitation, a total the World Bank Group.27 of 10,661 schools in South Africa currently do not 32 ENABLING SECTORS: DRIVERS OF LONG-TERM COMPETITIVENESS AND ECONOMIC INCLUSION have proper sanitation facilities, sometimes resulting private schools increased by 130 percent between in deadly incidents.29 Thus, while government 2000 and 2016 (256,000 to 590,000) (Institute of expenditure as a proportion of GDP is comparable Race Relations 2018). There was a similarly large to OECD countries, questions remain as to whether increase in the number of independent schools this expenditure is effectively used and well targeted, over that period, while the number of state schools particularly for previously marginalized schools declined. Between 2000 and 2016, the number of (UNICEF 2017). private schools increased by 91 percent, from 971 to 1,855 (ibid). Another challenge in South Africa’s education is the uneven quality of basic education. This has still not Tertiary Education been resolved. Around 95 percent of South African learners depend on public education—the quality of Since 1994, tertiary education has expanded which substantially lags that of private education. remarkably, with the public sector still acting South African learners constantly rank bottom as the main player in South Africa’s tertiary and second last for PISA test scores. What is even education system. Almost one million students more troubling is that South African learners are are now in the public sector, which represents a outperformed by international learners in lower big step from 500,000 enrolled students in 1994 grades. Moreover, the Southern and Eastern Africa (CHE 2016). In 2016 there were 50 public TVET Consortium for Monitoring Educational Quality colleges with 250 registered campuses for delivery (SAQMEC) III results show that peer countries with of qualifications and part-qualifications (DHET smaller education budgets—among them Kenya, 2016b). In 2016–17, government invested R 49.2 Eswatini, and Botswana—outrank South African billion in tertiary education (Education Year Book learners in reading and mathematics scores. 2017). In 2014, South Africa spent $11,000 per tertiary student, behind the OECD average of While the public sector continues to play a dominant around $16,400 (OECD 2017). At the same time, role in providing basic education, private schools in the proportion of public funding going to tertiary South Africa are seeing rapid growth as parents vote education is much lower in South Africa than in with their feet. The number of learners enrolled in most OECD economies. FIGURE 11 TOTAL SPENDING ON TERTIARY EDUCATION IN 2014 AS A PERCENT OF GDP, SOUTH AFRICA VERSUS COMPARATOR COUNTRIES 3 2.6 2.7 2.5 2.3 2.3 1.8 1.8 2 1.6 1.3 1.7 1.5 1.2 0.1 1.8 1.5 1.4 1.5 0.5 0.5 0.8 1.3 0.3 1 0.2 1.7 0.2 1.1 1.3 1.2 1.0 1.2 0.5 0.9 0.8 0.9 0.6 0.5 0 ca e ds UK a ile ea e y d A an ag ad nc lan US fri lan Ch r Ko Fra rm er n Fin hA Ca er av Ge th th ut u CD Ne So So OE Public Private Total Source: OECD and DHET. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 33 South Africa has several top-ranking universities scheme. Yet it still left many students—including but there are significant challenges in the quality of poorer ones—uncovered or under-covered. education offered in the second-tier university sub- sector and in Technical and Vocational Education In this context of poorly performing public education and Training (TVET). Times Higher Education ranks at basic level, and uneven quality and limited eight South African universities in the top ten in Africa spaces at post-school level, private institutions have and two South African universities among the top reoriented to cater to lower-income households. In 10 in BRICS countries. On the other hand, the WEF 2014, 120 independent schools charged less than R (2018) Global Competitiveness Index ranks South 15,000 a year and about 60 less than R 10,500— Africa’s quality of vocational training at 98 out 140 fairly affordable fees and lower than some former countries. Overall, WEF (2018) ranks the skills set of “Model C” public schools which continue to have South African graduates at 85 out of 140 countries. the best infrastructures and resources among public schools. Low-fee private schools range from schools TVETs were introduced as a complement to run by private companies, such as Curro, or founded university education that is better focused on the by entrepreneurs, such as Spark Schools. These low- needs of the workplace, but enrolment is lagging. In fee private schools not only service wealthy areas but 2013, only 13 percent of South African learners who are expanding to poorer communities (IRR 2018). were not in secondary school attended vocational Private schools require fewer resources to achieve training compared to 29 percent in G20 countries comparable results to public schools (van der Berg, (OCED 2018). Challenges faced by TVETs include 2017). At the tertiary level, private institutions such inadequately skilled lecturers, a lack of management as the ADvTECH Group’s Rosebank College can and leadership capacity, poor educational offer programs with a tuition of around R 25,000 infrastructure and underfunding (DHET 2010). annually. This is more affordable than some of South Consequently, there is qualification-job mismatch Africa’s public universities which can charge up to in TVETs: these institutions are not teaching the skills R 45,000 annually. that industry demands (DHET 2016). Moreover, only a third of TVET students eventually complete Barriers to private sector entry and investment their studies (World Bank, forthcoming). And finally, TVETs also suffer from some stigmatization as Despite growing enrolment at different levels, the they are seen as a distant second-best option after share of students enrolled in private higher education university (DHET 2016).30 lags other emerging countries. Only around 10.5 percent of South Africa’s PSET students are enrolled in Low tertiary enrolment rates are driven by limited private PSETs. In MENA and SSA, private enrolment access to ECD, the poor quality of basic education share is 39 percent and 32 percent, respectively. As that most South African learners receive, low of December 2017, the Register of Private Higher secondary education completion rates, and financial Education had 100 registered institutions and 27 constraints. As a proportion of total learners who provisionally registered institutions. Between 1995 start school, only 60 percent reach matric and only and 2016, the number of students enrolled in private 37 percent complete matric (van Broekhuizen et al. tertiary education institutions decreased from 2016). Ultimately, only 12 percent of the cohort of 150,000 to 90,000 students (CHE 2016). learners who started primary school enrolled for tertiary education after 12 years (van Broekhuizen Legal and administrative barriers prevent greater et al. 2016). This was partly due to learning deficits private sector participation, particularly entry by acquired in basic education (World Bank, 2019b). new higher private sector institutions and make it more difficult for existing institutions to expand. Additionally, a lack of collateral from students and For new institutions, the process for accreditation low completion rates limit banks’ interest in the is cumbersome and license conditions are stringent. student loan market. The National Student Financial For instance, private institutions must hire their full Aid Scheme (NSFAS) provided scholarships to nearly contingent of administrative and academic staff before half of students from the poorest 40 percent of being authorized to operate. Additionally, private schools during their first year of study, while only institutions are not allowed to refer to themselves as 11 percent of learners from the richest 20 percent of “universities,” even those licensed to award accredited schools received such support, making it a progressive university degrees up to a doctoral level. 34 ENABLING SECTORS: DRIVERS OF LONG-TERM COMPETITIVENESS AND ECONOMIC INCLUSION Specifically, South Africa’s complex education These stringent procedures may be stemming in part regulatory and approval system creates a barrier from the lack of trust by policymakers in the potential for private sector entry and expansion. There contribution of private institutions. In 2000, there are many quality assurance bodies, but a lack of were 323 private higher education institutions but standardized practice and requirements and a only 89 were accredited by SAQA at the time (CHE lack of coordination.31 One consequence of the 2016). There was rapid growth of private higher complex oversight and approval system is that education institutions, but the quality of teaching was the process for modernizing the curriculum and largely poor, and many were eventually discovered opening new programs seems to be overly lengthy to be unregistered “fly-by-nights” (CHE 2016). and cumbersome (Development Bank Southern Moreover, private higher education institutions in Africa 2016). It can take up to 18 months for a South Africa have been perceived as inferior to the “new” qualification to be accredited even when the big public research institutions. This is the reverse of institution is registered (SAPHE 2017). the situation at basic education level. BOX 5 INCREASING ACCESS TO QUALITY AND AFFORDABLE HIGHER EDUCATION - THE CASE OF ADvTech ADvTECH Group is one of the largest private education encounter in the workplace. This approach seems to be groups in South Africa. It is listed on the JSE with paying dividends: 86 percent of Vega College graduates a market capitalization of R 9.7 billion. ADvTECH has find employment in their field of study; 42 percent doing three business units: schools, tertiary education institutions so find employment before they graduate. and staff resourcing. In total, ADvTECH has around 92,500 students across 122 institutions. Its tertiary division is ADvTECH has positioned itself to attract students the fastest-growing segment and accounts for a quarter from different socio-economic levels. Rosebank of private tertiary enrolment with qualifications ranging College is based on a volume and value model. It targets from Higher Certificates to PhDs. Through the Independent students from low- to middle-income households. In Institute of Education (IIIE), ADvTECH offers 165 tertiary 2017, around 15,600 students were enrolled in Rosebank qualifications with a broad scope that includes accounting, College. The 2017 tuition fees ranged between R 15,000 branding, commerce, communication, culinary, design, for the most affordable qualification, a Higher Certificate in education, finance, hotel and hospitality, information Office Administration, and R 31,000 for the most expensive technology, humanities, law, management, psychology, program, the Bachelor of Information Technology in technical and vocational (TVET), and tourism. Business Systems. An equivalent qualification costs up to R 45,000 at one of South Africa’s public universities. ADvTECH’s curriculum is regularly updated, and In many cases, Rosebank College graduates are able to graduates have high employability. All new academic repay their tuition investment after working for two years. programs are developed through market research and academic benchmarking. Once the curriculum is finalized, it Through this business model, the group has achieved is shared with industry associations such as the Chartered strong growth in recent years, driven by the tertiary Institute of Business Management for endorsement. The division’s financial performance. In 2017, the group IIE has been accredited by the British Accreditation Council achieved revenues of R 4.1 billion with an EBITDA margin (BAC). Lecturers are recruited for their work experience and of 24.2 percent (see Figure 12 below). The tertiary division classes are smaller than in universities. Through its “Work accounted for 39 percent of the group’s total revenue. Integrated Learning” program, students apply hard and Rosebank College is the fastest-growing brand, proving soft skills in projects that simulate situations they would that even with a lower fee, its model is sustainable. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 35 FIGURE 12 ADvTech FIVE-YEAR FINANCIAL TRENDS Revenue Trading operating profit Cash generated by (R’m) (R’m) operating activities (R’m) 22% 1% 2% R= =2 R =3 CA G R CAG CAG 1 766 1 932 2 708 3 353 4 087 222 256 454 560 671 363 286 558 738 811 13 14 15 16 17 13 14 15 16 17 13 14 15 16 17 Source: ADvTECH Annual Report 2017, IFC (2018) and interviews with management. Recent policy developments and • Using alternative options to mobilize additional recommendations resources such as donations, contract research, consultancies, continuing education and other South Africa will need to address the challenges of fund-raising activities. enrolment, quality and completion in its education system with participation of the private sector. Improving the quality and relevance of public TVET The recently published World Bank (2019b) South institutions and employability of TVET graduates in Africa Economic Update (SAEU 12) outlines several South Africa is also critical. A review of the legal and interventions that have the potential to increase regulatory impediments to achieving a public-private tertiary education quality and enrolment in a fiscally funding model would help to make the TVET sector sustainable way. Ultimately these interventions financially sustainable. Better assessment of the can help South Africa reach the lofty goals of employability of the TVET’s existing curricula and enrolling 5.6 million tertiary students by 2030 extent of duplication between approved programs, as envisioned by the DHET (2013) White Paper. and steps to re-focus, rationalize and upgrade the The key interventions outlined in the World Bank TVET curricula, programs, and education delivery (2019b) SAEU include: mechanism (effective use of technology and open learning as appropriate) would increase graduates’ • A sustainable mix of PSET institutions and employability. TVET’s placement office need delivery modalities in private and public sector support to ensure students have increased access to to increase enrolment in a fiscally sustainable practical training, internships and apprenticeship way. For instance, expanding enrolment to by increased coordination and partnership with UNISA and giving greater consideration to private sector employers, including through public- community colleges taking the flexibility that private partnerships. they offer into account. • Strengthening quality assurance, creating Private higher education institutions are viewed closer links to the productive sectors and the by the NDP as an important component of higher labor market, and implementing performance- education, but to unlock the potential there is a based funding to encourage better performance need for a number of regulatory reforms that can from PSETs. In this regard, policy-makers encourage greater private participation. Recent could consider funding formulas, performance policy developments have been in the direction of contracts and competitive funds. increasing the role of state funding as a response 36 ENABLING SECTORS: DRIVERS OF LONG-TERM COMPETITIVENESS AND ECONOMIC INCLUSION to the “#Fees Must Fall” movement.32 Making the 2.2. Infrastructure administrative process and legal compliance easier, defining standard processing times for making Overview decisions regarding licensing, accreditation and approval of new programmes, reducing the number Many of South Africa’s infrastructural sectors continue of regulatory bodies, and improving coordination to be dominated by SOEs whose governance and between all bodies involved can reduce the barriers management challenges (see cross-cutting section) are to entry and expansion confronting the private sector. getting in the way of infrastructural development. For South Africa should also consider allowing private instance, South African Airways (SAA) has had seven institutions to award foreign qualifications that are CEOs in less than four years, has had to be bailed fully accredited in their country of origin. out several times in recent years amidst declining fiscal spaces. Other SOEs have also experienced high Greater private sector participation would ensure board and executive management turnover, perennial that the capacity of PSETS increases with minimal underperformance necessitating regular bailouts, fiscal implications. Private sector institutions have and challenges regarding the division of power demonstrated that they are often better placed to more between their boards and the various shareholder aptly align curriculum with industry trends. Increasing ministers. Another issue for corporate governance tertiary enrolment will also require South Africa to of South Africa’s SOEs is the appointment of board address the acute shortage of affordable student members and executive officials with questionable accommodation. This will go a long way in improving qualifications. And finally, it has been argued that student welfare and academic performance. There SOEs may be overstaffed, resulting in inefficiencies are several reforms that can unlock private sector and exorbitant wage bills. For energy, water, and participation in student participation, such as PPPs transportation, we discuss some of these issues in between public universities and private companies. detail in the respective sections below. FIGURE 13 PUBLIC OWNERSHIP AND SOE GOVERNANCE INDEX 6 5 4 3 2 1 0 GBR PER JPN NLD COL CHL DEU NIC BRA KOR CAN JAM SLV DOM MTL AUS DNK ISL BEL ESP HUN EST MEX AUT HND SVK NZL IRL BGR LVA FIN PRT LTU GRC ITA ISR CZE ARG SWE LUX CRI NOR ZAF CHE FRA ROU TUR SVN HRV RUS IND POL CHN Public ownership in network sectors Public ownership in other sectors Governance of SOEs Source: OECD. 2014. Limited government resources, the oversized role of SOEs through provincial and municipal infrastructure grants in key infrastructure sectors, and the limited space for (World Bank 2018). At the same time, in infrastructure private participation ultimately result in underinvestment sectors such as water, there is minimal private sector and decline in the quality of infrastructure. South Africa participation. While South Africa’s infrastructure and is expected to continue to reprioritize expenditure to fulfil logistics continue to lead Africa, ranking first in Africa fiscal consolidation, meaning significantly lower public according to the Ernest and Young Africa Attractiveness investment spending, both at the national level and Index 2018, global benchmarking shows that South SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 37 Africa has been on a decline. Between 2005 and The Doing Business 2018 report ranks South 2018, South Africa’s overall competitiveness ranking Africa at 112 out of 190 countries in terms of declined from 40 to 61 in a sample of 137 countries the efficiency of getting an electricity connection. (Global Competitiveness Report 2018). Deteriorating While the cost of getting electricity is low by global infrastructure was one of the key reasons for this standards (146 percent of GDP per capita) and same period as evidenced by infrastructure ranking there are only four procedures to get a connection, declining from 49 to 61. Electricity supply and quality it takes up to 84 days. And, while Eskom’s tariffs of infrastructure were two areas of particular concern, are below the average of high-income countries, ranking at 97 and 72, respectively. affordability remains a constraint for inclusivity and competitiveness. Against this backdrop, there is an urgent need to intensify efforts to attract private investment through Since the crisis of 2007–15, the electricity supply a Maximizing Finance for Development (MFD) has been relatively stable. However, there are approach. MFD aims to leverage the private sector and significant short-term and long-term downside optimize scarce public resources by identifying projects risks that have materialized in recent months.33 where financing can come from sustainable private Eskom’s large energy surplus of the 1990s began to sector sources that limit debt and contingent liabilities. decline when government started to expand access The approach builds on substantial cross-World Bank to rural communities and the mining sector was Group experience in working with governments to expanding thanks to a commodity boom. By early crowd in the private sector to help meet development 2008, Eskom was unable to keep up with demand goals. It is part of a broader effort to employ private and had to implement load shedding. Grid capacity sector solutions working with partners to help achieve was increased under the Integrated Resource Plan the SDGs. MFD has the potential to assist in solving through the commissioning of Medupi and Kusile several of the challenges identified in South Africa’s Power Stations. Between 2010 and 2016, the actual infrastructure challenges discussed below. net electrici energy sent-out for the country declined at an average compound rate of −0.6 percent 2.2.1. Energy (Deloitte 2017). This was on the back of declines in manufacturing and mining which reduced the The state-owned utility, Eskom, is the main supplier electricity intensity of the South African economy. of South Africa’s electricity. Distribution is shared Currently, the energy availability factor (which should between Eskom, municipalities and some other be above 80 percent) is below 70 percent. Short-term licensed distributors. Eskom is vertically integrated risks to supply include large coal generation plants and accounts for 90 percent of electricity generation that are at the end of their lifespan and have planned and all electricity transmission. The private sector and unplanned outages, while black start capacity is accounts for 5 percent of electricity generation and limited. These risks resulted in Eskom implementing plays no role in transmission and distribution. In Stage 2 of “load shedding” in June and November 2017, electricity and gas accounted for 2.2 percent of of 2018, and Stage 4 load shedding in February and GDP and 56,000 jobs and Eskom is by far the largest March 2019.34 producer of electricity in Africa (Quantec 2018). South Africa has made huge progress in expanding Performance and key challenges access to electricity. Eskom’s household electrification program provided connection to an additional The South African government has recently taken 5.7 million households between 1994 and 2014 measures to strengthen Eskom’s leadership and (Department of Energy n.d.). South Africa now has governance and begun a reduction in staff headcount. an electricity access rate of 90 percent: much higher Following cabinet reforms by President Cyril than the Southern African access rate of 31 percent Ramaphosa, government appointed a full board, a (International Energy Agency 2017). South Africa’s new CEO and a new CFO. The change in leadership is National Development Plan aims to have universal expected to increase accountability and transparency access by the year 2025. within the state-owned utility. In December 2018, Eskom announced that it would reduce senior While access to electricity has been expanded, South executives from 21 to nine and reduce management Africa lags in the efficiency of new connections. by 330 as part of a cost-reduction strategy. 38 ENABLING SECTORS: DRIVERS OF LONG-TERM COMPETITIVENESS AND ECONOMIC INCLUSION After years of delays in implementing measures worth of guarantees for its debt, and R 218 billion to unbundle electricity transmission, President had been utilized by 2017 (Deloitte 2017). In the Ramaphosa announced that Eskom would be 2019 budget speech, the Minister of Finance, Tito unbundled into three divisions focused on generation, Mboweni, announced that over the next three years transmission, and distribution. In 2011, the the National Treasury would set aside R 69 billion Independent System and Market Operator (ISMO) to help restructure Eskom. bill was drafted with the intention of creating a single buyer model. Under the ISMO bill, a state- Lower than requested tariff increases mean that owned company acts as the buyer of electricity Eskom’s revenue will be low, further undermining from generators and is responsible for transmission, the utility’s financial position. Under the Multi- functions currently being performed by Eskom. Year Price Determination (MYPD) framework, ISMO is meant to facilitate the introduction of more the National Energy Regulator of South Africa private players in the electricity generation sector (NERSA) approves Eskom’s tariff increases on the through the establishment of a non-conflicted buyer basis of a rate-of-return and allowable revenue. and dispatcher of electricity. ISMO has been under This results in low tariffs when sales have been discussion for the last eight years without being over-forecasted. While the real electricity price passed in parliament. President Ramaphosa, during increased by 147 percent between 2007 and 2016, his State of the Nation Address in 2019, announced Eskom’s tariffs are still below long-run marginal that Eskom would be restructured to establish three cost (Deloitte 2017). Moreover, high tariffs would entities to isolate costs and enable fund raising. It have implications for households and the overall is still unclear how exactly the restructuring will competitiveness of South Africa’s economy. In actually be implemented. April 2019, NERSA approved a 13.87 percent average price increase, effective on April 1, 2019 Eskom’s balance sheet remains fragile, with a debt for Eskom direct customers and a 15.63 percent of R 419 billion as of November 2018. Cash flows average price increase for municipalities, which will are insufficient to fund heavy maintenance costs, be implemented on July 1, 2019. large capital expenditures and debt repayments. Eskom had a loss of R 2.3 billion in 2018. Eskom Eskom’s financial position suffers from increasing has a large wage bill and increasing maintenance municipal arrears. Since 2013, municipal payment costs due to aging infrastructure. Poor credit rating, decreased from 97 percent to 86 percent (Eskom challenges in governance, and improper expenditure Holdings 2017). As of November 2018, municipalities restrict access to debt financing. In fact, Eskom owed Eskom a total of R 17 billion. Eskom has now accounts for government’s largest contingent repayment contracts with defaulting municipalities; liability—the state-owned utility’s precarious however, these agreements are often not honored financial position was one of the reasons for South (ibid). Furthermore, NERSA’s approach of applying Africa’s sovereign debt downgrades. the same percentage increases in price across all municipalities is regressive, which means that lower- Eskom has recently received a number of implicit percentile municipalities with fewer resources and subsidies from government. Government granted less capacity have payment problems. Eskom a R 60 billion shareholder loan which was converted to equity in 2015. In 2016, a And finally, other energy sectors in South Africa are further R 23 billion was injected (Deloitte 2017). characterized by substantial competition restrictions. Government has also granted Eskom R 350 billion This is discussed in more detail in Box 6 below. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 39 BOX 6 COMPETITION RESTRICTIONS IN OTHER ENERGY SECTORS Gas: energy prices being regulated. Moreover, the CCSA has Market rules in the piped gas sector have reinforced made findings of anti-competitive behavior by Sasol in the Sasol’s dominance in the sector and limited smaller gas sector, where Sasol had engaged in price fixing and players’ entry in downstream gas supply markets. market allocation of piped gas. There are currently only two sources of piped gas supply into the South African market, both of which are supplied Fuels: by Sasol Gas. Sasol is also the lead player in the gas A range of regulations create barriers to entry and transmission/distribution markets and, according to sector competition in fuels markets (such as petroleum regulation, has exclusivity over distribution in areas covered and LPG). The government regulates wholesale margins by its distribution network (Gauteng, Mpumalanga, Free and controls the retail price of petrol, based on import State, and KwaZulu-Natal). Moreover, a lack of mandatory parity price formulas, and retail licenses are limited. In access for third parties to Sasol’s distribution network LPG, four firms collectively account for more than 90 makes it difficult for new entrants in the trading market percent of the wholesale market and the Competition to supply gas customers. And while there is a mandatory Commission identified various barriers to entry in a third-party access to transmission pipelines, this is only the market inquiry into the sector.35 In addition, pricing of case for uncommitted capacity, which restricts access from LPG is set by the Department of Energy (DoE) – through independent traders. This situation has severely limited the setting of maximum refinery gate price (MRGP) entry of independent suppliers into the downstream gas and the maximum retail price (MRP). According to the trading market. Competition Commission, the current MRGP framework disincentivizes refineries from prioritizing LPG production Sasol’s vertical integration between transmission, as compared to other petroleum products, which impacts distribution and offtake of piped gas may further limit negatively on the security of supply for LPG. In the fuel its incentives to voluntarily make capacity available pipeline sector, questions regarding the independence to independent traders. Downstream manufacturers of the regulator NERSA towards Transnet’s pipeline have complained that the structure of the market provides transport operations were raised after a license for a Sasol with an advantage in downstream manufacturing, new pipeline was granted to Transnet despite a private given its favorable access to inputs, despite maximum gas sector bid at a lower tariff rate. make up 15 percent of electricity supply compared Recent policy developments and to South Africa’s 5 percent. Greater participation by recommendations the South African private sector may in part have been hindered by electricity tariffs that do not reflect Government has had substantial success in enabling marginal cost. Moreover, since 2016, Eskom has greater private sector participation on the supply side, failed to sign the remaining IPP contracts for Bidding which has also helped to diversify the energy mix. Windows 4 and 5 of the REIPPP.37 The failure to sign Under the IRP, the Renewable Energy Independent reflects Eskom’s ability to exercise its market power Power Producer Procurement Programme (REIPPPP) by denying IPPs access to an essential facility—the resulted in generation capacity of over six gigawatts transmission network - which risks to reverse gains being procured from the private sector in recent made through the REIPPP described above. In this years. A competitive bidding process over the five regard, the conflict of interest inherent in Eskom’s consecutive bidding windows has seen the price of vertically integrated structure and pricing power, renewable power decrease substantially.36 could be key inhibitors to private sector investment. However, South Africa is still lagging behind The Integrated Resource Plan (IRP) which outlines other developing regions in terms of private sector South Africa’s long-term energy plan is being updated. participation in electricity generation. In Sub-Saharan The first IRP was published in 2010 and was effective Africa, East Asia and the Pacific, private utilities until 2030. The draft Updated IRP would extend 40 ENABLING SECTORS: DRIVERS OF LONG-TERM COMPETITIVENESS AND ECONOMIC INCLUSION the coverage period to 2050. Updates to the IRP in South Africa’s transport infrastructure across all include changes to key input assumptions regarding modes as evidenced by deteriorating quality. South technology costs, electricity demand projection, Africa ranks 64 on the World Economic Forum’s fuel costs, and Eskom’s existing infrastructure 2016–17 infrastructure index, second in Africa to performance and additional commissioned capacity. Mauritius, but 10 years ago, South Africa ranked 49. Under the new assumptions, a slower pace of new Transportation in South Africa currently accounts project development would suffice to meet the for 5.2 percent of GDP and more than a million jobs capacity objectives of 2030. Furthermore, planned (Quantec; Quarterly Labour Force, April 2018). Key capacity additions will be implemented almost subsectors include: entirely by the private sector with solar, wind, and gas-fired power representing the bulk of the new • Water: While transportation by water only supply. Further consultations on the draft IRP are accounts for 1.2 percent of total transport GDP, expected in 2019 to address the concerns from this transportation mode is key for trade. Ninety stakeholders including social partners, and after percent of South Africa’s goods are traded by that it will be resubmitted for cabinet approval. The sea through eight commercial ports spread delays have been a source of policy uncertainty. through the country’s long coastal line and 16 port terminals. Bringing in more renewable and gas-fired generation through IPPs and Embedded Generation will help • Land: Rail and road account for 88.5 percent South Africa reach its carbon footprint objective. of transportation GDP. South Africa has 30,400 Currently, 92 percent of South Africa’s power kilometers of track rails servicing passengers and generation is based on coal. While the draft IRP freight. Passenger rail has 585 train stations update proposes to procure an additional capacity and a total fleet of 4,735 coaches. South Africa of about 16 gigawatts from renewable sources until also has a high-speed train, the Gautrain. It 2030 and despite the planned decommissioning of connects Pretoria, Johannesburg, and OR Tambo about 12 gigawatts of coal-fired generation, coal is International Airport through 80 kilometers of likely to remain the dominant source of electricity rail, and carries around 60,000 passengers daily. generation for South Africa for the foreseeable future. Gautrain was conceived in 2006, under Africa’s There is therefore a need to foster more private sector largest PPP at R 25.2 billion. South Africa participation so that South Africa can reach the IRP’s also has the tenth-largest road network in the objectives of reducing the coal-based electricity to world, stretching around 750,000 kilometers. less than 20 and 30 percent by 2040 and 2050, Most South Africans have access to public respectively. In addition to the continuation of the buses and minibus taxis. Because of its size and REIPPP procurement program, gas-fired IPPs and widely dispersed economic centers, land freight liquified natural gas imports from Mozambique can transport dominates South Africa, accounting play an important role in diversifying the generation for 85 percent of freight. mix and balancing the intermittent supply from solar and wind power. • Air: Air’s share of transportation GDP is 10.2 percent. South Africa leads African countries on 2.2.2. Transportation available airline seat kilometers per week. There are nine major airports in South Africa; three Overview of these (O.R. Tambo in Johannesburg, Cape Town, and Durban’s King Shaka) have close South Africa leads African and many emerging to 35 million passengers and 375,000 aircrafts markets in transport and logistics infrastructure, but annually (Transport Yearbook 2015–16). In quality is deteriorating. South Africa is ranked 29 out 2017, over 12 million passengers travelled in 167 countries (third among the upper-middle income and out of South Africa by air (Quantec 2017). countries in the sample) in the World Bank mean LPI for the period 2012–18 with the best global performer The state is responsible for most of South Africa’s outscoring South Africa by only 22 percent. The transport infrastructure and is vertically integrated Skytrax 2016 World Airport Awards ranked South along value chains, apart from public road transport. Africa’s three major airports as the top three in Public and private entities operate South Africa’s Africa. Despite these accolades, there are problems ports under a publicly owned and regulated ports SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 41 system. Transnet is vertically integrated along and exclusionary behavior seem to have limited new the entire cargo/freight logistics value chain and entry and competition in air transport. State-owned dominates the value chain from the landing of carrier SAA has suffered losses over the past decade cargo or liquids in South African ports to their final from which it has been repeatedly bailed out with destination. Passenger rail is maintained through the government funds and guarantees. Despite various state-owned Passenger Rail Agency of South Africa. attempts at market entry by private operators after In air, the state owns South African Airways (SAA) deregulation in 1991, only one of the 11 private and three domestic airlines. Through the Airports airlines that entered the industry between 1991 Company South Africa (ACSA), the state owns and and 2012—SA Airlink—is still in operation. 38 operates the nine principal airports, including the Additional formal and informal constraints that three main international airports. The structure in potential market entrants have faced include delays road transport is different. While road infrastructure in obtaining licenses as well as opposition from is primarily owned and maintained by government, existing domestic airlines. A 25 percent cap on privately owned minibus taxis dominate public road foreign equity in the domestic transport sector is a transport. Road freight also consists of a number of further deterrent for market entry that ultimately private players. prevented an international LLC from entering the South African market. Finally, South Africa’s bilateral air transport service agreements may Performance and key challenges have further protected SAA’s position on certain routes. According to the WTO’s Air Liberalisation Underinvestment and institutional factors have Index (ALI), South Africa’s bilateral air services led to a deterioration in transport infrastructure. agreements are more restrictive than those in Brazil, These factors include declining capacity in the India, Ghana, Nigeria, Europe, and the United management of SOEs and slow responsiveness States, although they are less restrictive than China to updating regulations (World Bank 2018). In and Russia.39 road transport; opposition to the South African National Roads Agency’s e-tolling system— High prices are an issue across several modes of which has resulted in diminished opportunities transportation. For example, in public road transport, for private financing of sections of the national estimates suggest that those who commute spend road network—and an increase in public financing as much as 40 percent of their gross earnings on requirements for road provision and maintenance transport because of the cost of gasoline, which (World Bank 2018). has been driven up by taxes (World Bank 2018a). Expensive commutes make it more difficult for the Across modes, substantial barriers to competition and poor to access urban jobs and raise their reservation private entry in South Africa’s transportation sector wage—that is, the wage that makes it worthwhile to are a result of a lack of competitive neutrality and work, given the associated costs. Another example pro-competition regulation. For example, state-owned is ports, where South Africa’s fees are 88 percent Transnet not only acts a ports operator but also has higher than the global average. Moreover, the design a mandate to carry out regulatory functions in the of rail continues to favor bulk transportation; tariff sector through the National Ports Authority (one of structures put cargo transporters at a disadvantage. its divisions). This gives rise to a conflict of interest As a result, non-mining businesses face high tariffs and can put rivals at a disadvantage. A combination and often must rely on road freight (ibid). of vertical integration and dominance (reinforced by regulations that restrict competition) have created For road freight transportation, cost is more an conditions where large SOEs in the transport sector issue of regional administrative inefficiencies and may have been able to abuse their dominance. For input prices. The price gap between South African example, SAA has previously been fined by the domestic-road-transport rand per ton-kilometer (R Competition Commission for excluding its rivals. 0.65/tons per kilometer) and the best practice rand Meanwhile, Transnet is currently being investigated per ton-kilometer (R 0.57/tons per kilometer) is by the Competition Commission for excessive pricing relatively small. But it has a substantial impact on and exclusionary practices in its ports business. total freight costs. Inefficiencies increase prices on cross-border routes by between 10 and 30 percent, A combination of informal and formal advantages as well as compromising the quality of some goods 42 ENABLING SECTORS: DRIVERS OF LONG-TERM COMPETITIVENESS AND ECONOMIC INCLUSION and reducing the number of trips per month that involvement. Greater private sector participation transport operators can complete. would also require government to address how bailouts to SOEs distort markets. Moreover, a single Across all modes of transport, South Africa lags in economic regulator for all modes of transport has the the efficiency of cross-border trading. The Doing potential to reduce regulatory fragmentation and so Business 2018 report ranks South Africa 147 out of enable private sector participation. Fast tracking the 190 economies in terms of trading across borders. implementation of the Single Transport Economic In 45 of the 115 economies exporting by sea, border Regulator (STER) could help with this issue. compliance can be achieved in 48 hours or less. The average time to comply with these border procedures As evidenced by the Gautrain success story, PPPs can across the four South African ports is almost three enable South Africa to rapidly upgrade transport times the average for the high-income OECD infrastructure in a fiscally sustainable way. In May economies that trade by sea, and 50 percent longer 2017, some 19 new Gautrain stations were in the than the average for the BRIC economies (Doing pipeline by May 2017 with the Gautrain Management Business South Africa Subnational 2018). These Agency planning to extend the rail route by 150 higher border compliance times in South Africa kilometers over the following 20 years. PPPs have stem from inefficiencies in handling. Handling time the potential to play a key role in implementation of is more than twice the overall average for trading the expansion of Gautrain and other infrastructure across borders (by land and sea) in all 190 economies. expansion projects. Inefficient cross border trading procedures impair competitiveness and regional integration. 2.2.3. Water Overview Recent policy developments and recommendations South Africa has improved water provision over the past two decades, but the level of inequality South Africa’s transport policy has been hampered in access is still concerning. While 89 percent of by lack of coordination between tiers of government South African households have access to piped or and other related infrastructure projects such as tap water in their dwellings either off or on-site housing. In its White Policy Draft, the Department (Stats SA 2018), 36 percent of households do not of Transport (DoT) recognizes that the responsibility have access to a reliable water supply (Water & for infrastructure used by different transport Sanitation Master Plan 2018). Moreover, 22 percent modes is fragmented between different government of households that depend on municipal water departments and parastatals and between different reported water interruptions that lasted more than levels of government. This has led to “mismatches” in two days at a time. In the agricultural sector, where infrastructure provision, inefficiencies in operation, use accounts for 61 percent of national water use, and duplication of facilities with consequent sub- around 70 percent of South Africa’s commercial optimal utilization. The DoT thus aims to create farms use 95 percent of the water allocated to the meaningful and accountable transport authorities sector. The national Gini-coefficient of water access at a provincial, municipal or city level. Such is 0.36 (Cole et al. 2018). structures need to enhance coordination between different modes of transport and better coordination Most South African dams are privately owned, but between spatial planning and transportation issues water storage and supply mainly lie with government. to overcome apartheid’s legacy of exclusion. There are more than 5,000 registered dams and government is responsible for 320 large dams, Changes in regulation and levelling the playing field which account for 93 percent of the country’s total have the potential to enable greater private sector storage capacity. A total of 144 municipalities are participation. In the White Paper Draft, the DoT water services authorities, meaning that supply is recognizes the need for private sector involvement their responsibility. South Africa’s four river basins in closing the gaps in infrastructure investment that contribute 45 percent of the country’s total river as public finances are inadequate. The DoT aims flow are shared with neighboring countries. Water to improve business fundamentals and to remove contributes 0.34 percent to GDP and employs over regulatory uncertainty to enable private sector 15,000 workers (Quantec 2018). SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 43 Performance and key challenges declined and a third of remaining wetlands are in poor condition. Around 44 percent of South Forecasts show that South Africa could have Africa’s treatment works are in poor condition; 11 a demand-supply deficit of around 2.7 to 3.8 percent of these are completely dysfunctional. The billion cubic meters annually by 2030. This is a capital replacement value of the existing water and short-fall of around 17 percent of available and sanitation infrastructure is estimated at R 1,362 surface and ground water. The demand for water billion. Its current book value is R 584 billion: a is increasing because of population growth and 57 percent asset depreciation. Additionally, there rapid urbanization. Households account for 27 is a significant underinvestment in infrastructure percent of national water use; average domestic maintenance. This has resulted in an accumulated water use is around 237 liters per person per day backlog in refurbishment of about R 53 billion. while the global average is 173 liters per person per Around R33 billion of annual capital funding must day. This, coupled with the fact that agriculture—a be closed over the next 10 years if the country is to water-intensive sector—is a priority growth area for achieve water security. the government, will only increase pressure on the demand side. Supply, meanwhile, is stagnant and Underinvestment is driven by poor governance, non- has downside risks. payment and high levels of non-revenue water. In 2017, municipalities owed the DWS R 10.7 billion for The downside risks to supply are significant and the delivery of bulk water services. Moreover, South include technical and institutional factors. More Africa’s budget allocations are geared towards new than half of South Africa’s municipalities have infrastructure projects at the expense of maintaining limited technical staff. On the labor demand side, current infrastructure and incentives to new capital municipalities are failing to appoint the appropriate projects are larger than those for maintenance. South professionals; on the supply side there are significant Africa has high levels of non-revenue water, in gaps in skills. For instance, there are fewer than 100 part due to municipal non-revenue water which is dam safety approved professionals in South Africa; currently at 41 percent. The average physical losses more than two-thirds of them are older than 60 in municipal systems are estimated to be around 35 and nearing retirement. In terms of institutional percent, against a global best practice in the order capacity, a third of the country’s municipalities are of 15 percent. Industry, mining, power generation, regarded as dysfunctional. Government has listed livestock, watering and nature conservation and 27 priority district municipalities which it has afforestation make up the remaining 12 percent of identified as being particularly dysfunctional and water use. requiring specific intervention. As a result of myriad institutions with a suite of Recent policy developments and functions, South Africa’s water supply chain is recommendations complex and inefficient. The Department of Water and Sanitation (DWS) is responsible for water and Through the National Water and Sanitation sanitation policy, regulation of water supply and Master Plan (NW&SMP), government has sanitation provision, oversight of water sector highlighted the need to optimize the water mix. institutions, water resources planning, as well as Supply is currently dominated by surface water. the operation and maintenance of 342 large dams. Groundwater will become increasingly important: Municipalities are responsible for supplying water it will not experience the increased evaporation to households and the South African Bureau of that will hit surface water as the climate shifts Standards (SABS) sets several water quality standards and temperatures increase. The total nationally for the sector, including drinking water standards. accessible groundwater potential is about 4,500 Applying for a water use license in South Africa can million cubic meters per year, of which between take up to 300 working days. 2,000 and 3,000 million cubic meters per year is being utilized. With the cost of desalination Other significant supply downside risks include decreasing due to advances in technology, ecological decay and infrastructure underinvestment. desalinated water is increasingly economically The ecological condition of many of South Africa’s viable. While the use of desalinated sea water is main rivers has deteriorated. Wetlands have also only financially feasible for coastal areas, it will 44 ENABLING SECTORS: DRIVERS OF LONG-TERM COMPETITIVENESS AND ECONOMIC INCLUSION free up surface and groundwater for upstream and/ & Sanitation Masterplan 2018). Frameworks that or inland use where water is currently transferred facilitate trading water rights will allow users or released for use in coastal areas. with surplus to trade with users with deficits and improve the equality of access to and efficiency of Various measures are in place to increase efficiency water use. These frameworks require buy in and of use. For instance, the DWS has reduced wastage capacity from local government. There are several by implementing the Water Administration System cases that South Africa can explore and scale for (WAS) Release Module at several irrigation schemes national best practices. to facilitate the release of the correct amount of water from a source according to demand. Some 2.2.4. Leveraging Capital Markets to address municipalities have done well to achieve water demand the infrastructure gaps targets, while others have lagged behind. In terms of domestic use, the government aims to reduce the Overview average domestic consumption to 175 liters per person per day by 2025. Government has also highlighted the South Africa has a relatively well-developed and need for a focus on water use efficiency, the quality sophisticated financial sector. Figure 14 below shows of water and sanitation fittings and the potential for the financial assets distribution among various types rainwater harvesting in low income areas. of financial subsectors. In 2016, total financial sector assets amounted nearly 300 percent of GDP, and South Africa should strengthen frameworks to the market capitalization of the equity and bond facilitate trading water rights, particularly in the markets stood at 322 percent and 55 percent of GDP, agricultural sector. Lack of access to water is one respectively, suggesting a financial depth in line with of the key constraints for emerging farmers (Water advanced economies.40 FIGURE 14 DISTRIBUTION OF FINANCIAL ASSETS IN FINANCIAL INTERMEDIARIES IN SOUTH AFRICA Per cent 45 40 35 30 25 20 15 10 5 0 2001 2003 2005 2007 2009 2011 2013 2015 SARB Banks Insurance companions Pension funds Public financial enterprises Other financial institutions Source: OECD. 2014. The level of market capitalization in South Africa as a share of market capitalization (approximately is consistent with a high degree of sophistication 0.4 percent in 2013). Sovereign bonds accounts for of financial market intermediation in the country. nearly 50 percent of the total value of debt listed in This has laid the ground for South Africa to consider JSE, while 48 percent accounts for private domestic becoming a regional financial hub. However, the debt, and the rest in foreign debt. Johannesburg Stock Exchange (JSE) stands behind developed markets in terms of value of traded equity Commercial banking remains the dominant source SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 45 of funding in South Africa, despite non-bank financial of sectors and projects (dominated by the successful institutions (NBFIs) holding the largest proportion of Renewable Energy Independent Power Producer financial sector assets. NBFIs account for about twice Program, REIPPP), with financing provided by a the assets held by the banking sector—a higher level handful of infrastructure funds and instruments. than in other emerging markets. Pension funds, long- Furthermore, investments in the REIPPP sector to term insurers, and other financial institutions (OFIs) date have been largely confined to equity investments such as Unit Trusts or Collective Investment Scheme, through specialized asset managers, as debt-financing are the part of the NBFIs that contributes the most to has been dominated by the local banks which have the South African financial sector, accounting for two- relationships with sponsors and the highly technical thirds of total financial assets. This is unusually large project and infrastructure financing capabilities. for an emerging market.41 In particular, pension funds and long-term insurers assets represent approximately In a global context, institutional investors have 110 percent and 64 percent of GDP respectively, increasingly emerged as ideal candidates for providing holding a large portion of market liquidity, as their long-term debt financing given regulatory tightening funds accounted for approximately 41 percent of and costly capital commitments for infrastructure financial sector assets and 78 percent of NBFIs assets finance for banks under Basel III, as well as the in 2016.42 NBFIs hold a substantial portion of their natural match for institutional investors in terms of assets in financial institutions through money-market their long-term liabilities. funds, exposing banks to high liquidity risks in case of a sudden large withdrawal. Recent policy developments and recommendations Performance and key challenges The new Financial Sector Regulation Act (FSRA) South Africa faces challenges in long-term finance, approved in 2017 is one of the most important reforms especially in the infrastructure sector. Weak economic in the last 30 years.43 It aims at aligning the South growth is making it more challenging for public African financial sector regulation to international capital to address the substantial infrastructure best practices by establishing a Twin Peaks regulatory financing gap. The falling sovereign credit rating, system for South Africa. The approved regulatory stricter BBBEE codes, capital pressure on banks model assigns a formal financial stability mandate because of Basel III implementation, and increasing to the SARB and creates two separate regulatory policy uncertainties caused by the election cycle bodies: Prudential Authority and Market Conduct pose further challenges to long-term finance and the Authority. The implementation of the Twin Peaks competitiveness of South Africa’s capital markets model will unleash additional regulation amendments in the near- to mid-term. Corporate bonds have (for example, the Financial Markets Act, Insurance decreased their importance in the bond market bill, and so forth), and an intensive institutional since 2009, accounting for only 12 percent of total strengthening agenda both for the public and private bonds and notes outstanding in South Africa in financial sectors. Likewise, reforms are expected to 2015. In addition, with a significant exposure to have a positive impact on financial stability as they contingent liabilities, and with government debt reduce implicit contingent liabilities from the banking projected at 52.6 percent of GDP by the end of 2017, sector, moving towards international standards. fiscal resources are less than sufficient to continue supporting infrastructure finance. Financial Markets Act review: The National Treasury, with support from the World Bank, has developed a Most current infrastructure financing is conducted policy paper that will serve as baseline to prepare a through the banking sector to project finance vehicles Financial Markets Act Amendment Bill for submission or directly to state-owned enterprises. The large to Parliament. The process is anchored in the need exposure of banks to such projects has converted for harmonized frameworks that incorporate into a limitation, since banks can no longer carry international standards and principles. One of the key this burden due to Basel III requirements regarding findings from investor feedback—beyond the scope of the net stable funding ratio (NFSR). Institutional legal considerations—was the lack of transparency investment in infrastructure so far has been limited and governance around debt issued by SOEs. in scale and scope, covering a relatively narrow range Ongoing reform of critical SOEs, such as Eskom, 46 ENABLING SECTORS: DRIVERS OF LONG-TERM COMPETITIVENESS AND ECONOMIC INCLUSION are complementary for the infrastructure component NT with the ability to assess fiscal commitments and could have a significant impact on capital market and risks and quantify the impact of infrastructure development, as many SOEs are listed and issue bonds. investments on the yearly budget and the MTEF. New governance and institutional frameworks As evidenced by the REIPPP sector, the government are needed to implement the Infrastructure is capable of rolling out a pipeline of well-structured Fund initiative for large-scale, priority projects infrastructure projects. Efforts in this sector could and to mobilize more private sector financing be scaled up considerably and replicated in other in infrastructure. The World Bank is providing sectors. However, investment guidelines and technical assistance to the National Treasury through amendments to investment rules (Regulation 28) donor trust funds to (a) design the most efficient are key policy considerations. Although most of institutional division of roles and responsibilities the pension sector is not currently restricted by between the entities involved in infrastructure policy Regulation 28 asset class limits, the largest funds are and implementation (Presidential Infrastructure hitting up against unlisted or alternative investment Coordination Commission [PICC]), relevant exposure. Working with the FSCA, the report will departments in the National Treasury (NT), (b) explore the possibility of creating a specific asset strengthen the institutional capacity of the public class covering infrastructure investment. This sector entities involved, and (c) capacity building would, in addition, provide direction and support and development of methodologies to provide the for smaller funds to move into the asset class. In Summary Factors affecting Policy options World Bank Group role private investment outlined in the report Enabling sectors Education and skills: Enrolment and Explore alternative ways to optimize resources Advisory support to reform completion rates are low. Participation allocation to higher education institutions TVET curriculum, strengthen of the private sector is relatively low such as performance contracts, research management, improve governance, due to legal and administrative barriers. contracts, and encouraging fundraising. and develop framework Raising quality of TVET education is Reform the compliance framework for private regulations to encourage greater challenging. Education infrastructure institutions by reducing the number of regulatory private sector participation. investment is backlogged. bodies and relaxing stringent regulations. Potential IFC investment in private Encourage TVETs to partner with industry, higher education institutions and to increase relevance to firm needs, and student accommodation. mobilize resources. Increase investment into education infrastructure through reforms to PPP framework. Infrastructure Energy: Significant short-term Continue to strengthen the governance Advisory support to support cost supply risks result from technical and management of Eskom, including minimization mechanisms for vulnerabilities and limited generation through unbundling. Eskom, embedded generation, capacity. New power connections are Bring in more IPPs and encourage embedded and mobilization of a broad inefficient. Eskom’s balance sheet generation to leverage the decreasing cost base of long-term domestic and is fragile, and its payments are in of renewable energy (for example, in solar institutional investors in IPPs, arrears. There is also a greater risk and wind) and diversify the energy mix. building on the REIPPP program. for anti-competitive outcomes due to Improve payments through net metering Potential investment into the presence of dominant firms and and smart meters. renewable energy and embedded SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 47 Factors affecting Policy options World Bank Group role private investment outlined in the report the high degree of vertical integration. Publication of refinancing guidelines for generation. REIPPP program. Transportation: Infrastructure is Improve governance of SOEs such as Transnet Advisory support to reform the deteriorating due to underinvestment, and SAA. governance of SOEs, improve pro- barriers to private investment, and Introduce pro-competition rules and a competition rules in segments poor management of SOEs. Sector framework for competitive neutrality between where SOEs operate, ensure regulation is also restrictive of private firms and SOEs in markets where both competitive neutrality between competition, especially in rail and air compete. public and private firms, and transport. Regulatory and financial In the longer term, consider how SOE activities foster PPPs. advantages are granted to SOEs can be refocused to sectors where the private through government bailouts, and sector is unable to operate efficiently. regulatory functions. Water: Multiple institutions are involved Reform the governance system to increase efficiency. Advisory support to introduce in the sector, resulting in a complex Continue to strengthen efficiency of water use. international best practices for and inefficient water supply chain. A Strengthen the framework for trading water rights. reducing non-revenue water, supply deficit is expected because of Diversify the use of water by bringing in more reforming the framework for technical and institutional factors and ground water and desalination. governance, trading water rights, underinvestment. High levels of non- Foster more PPPs. supporting more PPPs. revenue water. Possible IFC investment in municipal water infrastructure projects. Capital markets for infrastructure Address regulatory constraints preventing new Advisory support to modernize finance: Challenges include limited entrants in the domestic capital markets. the Financial Markets Act, provide competition, high costs, regulatory Upstream policy reform to deliver infrastructure upstream support to ensure limits to adopting new technologies, projects that are “market ready.” a viable and bankable project lack of viable project pipelines, Create opportunities for long-term domestic and pipeline, identify pilot transactions, limited vehicles for co-investing, and international institutional investors. create capital market solutions opportunities confined to equity (local to enable refinance for IPPs, and banks dominate debt financing). mobilize a broader base of long- term domestic and institutional investors into PPPs. Potential IFC demonstration transaction co-investing with domestic and international long- term institutional investors. 48 DEEP DIVES SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 49 03 DEEP DIVES 3.1. Agriculture and agribusiness Challenges to smaller suppliers include the lack of deep dive economies of scale, a shortage of skills, an inability to consistently supply continuous, high-quality Agricultural development is a priority sector because agricultural products, and limited access to finance of its economic impact, particularly in rural areas, and (World Bank 2018a). Furthermore, there is a trend backward and forward linkages to other industries.44 towards consolidation in the industry with several Although agriculture accounts for only 2.5 percent mergers taking place. This consolidation increases scale of national GDP, it is an important source of jobs economies but may also lead to lower competition in and incomes, especially in rural areas. According to the market.46 With notable exceptions, especially in the South Africa’s National Development Plan (NPC fruit sector and for select products such as maize, the 2012), the government aims to create 1 million new industry overall remains relatively poorly integrated jobs in the sector by 2030. The country is also a into the global food supply chain; this is partly due major food producer; exports of agricultural goods to distance but also because it lacks phytosanitary have increased from $4.4 to $9.9 billion per annum certifications, which are necessary for exporting, for over the past decade. Agriculture and agri-processing key markets.47 have strong linkages with the manufacturing sector, which sources many of its intermediate inputs, This deep dive shows how South Africa can create indirectly creating up- and downstream employment more and better opportunities—especially for opportunities (see CCRED 2018). smallholders and new entrants—that enable them to access competitive commercial value chains. Many of But the sector faces several vulnerabilities which South Africa’s core export products have substantial are critical for inclusion. South Africa’s agriculture unmet potential. Although agribusiness is already one sector is characterized by a strong dualism. Production of South Africa’s most dynamic sectors, addressing and exports are driven by a small number of large, constraints could unlock additional investment. capital-intensive, commercial farms. Smaller amounts Tackling the decline in trust between the private are produced by about 350,000 emerging farmers sector and government will be central to this. Overall, (that is, predominantly black farmers aiming to business confidence has declined in the last year. This expand to larger-scale commercial farming). These was in part driven by the renewed debate on amending are poorly integrated into the agribusiness value Section 25 of the Constitution on property rights— chain of corporate agri-food businesses. Moreover, which includes a clause allowing for expropriation production is still concentrated in lower-value and without compensation—which was adopted by the less labor-intensive crops despite substantial growth in National Assembly in December 2018. exports of high-value fruit. As such, integrating more emerging farmers into value chains and creating better This deep-dive is structured as follows: Section 2 linkages for smaller agri-processing firms can create provides an overview of the sector, including global more jobs, particularly in rural areas where poverty trends and their implications for South Africa, key and unemployment rates are higher.45 features of the South African agribusiness industry, 50 DEEP DIVES and a review of the policy and institutional framework on citrus and yellow maize. A cross-cutting markets for agriculture. Section 3 discusses six leading and competition diagnostic (Nyman 2018) and constraints to greater investment. These are: (a) an an assessment of impacts of the 2016–17 El Niño enabling governance framework, (b) more affordable (Ukaejiofo 2018) were also carried out. Section 4 access to finance, (c) a lack of relevant skills and concludes with recommendations to help address these capabilities, (d) uncertainty over land and water constraints, including what the World Bank Group can rights, (e) climate change and water scarcity, and (f) do to support South Africa. The analyses in Sections barriers to competition. Section 4 concludes with 3 and 4 are informed by background value chain recommendations to help address these constraints, studies on citrus and yellow maize.48 A cross-cutting including what the World Bank Group can do to markets and competition diagnostic (Nyman 2018) support South Africa. The analyses in Sections 3 and and an assessment of impacts of the 2016–17 El Niño 4 are informed by background value chain studies (Ukaejiofo 2018) were also carried out. FIGURE 15 AGRIBUSINESS CONFIDENCE INDEX Index 70 65 60 55 50 45 40 35 30 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Jun-18 Source: AgBiz. Sector overview areas by 2030, and nearly 80 percent by 2050. This will increase demand for food that can be easily stored and transported, for example, processed food Global trends and their implications for and standardized agricultural output. However, this South Africa opportunity will further strain South Africa’s food production systems (FAO 2017). Several broader trends are having a substantial impact on the development of South Africa’s Second, recent years have seen an acceleration in agribusiness sector. These include (a) population technology and use of data analysis to supplement growth and urbanization (especially in sub- farmers’ knowledge. This is having an impact Saharan Africa), (b) innovation and increased on agricultural production. Moreover, global mechanization in agriculture, and (c) increased agricultural R&D spending is growing after years of trade and investment protectionism globally and decline; investment in agricultural capital formation resultant policy uncertainty. is also increasing (FAO 2017). In line with the growing sophistication of this sector, agricultural First, the world’s population is expected to grow to production is becoming increasingly mechanized almost 10 billion by 2050, which will boost agricultural through automation, advanced robotics, and drones. demand. Sub-Saharan Africa will experience the most This raises the demand for skills and requires rapid growth, particularly in cities: 71.3 percent of highly complex distribution and transport services. South Africa’s population is expected to live in urban Moreover, these changes are not always job-creating. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 51 For example, the increased use of technology in African agro-food products has been increasing. The precision agriculture has led to increased yields in country is a net exporter of agri-food products and maize but has resulted in reduced demand for farm exports of agricultural goods increased from $4.4 labor and extension services. to $9.9 billion over the past decade with 24 of 36 crops as net exporters. Its agricultural trade surplus Third, for producers throughout the world— has increased significantly in recent years, driven by including South Africa—rising trade and investment a surge of horticultural exports. Fruits and nuts have protectionism is causing uncertainty. A prolonged been the largest export sector, with coffee/tea and slowdown in the pace of trade reform is leaving processed food products growing rapidly. widespread trade distortions and putting the strength and durability of the global economic recovery at risk. In addition, the importance of the rest of Sub- For South Africa and most of its trade partners, non- Saharan Africa as an export market has grown tariff trade barriers for agricultural goods are much substantially: only 22 percent of exports went to the higher than any remaining tariffs. This can have a region in 2005, while 41 percent did so in 2017. The cascading effect on trade costs because products often strength of the agro-food sector is central to South move across borders multiple times in agribusiness Africa’s food security. According to the 2017 EIU’s supply chains. Furthermore, in South Africa, variable Global Food Security Index, South Africa’s ranking tariff formulas are also in place for wheat, sugar, and has improved in recent years despite droughts—it maize, which raise the prices of inputs for processors is in first place in Africa. FDI inflows have been and the prices of basic goods for consumers. highly concentrated both in terms of sector and geography, with most inflows benefiting breweries Key features of agribusiness industry in and distilleries in Gauteng province.49 South Africa Despite the sector’s dynamism on several metrics, A few characteristics distinguish the South African primary agricultural employment has been declining agribusiness sector. First, it is still highly dualistic, for many decades, depressing incomes in rural areas, characterized by a commercial sector in which a while agribusiness employment is stable. Currently small number of large farms (between 35,000 and the sector employs around 700,000 workers, making 40,000) produce most of the country’s agricultural it one of the biggest and most labor-intensive in the output. These operate in a competitive market system country. However, over the past two decades its share and are integrated with global markets. Most of these of overall employment has declined from over 1.1 large farms have achieved scale economies, record million (or 18 percent of labor force) while output high levels of productivity, and can access up-to-date has increased. Declines in employment have primarily business intelligence. Meanwhile, at least 350,000 hit semi- and low-skilled workers. Most of these jobs emerging smallholder farmers—predominantly are concentrated in a few districts in the provinces of black-owned and located in former homeland areas— Western Cape, the North West, and Limpopo. While struggle under complex agricultural conditions the NDP’s employment goals are ambitious, there is involving security of tenure, poor infrastructure, still considerable growth potential in KwaZulu-Natal, skills development issues, droughts, and constrained the Eastern Cape, and Limpopo. These could be focal access to finance, technology, and markets. South areas for expansion and growth in the agricultural Africa must explore ways to create more and better sector. On the whole, employment in agribusiness opportunities for smallholders and new entrants to remains more stable and employs more highly skilled access competitive commercial value chains. workers than agriculture. It currently employs over 300,000 South Africans and, relative to agriculture, Over the past two decades, global demand for South more of these jobs are skilled or semi-skilled. 52 DEEP DIVES FIGURE 16 PRODUCTION HAS INCREASED AS FIGURE 17 EMPLOYMENT IN FOOD, BEVERAGES, AND EMPLOYMENT HAS DECLINED TOBACCO (1993-2017) 140 20 400,000 120 100 15 300,000 80 60 10 200,000 40 5 100,000 20 0 0 0 1991 1993 1995 1997 2001 2003 2005 2007 2009 2011 2013 2015 2017 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Gross Production Index for Agriculture (2004-2006=100)-left axis Formal unskilled Formal semi-skilled Employment in agriculture (% of total employment)-right axis Formal skilled Informal Source: FAOSTAT and ILOSTAT. Source: Quantec. Agriculture’s growth and employment impact varies Overall the sector’s outlook is positive but subject to significantly between different crops. Moreover, substantial fluctuations. Recent performance has been enterprises across and within different subsectors strong, though with significant variation—2017 was require various levels of capital investment and a record year while 2018 saw a sharp decline caused operating expenditure and offer different revenue- by drought in the Western Cape, Avian Influenza, generating potential. This makes entry for small listeriosis, and high carryover stock levels. In recent firms very challenging: margins increase rapidly years, horticulture has been driving growth while as capital-intensity increases, while less capital- production increases in field crops have lagged. The intensive sub-sectors struggle to remain profitable. growth of citrus as an export crop is a particularly These challenges are exemplified in the yellow notable case in this regard (see Box 7). Sectoral maize sector. Thus, while large capital intense growth is influenced by numerous factors, including firms can link to export value chains, smaller the macro-economic environment, global agricultural ones can only link to local markets and retailers. and commodity markets, the evolution of demand, These, however, are often uncompetitive and face policy uncertainty (especially around land reform), substantial entry barriers. weather stability, input costs and biosecurity. BOX 7 THE GROWTH OF THE CITRUS SECTOR - A SOUTH AFRICAN SUCCESS STORY South Africa is a major international player in the significant expansion opportunities in production that will world export market for fresh citrus and is the most drive investment in the cold chain and export infrastructure. competitive producer in the southern hemisphere. It is a profitable sector with a strong foreign exchange South Africa is the third-largest exporter globally, earning capacity, high employment-creating potential, producing about 2.34 million tons on 74,900 and opportunities for facilitating the entry of emerging hectares, with a gross value of $1.3 billion. As an commercial farmers. South Africa produces four types export market, the domestic and regional market are of citrus: easy peelers and mandarins, lemons, oranges, still small compared to the global market, but significant and grapefruit. Among counter cyclical producers, citrus for balancing production and disposing of fruit for is a significant industry within the agricultural sector. It processing. They allow for new entrants not yet at the contributes about 40 percent of total fruit production by required technical level for meeting export standards. value and is a substantial employer, both on- and off- South African citrus is recognized as high quality, and farm in upstream and downstream industries. There are in general, the country obtains good prices for exports. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 53 Investment in the development of eCommerce web-based However, these growers face challenges in accessing land, systems has significantly contributed to maintaining finance, skills, and water. Because it takes five years for international market access and supporting the efficiency newly-established growers to obtain meaningful yields, of interactions between the private sector and government and 10 years to break even, effective government and agencies responsible for monitoring phytosanitary private sector support will necessary to develop emerging compliance. With further investment, the development commercial farmers. Existing commercial growers are also of eCertificatation for phytosanitary compliance that is expanding their engagement in the sector through joint acceptable to international markets can bring further ventures. They may also benefit from concessionary funding efficiencies and facilitate trade. from government to increase their capacity. Production is projected to grow 24 percent in the next Considerable efforts are geared towards enabling three to five years, mainly because of expansion in black farmers to build successful farming businesses easy peelers and lemons. The number of jobs is estimated and participate in more profitable export markets. at 100,000 to 125,000 on-farm, with an additional 18,000 Yet, despite land reform, the establishment of the CGA off-farm. There are 1,270 commercial exporting producers, and a range of private and third-sector initiatives, black of which 123 are emerging commercial. Major producing participation in the citrus export market is still low. regions are Limpopo (43 percent), Eastern Cape (27 percent) The willingness of established actors to transform the and Western Cape (17 percent). There is potential to industry appears limited. One of the main restrictions that expand by between 15,000 and 27,000 hectares, but this black farmers face relates to financing and access to the is dependent on water availability. The expansion could export value chain. In response, exporter companies have generate an additional 25,000 to 45,000 jobs. started providing small farmers with equity programs or are entering strategic partnerships. However, there is The industry has a limited number of emerging an inherent risk in this, as the financing and partnership commercial producers (10 percent of the total). The programs can come with conditions or contractual Citrus Growers Association (CGA) is dedicated to helping arrangements that limit the scope with which farmers these producers and other entrants become sustainable. can freely participate in the chain. Source: Pringle (2018a), Nyman (2019). BOX 8 DESPITE STRUCTURAL CHALLENGES, YELLOW MAIZE HAS GROWTH POTENTIAL FOR SUBSISTENCE AND EMERGING FARMERS South Africa’s yellow maize production (about $915 adjusted. Pricing moves between export and import parity, million annually) is important as feedstock use in depending on the aggregate volume produced relative to animal feeds and as contributor to protein production domestic consumption. The evolution from controlled for human consumption. It is commonly grown in the eastern marketing to a deregulated market was marked by some production areas due in part to the proximity of export ports turmoil. The industry has adjusted, but at a cost: the area on the eastern seaboard. A major market is the local animal under production, the number of farmers, and employment feeds industry. Human consumption of yellow maize is limited. fell. These adjustments have also had an impact up and The product is a competitively traded global commodity, where down the chain, especially on the input side, where the South Africa must compete with the dominant producers—the waxing and waning of the fertilizer industry has followed United States and Brazil—on international markets. trends in the maize sector. Government removed controlled marketing The economics of production is challenging, arrangements in 1997. After considerable disruption with small margins driving farmers to seek scale in the immediate years thereafter, markets have economies. Due to improved technologies of production and 54 DEEP DIVES removal of marginal lands from production, average yields data sourced during this study, this figure is not entirely per hectare have increased significantly. Climatic variability reliable. Integrating emerging commercial yellow maize does, however, make for a difficult production environment. producers and SME businesses into the value chain is Predictions based on increased demand from the feed sector challenging given the dominance of existing established indicate that there is an opportunity for expanded production. businesses. Given the challenging local production The single largest underutilized region for increased yellow environment, farmers need access to larger areas of maize production is that of the Transkei in the Eastern Cape. land, technical support, skills development, and access to appropriately structured funding and crop insurance There is a sizable number of subsistence products. Furthermore, while large, commercial farmers smallholders—the estimated number of total maize in South Africa can produce yellow maize at close to import producers is between 314,000 and 628,000. Emerging parity prices, further analysis is required to determine commercial farmer numbers could be above 10,000 based whether smallholders and emerging farmers in the country on available information, but due to the limitations in the can stay under the import parity price threshold. Source: Pringle (2018b). FIGURE 18 BALANCE OF TRADE, FOOD, AND AGRICULTURE PRODUCTS $15,000 $10,000 $5,000 Millions $0 -$5,000 -$10,000 1993 1996 1999 2002 2005 2008 2011 2014 2017 Exports animal (01-05) Exports vegetable (06-15) Exports food (16-24) Imports animal (01-05) Imports vegetable (06-15) Imports food (16-24) Balance of trade Source: Comtrade. Domestic demand, in particular for cereals, meat, also made inroads throughout Africa. and processed foods has increased as incomes have grown. Compared with two decades ago, South These chains continue to source most of their Africans are consuming more kilojoules on average, products from South Africa due to the proximity. drinking more sugary beverages, eating more These supplier arrangements tend to be conducted processed and packaged food, more animal-sourced through specialized procurement agents with strict foods, more sugar, and fewer vegetables (Ronquest- product specifications, resulting in a shrinking base Ross 2015). South African producers and retailers of preferred suppliers (das Nair and Dube 2016). are well-placed to meet growing demand at home With food production becoming more capital- and beyond. Agribusiness, particularly food retail intensive, vertically integrated, and concentrated and food/beverage production/processing, is among in fewer hands, smaller producers will face greater South Africa’s largest and fastest growing sectors challenges. Growing demand, while creating (Annex 6). Some firms, like retailer Shoprite, have more opportunities, is also likely to lead to more SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 55 intense competition for natural resources, increased financial, technical, or market access support with a greenhouse gas emissions, further deforestation and few notable exceptions (for example the Broadening land degradation. Predicted temperature increases Access to Agriculture Thrust [BATAT]). As a result, under most scenarios could lead to dramatic declines producers feel they are at an unfair disadvantage in in yields. comparison with producers in other countries who receive generous subsidies. Government policy and related regulations More substantive government efforts have been made Agriculture development and successful land reform to address land reform (see Karaan and Vink 2014). are key pillars of the strategy laid out by the NDP These include: for integrated and inclusive rural development. The primary institution responsible for the sector is the • Settlement/Land Access Grant (1995–99): Department of Agriculture, Forestry, and Fisheries. Means-tested grants (however, these were too The key policy areas include the following: small to support beneficiaries, while the structure of the means test made it almost impossible to • Agriculture policy: The strategic direction was access loans). shaped by the Agricultural White Paper (1995), • Land Reform for Agricultural Development the Agricultural Policy (1998), and the Strategic (from 2001): Scalable grants designed to Plan for Agriculture (2001). establish a class of commercial black farmers. • Comprehensive Agricultural Support Program • Trade policy: Governed by the WTO Agreements, (from 2003): Main program to coordinate and as well as preferential trade agreements with provide support services. SACU, SADC, the EU, and the United States • Proactive Land Acquisition Strategy (PLAS) via AGOA. (from 2006): Program in which the state purchased land for prospective beneficiaries. • Rural development: The NDP emphasizes the • Settlement and Implementation Support (from need to create employment with agriculture 2008): Supplemented PLAS. as the key sector with a focus on small-scale farmers, the agro-processing sector, land reform, The recently launched Operation Phakisa provides and commercial farming. a novel policy direction for the country. Inspired by a similar approach in Malaysia, this program aims • Marketing policy: The Marketing Act (No. 59), to drive transformation within the sector. It aims the Cooperative Societies Act, and industry- to contribute towards the achievement of the NDP specific statutes for sugar and wine and spirits vision and the Revitalization of the Agriculture regulate marketing policy; much of this was and Agro-Processing Value Chain (RVAAC).50 It deregulated under the Marketing of Agricultural comprises three commodity-based work streams Products Act of 1996. and four sector enablers. Expected outputs include a farm worker skills development program, a farm • Land reform: Efforts focus on restitution (return workers’ database, an extension recovery plan, and of historical land rights), tenure reform (securing a skills audit of communal and small holder farmers. property rights) and redistribution (transformation of racially biased land ownership patterns). Finally, the new BBBEE code also is relevant for the agriculture sector. The Amended Agri-BEE However, DAFF has lost several core functions in Sector Code of Good Practice (Agri-BEE Code) recent years. These include farmer support (in the was published on December 8, 2017. It intends to provincial sphere), Land Bank (with Treasury) and strengthen the drive towards creating black suppliers, cooperatives (now with the Department of Trade and black commercial farmers, and black industrialists. Industry [DTI]). DAFF also has little direct control The main changes include: over policies and programs related to food safety, food security, and the National School Nutrition • The targets and point allocation of the first three Program. Firms in the sector must also comply with scorecard elements under the Agri-BEE Code, the Competition Act and trade policy. Overall, the namely ownership, management control, and agricultural sector receives very little government skills development, are essentially identical to 56 DEEP DIVES those in the amended BEE codes. The ownership Creating an enabling governance environment target remained at 25 percent plus one vote and 10 percent for black ownership and black women South Africa’s agricultural policy and institutional ownership, respectively. The skills development apparatus is insufficient. This leads to policy element, however, contains an additional uncertainty, incoherence, and fragmentation. The requirement—that at least 85 percent of total main problems include: (a) a disjuncture between job recognized skills development expenditures must creation and rural development objectives (especially be for scarce and critical skills. in DLRRD), (b) the lack of a clear process for land • Despite the socio-economic development not reform beneficiaries to receive land titles and weak being a priority element, it has received additional land tenure rights, reducing incentives for investment emphasis under the Agri-BEE Code. Unlike the and making access to credit challenging, and (c) the target of 1 percent of an entity’s net profit after failure to recognize the multi-generational nature of tax contained in the amended BEE codes, the agriculture, obstacles, start-up costs for new farmers Agri-BEE Code has a higher target of 1.5 percent and need for extensive support and mentorship of the entity’s net profit after tax. This element services to benefit emerging farmers (Cousins 2014). also counts for 15 points on the Agri entity’s BEE scorecard as opposed to only five points under These governance failures manifest themselves in the Amended BEE Codes scorecard. numerous ways, including farmers’ access to inputs • A major change relates to the target for supplier and tractors (Aliber 2018). The government’s main development, which has been increased to 3 approach to farming inputs has been to give these away percent of the entity’s net profit after tax. The for free via group projects with few beneficiaries. In Minister of Trade and Industry has indicated the case of supporting mechanization, interventions that the aim of this is to create a pipeline tend to poorly conceived and ineffective resulting in of black suppliers and black industrialists few tractors being available, with many of these in within the value chain of the South African disrepair and contracting services unreliable. agricultural industry. Current policymaking is spread across numerous The government also recently established the ministries and departments with overlapping AgriBEE Fund, which aims to increase the number responsibilities and declining resources to meet their of black entrepreneurs in the sector. mandates. New policies and programs are frequently announced, but there is limited implementation or follow-through. This has resulted in many producers Priority constraints to coming to believe that the government sees them as private sector development the enemy. Karaan and Vink (2014) argue that DAFF and investment become “little more than a regulatory agency for the commercial farming sector with few programs For this study, six leading constraints to greater that provide support to emerging farmers.” At the investment were identified: These are (a) the sector’s local level, administered prices and services such as governance, (b) climate change and water scarcity, electricity and bulk water provided through failing (c) access to financial services, (d) a lack of relevant municipalities pose real risks to business continuity. skills and capabilities, (e) uncertainty over land and water rights, and (f) barriers to competition. They also become apparent in producers’ challenges in This section unpacks these challenges by drawing accessing foreign markets. For example, South Africa on a review of existing sources, discussions with only has a few trade agreements with emerging and stakeholders, and background papers that include developed economies apart from the EU. Moreover, in-depth studies of the citrus and yellow maize in the context of increased U.S. protectionism, South value chains. The relevance of each constraint in Africa also risks losing AGOA privileges.51 As other the citrus and yellow maize value chains is outlined countries are signing such agreements, South Africa in Annex 7, which also focuses on the differing is becoming less competitive. This can at times be salience of these constraints for emerging and compounded by administrative oversights—for commercial farmers. example, specific export licensing agreements with SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 57 Asian countries were not renewed in time, resulting spatial misallocations exacerbate water insecurity. The in containers remaining in ports until these issues 2015/16 El Niño drought affected 14 million South were addressed. Africans (25 percent of the population). Predicted temperature increases under most scenarios could The lack of government support in concluding lead to dramatic declines in yields. trade agreements and upgrading the trade-related infrastructure is a particular challenge for export Climate change is expected to result not only in higher crops like citrus (Pringle 2018a). Cold store and temperatures but also sporadic rainfall patterns and ship-loading connectivity are inadequate for the frequent droughts. Even if “high mitigation” measures increasing fruit volumes. Most products are trucked are implemented, average temperatures in the interior from processing centers to gateway ports due to an could increase by up to 4°C. Drylands areas will inadequate but cheaper rail service. Furthermore, expand and shift because of climate change. Some producers have difficulty meeting standards (both zones might become incapable of sustaining livestock private and official); there is insufficient coordination production and intensive agriculture. These varying among the government bodies covering this area.52 weather scenarios are expected to increase food There are also key gaps in South Africa’s logistics insecurity in South Africa and exacerbate poverty infrastructure, which hampers regional exports and among the rural communities (FAO 2008). This remote producers. The role of producer organizations, will place additional strain on South Africa’s food which vary significantly in capacity, has been critical production systems. in bridging these gaps. Furthermore, the government of South Africa plays a Adapting to climate change and water scarcity key role in providing water to emerging farmers. As a result, adapting to climate change and water scarcity Growing pressures resulting from a growing will become increasingly important. There is a clear link population, climate change, and resource scarcity between agricultural GDP and the incidence of climatic are likely to have a profound impact on the sector. shocks in South Africa (moderate El Niño in 2009–10 Growing demand will create more opportunities, but and strong El Niño in 2014–16). Moving forward, it is likely to lead to more intense competition for natural will be necessary to take into account the geographically resources, increased greenhouse gas emissions, and heterogenous impacts of climate change in planning both further deforestation and land degradation. South what to grow and related infrastructure investments to Africa is one of the region’s most arid countries and support different value chains. BOX 9 PRODUCERS HAVE MOVED INTO SOYBEAN PRODUCTION TO REDUCE EXPOSURE TO SHOCKS Soybean development is one of South Africa’s agricultural success stories. This was stimulated by growing demand for South Africa imported more than 80 percent of the soybean oilcake or meal by the animal feed industry. This, in local consumption of soybean meal in 2006–07, but turn, has been driven by an increase in the demand for high imports have since declined to less than 30 percent protein food, particularly poultry products. South Africa’s per because of growing domestic production. South Africa capita consumption of poultry meat almost doubled over the adopted genetically modified seeds (GM) in the early 2000s, past 17 years, currently estimated at 41 kilograms, according to which continue to spread across the country. In the 2016–17 data from the Department of Agriculture, Forestry, and Fisheries. production season, GM seed constituted roughly 95 percent To service the growing demand, South African agribusinesses, of South Africa’s soybean plantings. Coupled with an increase supported by the government, made investments to increase in the size of area planted, and technological improvements domestic soybean processing capacity from roughly 860,000 in the form of seeds, fertilizers and better farming practices, tons in 2012 to a level in excess of 2.2 million tons. This was amongst others—soybean area increased 14-fold over the past also aimed at stimulating domestic soybean production, as part 24 years to 787 200 hectares in the 2017–18 production season. of an import substitution strategy. The contribution of better farming practices and technological 58 DEEP DIVES advancements is apparent from improvements in yields, which Domestically produced beans were supplemented with imports increased by 60 percent from the 1993–94 production season in 2014 and 2015. Consequently, the demand for livestock to 1.97 tons per hectare this season. products increased substantially, increasing the demand for protein meal as feed input to the growing livestock sectors. This Economic considerations, such as the favorable soybean growth encouraged significant investment in the soybean value to maize price ratio (particularly in normal years, when chain and rapid growth in soybean production. Further benefits South Africa was a net exporter of maize) and the to producers include the crop nitrogen fixation properties when magnitude of the investment in crushing facilities, produced in rotation to maize and the opportunity to diversify meant that South African producers were unable to income and reduce risk, which was witnessed when the El-Niño supply sufficient soybeans—even prior to the 2016 drought. drought impacted maize. Increasing affordable access to that farming debt in South Africa totaled R 116.6 financial services billion ($7.6 billion), which equals approximately 32 percent of the value of capital assets (DAFF 2015a), South Africa has a strong financial sector, with a significant proportion. Commercial banks provide substantial levels of rural lending and insurance. Its the majority of agricultural credit, with 57 percent supply of agricultural credit is significant. Farming of farming debt, followed by the Land Bank with 31 debt totaled R 116.6 billion ($7.6 billion) in 2014, percent (DAFF 2015a). Among the key commercial equal to 32 percent of the value of capital assets banks, however, agricultural lending is only a fraction (DAFF 2015). Agricultural insurance also has a of total lending, accounting for approximately 1 long history in South Africa, dating back to at least percent of their portfolio.53 Interestingly, facing 1929 (Pringle et al. 2014). Premium volumes are the similar challenges with land rights, commercial largest in Sub-Saharan Africa, averaging R 4.4 billion banks are willing to extend access to commercial ($310 million) each year (SAIIA 2016). However, farmers without collateral on the condition that they agricultural insurance—even among the commercial purchase agriculture insurance to act as security (for farmer—is limited by the reinsurance market for commercial farmers the insurance product is multiple South African agricultural risk, leading to limited peril crop insurance, MPCI). capacity and higher premiums. Interviews with rural lending institutions point to Access to financial services for emerging farmers several constraints to expanding access to agricultural is substantial, but does not necessarily translate to credit to emerging farmers: farmers being able to access affordable finance for agriculture. While access to finance for emerging • Perception of high risk of such farmers from the farmers is increasing—partly due to efforts by the bank’s perspective Land Bank—access to finance for smallholders • Limited collateral to back loans given land remains challenging. Commercial banks primarily tenure practice of most smallholders lend to agribusinesses. The Land Bank has been • Lack of bankable business plans mandated to increase its share of lending to small • On the supply side, commercial banks face few farmers, which it mainly accomplishes through incentives to extend lending to the agricultural intermediaries. Emerging digital platforms could sector given the profitability of lending to address gaps in access to finance and information, other sectors but this is a long-term prospect. • Difficulties to access commercial financing for multi-year cropping (especially for fruit) Access to credit among South African farmers is markedly different for commercial and small This disparity also exists for agricultural insurance and medium scale producers. The current supply where a vibrant market exists in South Africa to of agricultural finance to commercial farmers is cater to commercial farmers. Agricultural insurance significant. In 2014, DAFF statistics indicated has been available in South Africa for close to a SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 59 century, starting with the launch of a mutual financial service providers. For example, insurance society-based hail insurance cover in 1929 (Pringle companies could partner with financial institutions et al. 2014). Currently, the primary two agricultural and explore ways of bundling agriculture insurance insurance products sold in south Africa are MPCI with savings products to leverage this existing and hail cover. Both these products are catered distribution channel.54 for commercial producers, with international experience demonstrating that they are too costly Upgrading skills and improving to provide to small and emerging farmers. The labor productivity premium volume for the MPCI market peaked at R 309 million (about $22 million) in 2012–13 and There is an urgent need to upgrade skills in the then declined to R 217 million (about $16 million) sector. Emerging commercial farmers have limited in 2014–15. The reductions in premium volumes own capital and skills and require appropriately are due to the poor experience of the portfolio, with structured finance and intensive technical and the long-term loss ratio for 2004–05 to 2014–15 mentoring support. Recent analysis by Agri-SETA at 114 percent. Of farmers who do have access to identified a range of scarce skills in agriculture, agricultural insurance products, most losses come including farm management and entrepreneurship, from climatic shocks: 42 percent are due to drought resource management and record-keeping, financial (and this is increasing) and 57 percent are due to planning and management, marketing, processing and storms and floods. packaging, transport, natural resources management, and mechanical and electrical knowledge. Beyond Constraints to agricultural insurance lie primarily this, low education levels among many agricultural in the lack of appropriate products to suit their laborers require investments in adult basic education needs. Index-based insurance products have been in and life skills programs. Agricultural colleges remain the market for about 15 years, which international in poor shape and there are gaps in some core areas, experience has demonstrated can provide affordable such as among agriculturalists, agricultural engineers insurance protection for small and emerging farmers. and veterinaries. Indeed, countries such as India have actively supported the expansion of index-based insurance The situation is particularly acute for extension products, with the objective of de-risking agricultural services. In 2008 efforts were made to increase production for small and emerging farmers, and extension officers, but numbers remain inadequate, thereby unlocking access to credit for said individuals. and in many cases, these are underutilized—for As stated above, there are no index-based insurance instance, extension officers in the Eastern Cape spend products available in South Africa, not even on a at least 40 percent of their time in their offices on pilot basis. administrative tasks (Aliber 2018). Furthermore, farmers tend to dislike their interactions with The existing levels of financial development and extension officers with most farmers generally financial inclusion represent an opportunity to learning best from other farmers and from family expand access to agriculture insurance to small and members. A recent review of select agribusiness emerging farmers in South Africa. Leveraging the operations found that a shortage of skills, experience, well-developed network of commercial banks with and knowledge is a central challenge for smaller extensive agribusiness-finance experience could have suppliers. Here stronger incentives to lead firms to a major impact. This network includes the Land support smaller producers through, for mentorship Bank, a DFI that is a key provider of agricultural programs, secured offtake agreements and training in finance, especially to historically disadvantaged areas such as better farming techniques, agronomics, emerging farmers. Furthermore, the levels of financial food safety, and the creation of platforms for access inclusion among emerging farmers in South Africa to markets could make significant difference (World are noteworthy, with 34 percent of emerging farmers Bank 2018). having access to transaction accounts, 52 percent having access to savings accounts, and 20 percent There are some attempts to address these issues. of emerging farmers having funeral cover (Finmark Under the National Skills Development Strategy 2013). Support programs could take advantage of III, the AgriSETA Strategic Plan (from 2015–16 this financial inclusion to deepen the relationship to 2019–20) aims to “impact on the productivity between small and emerging farmers and agricultural and profitability of the agricultural sector and to 60 DEEP DIVES contribute to food security, vibrant entrepreneurship Providing greater certainty in land and water rights has and self-reliance especially for rural economies” become an increasingly urgent growing policy priority. through skills development across three key sub- The Land Restitution Act of 1994 was one of the first programs: (a) professional, vocational and workplace acts of the ANC government. Since 1994, ANC under learning, (b) rural development, and (c) youth and the Reconstruction and Development Plan committed career development. Such strategies also need to take to: (a) restitution to restore land rights to those who account of the very different extent of provision by were dispossessed of them under discriminatory laws, sub-sector. For example, industry associations in the (b) redistribution to make land more accessible to citrus sector have been quite effective in providing those who had previously been denied access, and technical support to farmers while for yellow maize (c) tenure reform to give security of tenure to labor support programs such the MFPP have not facilitated tenants, farm workers and other rural dwellers who adequate training and skills transfer (Pringle 2018a lived on land without secure rights. and 2018b). Lands restitution and redistribution are intended to Securing and managing land and water rights reallocate 30 percent of farmland to black households. About 21 percent of the country’s total 83 million Land reform policy has failed to address historically hectares of farmland has been transferred from skewed ownership patterns. According to the Land white ownership since 1994 (Sihlobo and Kapuya Audit (2017), white South Africans make up around 2018).56 The resolution of the “land question” plays 10 percent of the population but own 75 percent a central role in the post-apartheid social contract, of all agricultural land (Land Audit 2017). Several and advancing land reform remains a critical priority. land reform policies implemented by the democratic There is wide consensus on the need for reform in a government since 1994 have failed to address this.55 manner that helps rectify historical injustices while The target of transferring 30 percent of arable land still supporting the livelihood of rural South Africans to black landholders by 2014 was not achieved, and encouraging investment in the sector. However, and there is limited information on the current level there is still considerable uncertainty and debate on of transfer. Factors impeding effective land reform the outcome. include inadequate resources—the average budget for land reform is 1 percent of the national budget Restitution and redistribution proved to be expensive and has been on a decline over the past decade—and and were saddled with legal complications, such as limited administrative and management capacity. multiple claimants, burden of proof, price setting, This has become inadequate amid a mandate that and general implementation. The land reform process has expanded to include production support to has been constrained by: (a) inadequate Department agricultural beneficiaries (Kepe and Hall 2016). of Rural Development and Land Reform (DRLDR) Moreover, restitution and redistribution proved to be capacity and budget allocation, (b) insufficient expensive and were rife with legal complications, such decentralization of decision making, (c) inadequate as multiple claimants, burden of proof, price setting, land administration systems, and (d) insufficient post and general implementation (Kepe and Hall 2016). settlement support (access to finance, markets and technology and establishment of rural settlements) Land markets have low volumes of transactions and to farmers emerging from land reform to help large variations in prices across the nation—even ensure their success and failure to reallocate water across regions that have similar levels of economic rights in parallel with land rights. Furthermore, development. For instance, while the Western Cape many redistributed farms fail. This has a number is among South Africa’s agricultural hubs, only 5 of causes: often the quality of restituted land is percent of agricultural land was transacted in the inferior, owners lack relevant farming experience, province between 2003 and 2014 (Nowers, 2014). In or government support is inadequate (World Bank 2011, Western Cape farm land prices were estimated 2018). Moreover, a lack of land tenure rights to differ by more than four orders of magnitude, from impedes emerging farmers from accessing finance $15 per hectare to $178 000 per hectare of farmland and production support programs from government (Osano et al. 2011). And in 2014, the price for a (Kepe and Hall 2016).57 For example, many land hectare of land in Western Cape ranged anywhere reform beneficiaries of citrus estates have found between R 10,000 and R 70,000 for similar regions it challenging to produce the quality and quantity (Nowers 2014). required to service export markets, compounded by SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 61 an inability to secure finance due to the land tenure economic growth, and protected food security,” not enabling collateralization (Pringle 2018a). should issue its report in 2019. There are still substantial opportunities to Barriers to competition increase land redistribution purely through market mechanisms. However, this remains constrained The existence of previous anticompetitive regulation because land tax incentives aren’t in place to appears to have been a facilitating factor in a number encourage sales. Another issue is that the land of South Africa’s cartels.59 All food and agriculture- titling system is not designed to handle the number related cartels found in South Africa were in markets of applications arising from an expansion of the previously characterized by control boards or with a land market; restrictions on sub-divisions are history of price controls, with the exception of fish/ also problematic. In terms of government-driven fishing and poultry. land redistribution, key issues include: (a) policy options (compulsory or voluntary), level and type Despite deregulation from 1998 onwards dissolving of subsidization (which transaction costs should be commodity boards and removing fixed prices, most subsidized to improve target beneficiaries’ market food is still produced by commercial farmers and access; what levels of land purchase subsidies would some of these structures persist. Indeed, some markets be needed to bring in different target groups); (b) appear to have privately “re-regulated” following the role of the state, especially in terms of post- deregulation—partly facilitated by the strong role settlement support; and (c) assessing economic currently played by industry associations in South impacts, especially in relation to business confidence Africa, which is in some cases supported by sector and the financial sector. regulation. In around a third of all (non-construction) cartel cases detected in South Africa between 2005 and Equally important to reforming land rights and 2015, an industry association was explicitly found to clarity in this area will be water rights—the lack of have facilitated a collusive agreement (25 out of 76 clear water rights substantially reduces the value of cases). This is especially prevalent in the food sector, land and the incentives to invest. Weak institutional where six out of 12 cases involved a trade association. frameworks for allocating and trading water rights This is relevant for the way in which sector regulations are a constraint. Given the relative aridity of South are set for a number of agricultural markets: players Africa, water use is strictly regulated via the National are compelled by regulation to register with and Water Act of 1998, which ensures that the nation’s provide detailed information to industry bodies. water resources are protected, used, developed, conserved, managed and controlled to the benefit of In several agricultural markets these associations all. However, insufficient water resources for farming take on the central role that the commodity board remain a concern for many farmers involved in the would have previously played (such as the setting land reform process, for whom rights remain are of standards), which can result in anticompetitive often not linked to land rights.58 outcomes. There are still statutory measures in place that compel players to register with and provide Growing impatience with the pace of progress has information to an industry body (for example, wine, led the National Assembly to review Section 25 of dried fruit, eggs, potatoes, milk, and sugar). While the Constitution to potentially enable expropriation associations can perform valid roles in a market and a without compensation. In addition to restitution value chain, they can also serve as fora for information and redistribution, ensuring the viability of new exchange and therefore can facilitate collusion. farmers will be central, especially given the high Associations need to be managed in a way that levels of debt farmers generally face. Many of these minimizes their distortive effect on the market. For issues are now being clarified in a high-level report example, mandatory membership and information by the President’s Advisory Panel on Land Reform provisions in sector regulation could be reviewed, which will support the Inter-Ministerial Committee and associations that comprise of incumbents should (IMC) on Land Reform. The Panel, which has been not be involved in making registration or licensing mandated “to review, research, and suggest models decisions for new entrants. As such it is important for government to implement a fair and equitable to monitor the effects of these associations since the land reform process that redressed the injustices of functions of coordination and information exchange the past, increased agricultural output, promoted by industry associations can facilitate anticompetitive 62 DEEP DIVES outcomes. It is also important that associations is dominated by large commercial farmers who are encouraged to consider new entrants and new are vertically integrated and can source inputs products when for example setting standards or cheaper due to economies of scale and networks. registration/entry requirements.60 Furthermore, silos are a critical element of yellow maize marketing and access to silos is a crucial There has been significant consolidation in the bottleneck in the market as the market for silos commercial sector with the number of commercial is dominated by large vertically integrated farming units in primary agriculture declining agribusinesses. Silos are prohibitively costly to steadily from almost 120,000 to around 39,000 construct and are seldom at full capacity, making between 1950 and 2014.61 This was accompanied it an imprudent investment for new entrants. In by a commensurate increase in average farm size— the citrus sector, quality is a main channel through this is perhaps not surprising given the evolution in which associations restrict market entry. Recent farming technologies over that period with a move efforts by the CGA has seen a tendency to push away from labor towards capital. for more stringent quality standards, which are naturally more difficult for new entrants to uphold, South Africa’s three largest field crops in terms of to gain market access. In turn, black participation value: wheat, sugar and maize are subject to variable in the citrus export market still appears to be low tariff formulas, benchmarked against a dollar-based as the willingness of established actors to transform floor price.62 The intention is to maintain prices of the industry appears limited. Many blended finance the commodities above a reference level with the aim models (such as the Jobs Fund) are just in their early of preventing a decline in local production levels. stages but showing great promise. When the dollar price of imported wheat over a set period of time falls below the floor, import duties rise Finally, the market power of actors up- and based on the difference between the two. This means downstream puts smaller farmers at a disadvantage that substantial depreciations in the value of the rand when entering into contracts. Access to inputs, against the dollar can increase the value of import irrigation and, importantly, pack houses remains duties out of proportion with the value of non-U.S. a main restriction for small farmers to enter the dollar imports, leading to complaints of “over- market. Assistance in negotiating with providers of protection” in rand terms.63 A number of players in those inputs or services is crucial to enabling market the processing industry and consumer groups have access. Some labor-intensive sub-sectors still have opposed these tariffs and have advocated for a switch substantial growth potential (including berries, to a rand-based system.64 grapes, peaches and macadamias). This underlines the power structure along the chain and the potential The variable tariff raises prices of inputs for for policy to increase competitiveness in inputs and processors and the prices of basic goods for to ultimately open market access. consumers. Bread and cereals prices have increased in line with increases in the floor price of wheat during the period from 2013 to 2016, over a period Recommendations where international prices remained steady.65 In the case of sugar, the tariff is part of a broader industry South Africa’s agriculture and agribusiness sector management scheme which aims at raising prices has potential for further growth and shows growing above the competitive level. And while the tariff on competitiveness on export markets. Compared to maize is zero, Grain SA,66 an association of grain other sectors in South Africa’s economy, it already farmers, has made a number of applications to ITAC has many efficient and highly profitable firms that are for an increase in the maize floor price. To date, this world-leading in some sub-sectors. The renewed focus has been resisted because of the effect it would have on supporting emerging and subsistence farmers is on the poultry and livestock industries.67 timely and can play an important role in addressing high poverty rates, especially in rural areas. To This has different impacts across different sub- succeed, it will require new approaches that directly sectors. For yellow maize, emerging farmers face leverage the strengths of the sector’s value chains large high entry costs as maize production has and encourage the roll out of financial products become more and more mechanized. The market that can meet the needs of smaller producers, taking SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 63 advantage of the high level of financial development redistribution programs not only from a and inclusion. perspective of racial and socio-economic inclusiveness, but also gender. For example, Increased private sector investment and involvement because of their limited access to capital through will be integral to fulfilling the potential of the credit and formal employment, women face sector and address its duality. There is likely to difficulties in purchasing land in the market- be increased space for PPPs in key trade-related assisted land redistribution program. services (trade information, certifications, veterinary • Support and scale up investments in improved services). Moreover, there is substantial demand water- and power-efficient irrigation and for new agricultural financing products for lower- irrigation management systems. income customers. Finally, at the very end of the value chain, retailers can take various steps to Finally, following the release on March 31, 2019 of increase inclusion by, for example, implement a the Final Report of the Presidential Advisory Panel on sector code of conduct to encourage suppliers and Land Reform, it will be important to urgently begin retailers to offer fair prices and terms of supply to addressing its recommendations for fast-tracking smaller players.68 land reform via the Inter-Ministerial Committee on Land Reform. In this context, there is scope for show- However, there is also a lot government could do casing examples of the redistribution and restitution differently to support private investment. The sector’s programs which have been effective and assessing greatest potential is primarily around addressing the potential for transferring lessons to South Africa. its dualism and increasing inclusivity—which is primarily an issue of addressing policy constraints, In the area of access to finance, recommendations include: sector governance, and improving access to finance. Increasing the capacity of DAFF and related agencies • Carry out an agriculture finance diagnostic in South so they can effectively support private sector will Africa to understand the demand and supply side build trust and ensure that the public goods needed constraints of agricultural credit and investments, by producers to start-up, grow, manage risks, and identify the key challenges to expanding access to export are available. The recommendations are financial services in the agricultural sector and key grouped into “general,” those which are specific to opportunities to further develop agriculture finance the two value chain analyses on citrus and yellow in South Africa.69 maize, and suggested interventions that the World • Support programs that improve the productivity Bank Group could roll out to support this sector of emerging farmers and more effectively linking building on the project with the Land Bank. these to markets.70 • Identify the key market failures and public good challenges for agriculture insurance for emerging General recommendations farmers through an agricultural insurance solutions appraisal. The findings of the appraisal Increasing inclusivity would provide recommendations to the GoSA outlining options for public sector support to the With respect to the debates on land reform and access market, with associated costings. Recognizing the to land there is considerable scope to: challenges with access to credit for subsistence and emerging farmers, the analysis should • Develop a comprehensive audit on land and investigate the potential of agriculture insurance irrigation water and improve data to facilitate to act as collateral for loans. a shared understanding of what the scale of redistribution has been. Finally, to address the country’s skills deficit, the • Review ongoing transformation and following options are advised: 64 DEEP DIVES and clarifying risks related to losing market • Assess mentoring programs and technical access to the United States under AGOA. colleges to determine how to make them more • Address the inadequacy of rail transport services attractive for instructors and mentors, and in from remote areas to Durban harbor and turn increase retention. improve port infrastructure. Engage Transnet on • Assess skills gaps in key areas (health/SPS, the revitalization of the rail network in support extension services, entrepreneurial skills) to of the agricultural sector. determine what kind of provision is viable. • Move towards greater harmonization/mutual recognition on non-tariff barriers and standards Supporting integration into local, regional, within the SADC region and through the and global markets African Continental Free Trade Area with a focus on developing regional value chains, as Recommendations to help producers access regional the greatest potential for increasing exports, and global markets include: especially for emerging farmers, most likely lies in Sub-Saharan Africa. • Focus on strengthening exporters and export associations with direct links to producer To address barriers to competition, recommendations organizations and producers to expand exports include: given DAFF’s capacity constraints, with a particular focus on supporting the export • Review impact of tariff formulas for wheat, competitiveness of emerging farmers. sugar, and maize on consumer prices and • Improving market access to key export markets contestability of markets, taking into account (especially EU but also emerging export broader agricultural value chains. destinations such as China, Vietnam and India) • Facilitate access to value chain facilities and and clarifying risks related to losing market logistics (such as storage, pack house capacity, access to the United States under AGOA. floor space in NFPMs) for emerging farmers. • Address the inadequacy of rail transport services • Consider the potential to regulate enforcement from remote areas to Durban harbor and of private standards, for example, by establishing improve port infrastructure. Engage Transnet on mandatory grace periods for small firms and the revitalization of the rail network in support new entrants to attain gradual compliance with of the agricultural sector. private standards and ensure that small suppliers • The greatest potential for increasing exports, are represented in the establishment of public especially for emerging farmers, most likely lies in standards, for example, with representation on Sub-Saharan Africa. Thus, moving towards greater the South African Bureau of Standards. harmonization/mutual recognition on non-tariff • Develop and implement a voluntary or obligatory barriers and standards within the SADC region code of conduct for the retail sector to encourage and via the African Continental Free Trade Area retailers to offer fair prices and terms of supply with a focus on developing regional value chains. to smaller players.71 • Promote competition between retailers (and Supporting competitiveness and investment provide suppliers with more outside options) to address imbalances in bargaining power Recommendations to help producers access regional between suppliers and retailers. For example, and global markets include: support buying groups that buy in bulk on behalf of independent retailers. Consider approaches to • Focus on strengthening exporters and export regulate exclusive lease arrangements between associations with direct links to producer supermarkets and malls which may restrict entry organizations and producers to expand exports by other retailers.72 given DAFF’s capacity constraints, with a • Following amendments to the Competition particular emphasis on supporting the export Act, publish clear and transparent regulations/ competitiveness of emerging farmers. guidelines on assessing buyer power and price • Improving market access to key export markets discrimination by buying firms. (especially the EU, but also emerging export • Assess the impact of supplier developer programs destinations such as China, Vietnam, and India) implemented by large agro-processors and SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 65 retailers to understand how their impact on entry • Commercial producer associations are restricted and expansion of new players can be enhanced. from using land as collateral to raise finance. As community, group-owned entities based on Supporting resilience to climate change democratic principles, these usually have weak institutional governance systems. Governance To address potential climate-related risks and water support and strengthening is required. Joint scarcity, recommendations include: ventures between private companies and common property associations as land-owning • Explore the potential to expand access to entities can be successful if appropriately agriculture insurance to emerging and commercial negotiated and structured. farmers in South Africa, which can act as • Private joint ventures between existing, large, collateral for loans and develop a comprehensive financially strong, commercial growers and approach to risk management approach where individual, emerging, commercial growers, insurance products can complement agriculture where the commercial partner brings finance, risk management techniques, while facilitating expertise and access to a pack house and markets access to credit for emerging farmers and remove is another potentially sustainable model. parts of agricultural risk from farmers. • Government use of community governance • Addressing water rights with as much urgency as development councils as implementing agents has been shown around land rights and ensuring for grant funds to support emerging commercial that secure rights are allocated rights to emerging farmers, within clearly agreed project commercial farmers falling within support programs. parameters to address critical success factors • Support and scale up investments in improved is proving successful. This could be scaled up. water- and power-efficient irrigation and • Review target investments of the CGA and irrigation management systems. prioritize according to effectiveness for transformation (investments in infrastructure, Sector-specific recommendations such as pack houses, might prove more useful to black farmers than skill-building activities). Citrus Increase transparency and reduce discretion in allocation of the industry levy by the CGA to To drive forward the integration of emerging boost transformation. commercial farmers in the citrus sub-sector, the • Create a permanent representation of black following is recommended: producers within the CGA, and review the composition of the state-run export certification • Tenure security needs to be assured over the long body, the Perishable Produce Export term. Short-term (three-year) leases on PLAS Certification Agency (PPBEC), given the role farms are inadequate. of large incumbents on the board. • Poorly resourced farmers are reluctant to • Reduce the cost of inspection and certification consider long-term crops with delayed returns for small producers, for example with a fee due to short term financial needs. Appropriate structure that differentiates between small and industry, technical, and mentoring support is large producers. required in addition to appropriately structured financial products using matched government Potential areas for engagement are highlighted in grant and commercial loans. Figure 20 below. 66 DEEP DIVES FIGURE 19 PUBLIC AND PRIVATE SECTOR ENGAGEMENT OPPORTUNITIES IN CITRUS SECTOR SHORT TERM LONG TERM • Engage government for a sector-wide • Investment in improved water efficient PRIVATE emerging farmer support program. irrigation systems. SECTOR • Finalize the development and integration • Larger commercial producers consider SOLUTIONS of e-commerce PhytClean system partnering with emerging commercial with government systems for ease of neighbouring farmers within an phytosanitary certification. appropriately designed support program • Identify new markets for the future to provide access to expertise, finance, increased lemon and soft citrus (easy pack house and markets. peeler) crops. • Develop a clear program of support in • Ensure markets to EU are accessible, partnership with CGA to assist emerging address trade protocols with Vietnam, POLICY commercial farmers to address constraints. China and India and other countries SUPPORT & • Support CGA in securing trade identified as potential export destinations. MARKET agreements and addressing phytosanitary • Allocate water rights to emerging FAILURES protocols that are discriminatory and a commercial farmers that fall within threat to exports. a properly accredited CGA support • Identify areas where water rights program so as to ensure the best can be made available to emerging opportunity for success. commercial farmers. • Allocation of existing grant support • Transport: Improve rail transport service programs to emerging commercial from Limpopo to Durban. PUBLIC AND farmers identified through CGDC. • Port infrastructure: Address deficiencies in CONCESSIONAL • Design a program of support of a full port cold room facilities and loading systems. FINANCING package of appropriately structured and • Investment in emerging commercial blended. Grant commercial funding to farmer development projects. enable the establishment of emerging commercial farmers. Source: Pringle (2018a). Yellow maize subsistence farmers producing about 125,000 hectares of maize could be transformed to To drive forward the integration of emerging emerging commercial farmers. commercial farmers, the following is recommended: • Institutional arrangements need to focus on • The Eastern Cape region offers an opportunity commercial business development under business for significant expansion, potentially principles. Institutional rules should incentivize by 500,000-hectares, of which 360,000 Good Agricultural Practice (GAP) and best hectares are unutilized—only about 11,000 business practice. A clear route to market, with hectares of commercial yellow maize are clearly-understood price-fixing arrangements is under cultivation. The high concentration of essential. Organizational arrangements should SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 67 ensure professional management by suitably be available with appropriate equipment. skilled and qualified individuals selected on merit. • Lower the cost of accessing a silo by small farmers Adequate scale economies of the production base and ensure adequate storage infrastructure need to be a consideration. is provided before the harvest season so that • A structured, well-managed training and grains can be properly stored to maintain quality. capacity development program, including both Fencing in of arable lands will be required to technical farming and business management ensure controlled access. skills is required. • Cost effective mechanization is critical. Potential areas for engagement are highlighted in Competitively-priced contracting services should Figure 21 below. FIGURE 20 INVESTMENT CONSIDERATIONS FOR YELLOW MAIZE Will additional investments in this subsector add value to South Afrca? IMPACT The sector supports significant domestic earning and supply into related animal Potential feeds value chain. It has low per ha employment creating capacity but it does so High Development Impact in deep rural areas. Significant additional production potential in Transkei region, Medium would have a high developmental impact sub-regional level. Low Does this subsector offer an attractive proposition for investors? TARGETED MARKET Is the local/regional The regional market has attraction compared to global market due to proximity but Global market attractive? neighboring countries becoming self-sufficient. Local market for feed is attractive Regional with projected future growth. Domestic Is the global market attractive? Limited to markets (SE Asia) that require a good quality but international prices are significantly lower than domestic. Does South Africa offer competitive supply conditions for investors in this sector? COMPETITIVENESS Does South Africa have No - climatic variability from one season to the next creates challenging production High competitive natural conditions, but current production does satisfy domestic demand. Medium endowments? Low Does South Africa have Moderately - bulk inputs of fuel, fertilizer and chemicals are usually imported and competitive inputs and exchange rate fluctuations create challenges. Support services from government are support services? weak but technical support from input sector is good and information services good. Does South Africa offer Moderately - uncertainty on land rights, legislated wage rates and high administered a conducive business prices relative to service offering have negative impacts but a strong finance sector environment? making production credit available, SAFEX as a risk mitigating mechanism and a strong private sector creates an environment incentivizing efficiency gains. Source: Pringle (2018b). 68 DEEP DIVES How can the World Bank Group about a new program targeting water/energy use support this agenda? in the agro-processing industry. In this context, this CPSD may unlock opportunities in this sector by addressing some of the overarching constraints to The World Bank and IFC have substantial expertise its development, including on competition, fostering in the agricultural and agribusiness sector. The linkages to MSMEs, and larger agro-processing firms. World Bank is already providing support through Finally, this is an area where the IFC has a significant the Land Bank Financial Intermediation Project. portfolio (up to four transactions and $70–100 There are also advanced discussions with SECO million per annum). In Summary Factors affecting Policy options World Bank Group role private investment outlined in the report Agriculture and agribusiness Governance framework: Policy is Increase space for PPPs in trade-related Advisory support to support spread across numerous ministries services (trade information, certifications, an agriculture sector public and departments with overlapping veterinary services). expenditure review (including responsibilities, while capabilities Improve access to key export markets land reform spending), provide within ministries to meet mandates (especially EU but also emerging export expertise to move towards PPP are declining. destinations). models in key trade-related Efforts to monitor and evaluate past Address non-tariff barriers within the Southern services, develop new trade support programs (especially in terms of African Development Community (SADC) region. agreements for key export land reform and redistribution) are limited. markets (especially in Asia), analyze the impact of trade barriers within SADC region, and support multi-country processes that enable harmonization of standards to facilitate intra- regional exports. World Bank lending for capacity building and financial support for producer organizations to provide support services (entry, exporting). Access to finance for emerging Support development of agriculture insurance. Advisory support on agricultural farmers: Subsistence and emerging Increase efforts to bring commercial banks insurance markets, especially in farmers remain largely excluded from into lending to emerging farmers, for example, the context of increased climate agricultural finance and insurance by providing risk guarantees and facilitating risks, and for an agriculture products. The lack of credit results access to collateral. finance diagnostic to understand in low investment, dampening yields the demand and supply side and productivity. Increasing levels of constraints of agricultural credit financial inclusion have not led to a and investments. deepening of the relationship between World Bank lending to scale-up emerging farmers and agricultural the Land Bank project supporting financial service providers. Most blended finance initiatives for emerging farmers lack collateral emerging farmers. and the capacity to develop bankable Potential IFC investments to business plans. direct funding to key players in chosen sectors to strengthen SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 69 Factors affecting Policy options World Bank Group role private investment outlined in the report out-grower programs and risk sharing facilities with South African banks. Skills among emerging farmers: Enable greater skills transfers from larger Advisory support to assess Agricultural colleges remain in poor commercial to emerging farmers through existing mentoring programs for shape. In some core areas there mentorship. emerging farmers to determine are gaps leading to a shortage of interventions that lead to agriculturalists, agricultural engineers, retention and skills transfer. and veterinarians. Potential World Bank lending to support skills programs in key deficit areas through extension programs, universities and TVETs, including potential direct funding to agricultural colleges. Land and water rights: Lack of secure Bring certainty to investors by quickly finalizing the Advisory support to assess the land and water rights deter investment amendments to land reform and the framework effectiveness of past restitution and limit scope for credit. for how this will be applied in practice. and redistribution programs, Consider performing a comprehensive land conduct a comprehensive land audit to improve shared understanding of audit, and support exchange redistribution to date. and lesson learning from other countries’ land reform processes. Climate change and water scarcity: Increase preparation for El Nino by strengthening Advisory support to develop Growing demand is likely to lead to more government insurance for disasters. a Climate Smart agriculture intense competition for natural resources, Explore the potential to expand access to s t r a t e g y, d e v e l o p r i s k increased greenhouse gas emissions, agriculture insurance to emerging farmers management techniques to help further deforestation, and land degradation. which can act as collateral for loans. emerging farmers access credit, Substantial spatial misallocations that Develop a comprehensive approach to risk conduct analytical work for an exacerbate water insecurity. management. audit on water rights linked to Investing in improved water-efficient restituted or redistributed land. irrigation systems. Potential World Bank lending to develop improved and more water-efficient irrigation. Barriers to competition: Industry Assess the role and mandate of industry Advisory support to the Competition associations can perform valid roles in associations and consider how to minimize Authorities’ enforcement and a market but can also serve as fora for the potential for anticompetitive outcomes. advocacy work in the sector; information exchange and therefore Ensure effective implementation of new embed competition principles in facilitate collusion. provisions of the Competition Law to tackle key value chains in the market The involvement of associations anticompetitive behavior by associations or framework for National Fresh and large incumbents in channeling abuse of dominance by large buyers. Produce Markets and in the retail government support to emerging Advocate with large buyers to encourage fair sector; implementation of the farmers may lead to conflicts of dealing with small suppliers (for example, Competition Law (including clear interest. The imbalance of market through codes of conduct). and predictable regulations and power between small suppliers and Build mechanisms and capacity for regulators guidelines); o rationalize the role large buyers (such as retailers and and policy makers (such as SABS, ITAC, DAFF, dti) of industry associations in the 70 DEEP DIVES Factors affecting Policy options World Bank Group role private investment outlined in the report processors) reduces incomes for to embed competition principles in standards, market; analyze the impact of small suppliers. market rules, and public policies. existing tariff formulas for wheat, Establish a pro-competition framework sugar, and maize on consumer for the design and award of government prices and market contestability. support programs. 3.2. Automotive manufacturing the original equipment manufacturers (OEMs) that deep dive assemble vehicles, whereas the component industry has performed below its potential. Component South Africa is a small player in the global automotive manufacturing firms struggle to compete with other market but a leader in the Africa region (Figure 23). emerging economies for a variety of reasons that South Africa produced about 600,000 units in 2017, we unpack later in this section. Future growth of with an estimated share of global production of 0.63 the industry in South Africa will hinge on OEMs percent, far behind other BRICS economies. South global strategies to address cyclical factors (saturated Africa is ranked 22 based on its global share of markets, overcapacity in automotive manufacturing car production. A relatively small domestic market globally) as well as South Africa’s ability to compete and long distance to key export markets—the with other investment destinations. The latter would United States, European Union, and Japan—puts require opening up SOE-dominated sectors among South Africa at a disadvantage relative to many other factors. competitors. However, South Africa is a leading automotive producer on the continent, and accounts Supportive government policy played an important for 59 percent of total motor vehicle production in role in developing the automotive industry. The car Africa. It is followed by Morocco, which accounts for industry enjoyed relative policy certainty provided 35 percent of total vehicle production with 376,286 by the Automotive Production Development units (Econometrix 2018). Program (2013–20), which offers a combination of duty rebate schemes and cash grants for qualifying The automotive industry is among South Africa’s investments. Following in-depth consultations leading manufacturing industries and has performed with private sector stakeholders and academia, better in terms of investment, output, and exports. the program was extended to 2035 (with some It accounts for 30.1 percent of the country’s amendments), providing further confidence to manufacturing output and 13.9 percent of its industry players. The government is also engaged total exports (Export Manual 2018). It also plays in dialogue with the industry to make the ownership a significant role in employment and accounts for requirements of the Broad-Based Black Economic 8.6 percent of total formal jobs (when linkages with Empowerment (BBBEE) legislation achievable other industries are taken into consideration).73 The for the OEMs. At the provincial level, there are automotive industry’s generally positive performance also numerous initiatives to support the industry has persisted even against the backdrop of sluggish through infrastructure investments (such as Coega domestic demand and weak overall growth of Special Economic Zone in Nelson Mandela Bay and manufacturing activity. Indeed, South Africa’s the Automotive Supplier Park in Gauteng) as well manufacturing sector performed poorly overall. as supplier development programs. Employment in the sector declined from 1.9 million in 2008 to 1.7 million in 2016 (dti) and manufacturing Global Trends in the Automotive Industry and valued-added went down from 14 percent to 12 Implications for South Africa percent of GDP over the past decade (World Bank, WDI indicators). The global automotive industry is undergoing continuous change. This section focuses on three These positive trends in the automotive industry have important trends with potential implications for come on the back of expansion of the operations by South Africa: SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 71 1 Trade wars and rise in protectionism can to the U.K. market until a new agreement threaten access to South Africa’s traditional between South Africa, SACU or SADC and export markets. The Trump Administration has the United Kingdom is negotiated to replace initiated an investigation under Section 232 of the current Economic Partnership Agreement the Trade Expansion Act of 1962, as amended. (EPA) between the EU and SADC. Brexit could The investigation will determine whether also result in the United Kingdom’s economy imports of automobiles, including SUVs, vans worsening and reduce demand for vehicles and and light trucks, and automotive parts into the other goods. United States threaten to impair the national security. Given the timelines of the investigation, 2 Increasing share of emerging markets in global the status quo is likely to remain in place until automotive sales. Emerging markets already May 2019. The potential negative impact contribute the bulk of growth in vehicle sales. from May 2019 would be mostly felt by the The demand is particularly strong in Asia: sales component industry. Even if the ongoing Section in the region are projected to grow 4.7 percent 232 investigation does not impact South Africa’s in 2018 versus 3.6 percent of global sales access to the U.S. market, there is uncertainty growth.76 Lack of free trade agreements with about the post-AGOA trade regime and Asian economies disadvantages South African concerns that the planned NAFTA agreement manufacturers relative to some competitors. between Mexico and the United States may Sub-Saharan Africa has the lowest vehicle serve as the new blueprint for trade deals with ownership rate and demand for cars relative other countries. The agreement requires that cars to other regions. Most markets on the African have 75 percent of their content originate in continent are small; vehicle sales are dominated the United States and Mexico, and that workers by second-hand cars. Nevertheless, the regional earn higher minimum salaries. market has good potential for growth, driven by growing populations and fast urbanization. If the European companies are squeezed in the Several governments such as Kenya, Nigeria, U.S market, the EU can introduce protective and Rwanda are also trying to develop assembly measures as well. In addition, Brexit could operations. These would create opportunities lead to a worsening of South Africa’s access for South Africa’s component manufacturers. FIGURE 21 MOST MARKETS ON THE AFRICAN CONTINENT ARE SMALL Provisional new passenger car registrations or sales on the African continent, 2017 862,907 900,000 800,000 700,000 600,000 500,000 369,599 400,000 300,000 155,218 200,000 133,391 74,979 15,800 100,000 35,963 25,289 10,353 4,438 4,051 4,013 3,570 3,500 3,389 2,755 2,562 2,335 2,254 1,632 1,531 0 Africa South Africa Morocco Egypt Algeria Tunisia Reunion Libya Mauritius Ivory Coast Nigeria Senegal Uganda Botswana Ghana Angola Zambia Tanzania Kenya Cameroon North Sudan Source: OICA. 72 DEEP DIVES 3 New disruptive technologies can impact demand to the more demanding fuel standards. South for certain components and cars overall. Tightening Africa has Euro 2 fuel standards and OEMs environmental standards and the move toward operating in the country need to manufacture greener technologies (electric vehicles and hybrids) vehicles with different engine specifications for will have a major impact on engine production and the domestic and international market, which may reduce demand for catalytic converters—a increases their production cost. Lastly, software key export product of South Africa’s component and infotainment components account for an industry. It will also expand the opportunities increasing value of vehicles and are a source for manufacturing of certain components, such of innovation; South African suppliers are not as batteries. A shift toward the use of lighter yet active in this segment. In addition, increased materials (for example, aluminum) and recyclable emphasis on autonomous and semi-autonomous components also offers opportunities for the new cars and connected vehicles, combined with the players but requires partnerships with OEMs spread of mobility services can have a major and Tier 1 suppliers as well as investments in impact on private car ownership—particularly R&D. Vehicle manufacturers also need to adapt in developed countries. Key features of automotive industry in Rand. The OEMs are clustered in three provinces—the South Africa Eastern Cape, Gauteng, and Kwazulu-Natal. South Africa is home to major global OEMs, some of Car manufacturers from emerging markets also see which are expanding production. The country is home South Africa as an attractive investment destination. to seven light commercial vehicle (LCV) manufacturers Two investments underway by manufacturing and nine assemblers of medium and heavy commercial companies from China and India would be located in vehicles (MCVs and HCVs) and buses. There are no Port Elizabeth (at the Coega Special Economic Zone) domestic car manufacturers; the industry is driven and in Durban. Although these are small operations, by OEMs. Some of the global manufacturers with currently focused on semi-knockdown (SKD) assembly, established operations in South Africa have recently they have the potential to grow into export-oriented expanded production or announced plans to do so, enterprises with a focus on the regional market where the total investment would reach almost 20 billion lower cost models are in strong demand. FIGURE 22 SHARE IN TOTAL WORLD MOTOR VEHICLE PRODUCTION, 2017 29.8 BRICS countries marked in dark blue % 11.5 10.0 SA in the same league as 5.8 4.9 4.2 4.2 Hungary & Poland 2.9 2.8 2.3 2.3 2.0 1.8 1.7 1.6 1.6 1.5 1.3 1.2 1.0 0.7 0.6 0.6 0.6 0.5 0.4 0.4 0.4 0.3 0.2 0.2 0.2 0.2 0.2 0.2 China USA Japan Germany India South Korea Mexico Spain Brazil France Canada Thailand United Kingdom Turkey Russia Iran Czech Republic Indonesia Italy Slovakia Poland South Africa Hungary Argentina Malaysia Belgium Morocco Romania Taiwan Vietnam Pakistan Sweden Slovenia Portugal Netherlands Source: Econometrix based on OICA. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 73 The industry’s relatively small size is one of the factors tier 2 and tier 3 suppliers that produce parts for the that impedes components’ localization. Component sub-assembly phase as well as basic products. Most manufacturing is a low margin industry and of these are local companies and SMMEs. economies of scale are essential for profitability. Fewer than 40 percent of the components used in vehicles South Africa increased exports of both passenger and manufactured in South Africa are of local origin. commercial vehicles over the past decade. However, Relatively low volumes of local vehicle production, exports of components declined (Figure 24). South distance to other large automotive producing Africa registered the highest export growth rate in countries and lack of a regional value chain constrain commercial vehicles (pickup trucks) of all comparator development of the South African component industry. economies and doubled its global market share in this These factors impede both the entry of new Tier 1 segment over the past decade (Annex 9A); similarly, suppliers and the growth of the local component global market share for passenger vehicles showed a industry; only a quarter of the 150 Tier 1 suppliers positive trend (Annex 9B). However, global market operating in South Africa are local companies. Besides share in components declined by over a third during Tier 1 suppliers, South Africa counts with over 350 the same time (Annex 9C). FIGURE 23 EXPORTS OF CARS INCREASED WHILE EXPORTS OF COMPONENTS DECLINED OVER THE PAST DECADE Vehicle and Component Exports (US$ 1,000) 600,000 500,000 400,000 300,000 200,000 100,000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Final vehicles commercial Final vehicles passenger Components Source: UNCOMTRADE. Component exports comprise mostly basic trade agreements with the EU, the United States products and are quite concentrated (Annex 9). (under AGOA) as well as with SADC and SACU. Catalytic converters (which incorporate platinum South Africa exported cars and components to 154 mined in South Africa) constitute over a third of countries in 2016; however, about half of all exports all component exports and the top three products are destined for the EU (Figure 25). This is also the account for almost half of all exports. There region where South Africa has achieved the most are opportunities to localize other components, impressive growth over time (Figure 26). The United particularly at the Tier 2 and 3 levels building on States is also an important market, although exports South Africa’s large mineral deposits, but these are have stagnated in recent years. Exports to the Africa yet to be realized. region accounted for 18 percent of the total in 2017. SADC countries comprise 86 percent of exports to Most of South Africa’s exports are destined for Sub-Saharan Africa, indicating the importance of free developed countries. South Africa benefits from free trade agreements. 74 DEEP DIVES FIGURE 24 THE EU AND THE US ACCOUNT FOR OVER FIGURE 25 SA ACHIEVED THE MOST IMPRESSIVE HALF OF THE AUTOMOTIVE EXPORTS EXPORT GROWTH TO THE EU Share of regions in SA automotive Exports of cars and components (HS 87) exports, 2016 in US$, thousands 6,000,000 1 16.2 5,000,000 4,000,000 18.3 3,000,000 2,000,000 14.2 50.3 1,000,000 0 07 08 09 10 11 12 13 14 15 16 17 20 20 20 20 20 20 20 20 20 20 20 EU NAFTA Africa Mercosur Other EU 27 US SSA Source: Econometrix 2018. Source: UNCOMTRADE Government policy and related regulations and localization of light vehicles. Importantly, imports of used cars are not allowed in South Africa, which differs The automotive industry has a long track record in from many countries in the region. South Africa and government policy has always played an important role in its development. The South African The APDP has several elements and its main objective motor industry dates back to 1924 when the first US car has been to increase production. The APDP’s main maker set up an assembly operation in a Port Elizabeth objective was to increase South Africa’s vehicle wool-packing shed. Although the industry has developed production to 1.2 million units by 2020 (with associated under protectionism, it managed to integrate with the deepening of the components industry and increase in global market after 1994 thanks to the government’s employment). APDP has several elements, including industrial policy and export subsidies under the Motor tariffs, duty rebate schemes and a cash grant scheme Industry Development Program (MIDP). The latter was (Table 3). The duty rebate schemes were introduced replaced with the Automotive Production Development to compensate OEMs for the need to import certain Program (APDP) in 2013 to bring the incentive package components that are unlikely to be produced in South in line with WTO requirements and to grow production Africa in the short- to medium-term. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 75 TABLE 1 SUMMARY OF ADPD Type of incentive APDP elements (2013–20) Tariffs Import duties on vehicles and automotive components remain at 2012 levels (25 percent on light vehicles and 20 percent on original equipment components) through to 2020. A preferential agreement results in imported vehicles from the EU paying 18 percent duty. Duty rebate Applicable Vehicle Assembly Allowance: 18 percent of the locally assembled vehicle’s wholesale price to OEMs only is rebated against the duty payable on imported components used in the production of vehicles (the rebate was 20 percent in 2013 and went down to 10 percent in 2014 and 18 percent in 2015). This represented 4 percent of the ex-factory vehicle price in 2013, reduced to 3,6 percent in 2015. From 2016 the VAA is calculated on a sliding scale based on total plant production, commencing at 10 percent for 10,000 units to 18 percent for 50,000 units annually (Before 2016, only vehicle assemblers producing at least 50,000 vehicles qualified for the incentive). Duty rebate applicable Production Incentive (PI): calculated as a percent of value addition and given in the form to both the OEMs of duty-free import credits. In 2013, this support started at 55 percent of the designated local and component value addition, reducing by 1 percent annually to 50 percent for 2018–20. Vulnerable products manufacturers earn a higher PI. The exact level of benefit from the PI is dependent on the actual levels of value addition and can vary significantly by applicant. Automotive Investment Scheme (AIS): non-taxable cash grant of 20–35 percent of qualifying Cash grant applicable investment in productive assets. The benefit is payable over three-years. Vehicle manufacturers to OEMs and component must demonstrate that they have achieved or will achieve a minimum of 50,000 annual units manufacturers of production within a period of three years to be eligible for the AIS. Qualifying component manufacturers must be part of the OEM supply chain (should be able to provide a contract or a letter of intent issued by the OEM). Source: Adapted from Barnes et al. 2017. Although the APDP initially aimed to support light absolute local content increased thanks to increased vehicle production, some of its provisions were assembly but local content levels as a percentage of extended to the MCV/HCV sector: (a) production sales declined since the start of APDP; (c) there was incentive (PI) can also be earned for components a marginal increase in employment levels, despite the produced for trucks/HCVs (however, it is earned by drive towards automation (Barnes et al/ 2017).74 These the component manufacturer and not passed through results were accomplished against the backdrop of to the heavy commercial vehicle manufacturer as is the overall decline in manufacturing activity in South done on light vehicles), and (b) the AIS scheme for Africa, weak domestic demand, and stagnant demand the MCV/HCV has been available since 2014. in South Africa’s main export markets. The APDP may have also incentivized capital intensive production Interviews with industry stakeholders reveal that (despite the government’s objective to create labor APDP was essential for maintaining OEM operations intensive jobs) and production of expensive/luxury in South Africa and encouraging new investments. vehicles (that have higher margins but will be harder The key results of the APDP could be summarized to sell in the domestic and regional market). as follows: (a) investment by OEMs and aggregate vehicle production has increased (however, the Going forward, OEMs believe that preserving government’s target of increasing production to 1.2 APDP incentives is essential for further growth of million units by 2020 will not be achieved as it was production in the country. Based on the interview over-ambitious for a seven-year period, particularly with The National Association of Automobile in the context of the weak global economy and Manufacturers of South Africa (NAAMSA), if the overcapacity in the global automotive industry); (b) level of future support is equivalent to the APDP, 76 DEEP DIVES the OEMs consider it realistic to grow production process, involving industry associations representing to 1 million units per annum by 2035, with the local both the OEMs and component manufacturers as content level estimated at 39–50 percent.75 well as technical experts and academia. The SAAM sets ambitious targets of reaching 1 percent of the The government has approved the South African global production, increasing local content to 60 Automotive Master (SAAM) Plan 2035 as the main percent and achieving a 100 percent employment instrument to continue supporting development of growth (Figure 27). It also places increased emphasis the automotive industry. The SAAM Vision and on localization and development of strategic linkages summary of objectives were announced by the DTI between South Africa’s materials base (particularly Minister on November 23, 2018 and the work platinum group metals, aluminum and certain grades on implementation guidelines and action plans to of steel), and emerging automotive technology. The achieve the vision is about to commence.76 The SAAM Vision also prioritizes development of lower SAAM vision was developed through a consultative Tier majority black owned suppliers. FIGURE 26 MASTER PLAN VISION, OBJECTIVES, AND PILLARS 2035 VISION A globally competitive and transformed industry that actively contributes to the sustainable development of South Africa’s productive economy, creating prosperity for indusry stakeholders and broader society Key objectives: 1% of global vehicle production, up to 60% local content, 100% employment growth, competitiveness to leading competitor standards, transformation of the auto value chain, increased vallue addition 1 2 3 4 5 6 Local market Regional market Infrastructure Industry Technology & Localisation optimisation development development transformation associated skills development Supporting institutional environment (including monitoring and evaluation) Enabling policy post - 2020 Source: Barnes et al. 2017b. APDP incentives were extended to 2035 with be earned based on local value addition rather than amendments to support achievement of SAAM objectives manufacturing sales value. It will be implemented in a and to place a greater emphasis on localization. The phased manner over the period 2021 to 2026 to protect main change is the replacement of VAA with a Volume existing OEM volume investments. Table 4 provides a Assembly Localization Allowance (VALA), which will summary of APDP amendments. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 77 TABLE 2 SUMMARY OF KEY ADPD AMENDMENTS Current APDP (2013–2020) APDP Policy amendments (2021–2035) Tariffs No change in the overall tariffs; subject to engagement with the EU, the duties on EU products will be aligned with duties on products imported from other countries. Vehicle Assembly To be replaced with Volume Assembly Localization Allowance (VALA) set at 35 percent of Allowance local value add for OEM volumes above 10,000 units annually from 2026. Transition set at 40 percent in 2021 and reducing annually. Production Incentive (PI) PI to increase from 10 percent to 12.5 percent of value addition; vulnerable status benefits will be removed, so that all components earn the same benefits to eliminate any distortions in localization decisions. AIS AIS is maintained but it will be reduced by 5 percent if non-South African tooling and machinery are used. Source: DTI, 2018 APDP Policy Amendments 202–2035. Note: MCV/HCV manufacturers will benefit from PI and AIS incentives in the same as light vehicle manufacturers. To qualify for current and future incentives, the component manufacturers and local companies industry must comply with the Broad-Based Black (limiting the potential of technology transfer). Economic Empowerment (BBBEE) legislation. The BBBEE program was introduced in 2003 to empower OEMs have come up with an initiative to create a black- the previously disadvantaged population groups and managed (equity equivalent) venture capital fund to grow the economy. The BBBEE scorecard currently has satisfy ownership requirements. The program would five key components: (a) ownership, (b) management allow multinationals to earn ownership credit without and control, (c) skills development, (d) enterprise selling shares to black shareholders. The goal of the and supplier development, and (e) socio-economic fund would be to drive black supplier development, development. The regulation was amended in 2016. upstream dealer initiatives and job creation. As a result One of the significant changes was the increase in the of this initiative, OEMs could move from Level 8 to weight of the ownership requirements. Furthermore, Level 4. The size and scope of the program as well as the penalties were introduced for non-compliance with contributions by OEMs are currently under discussion. priority areas (ownership, enterprise development, and supplier development), which result in downgrading by one level. In particular, black ownership must reach Priority constraints to private 40 percent of the net value to avoid a downgrade. sector development and Companies with an annual turnover of R 10 million investment or less (previously R 5 million or less) now qualify as Exempt Micro Enterprises (EMEs) and are awarded Further growth of the industry and achievement of automatic Level 4 status. government targets is constrained by several factors. Some of these, like the small domestic market and lack The ownership requirement is hard to reach for of the regional value chain are external constraints the OEMs and international companies that that are hard to act on in the short-medium term. The cannot dilute ownership due to host governments’ key constraint to achieving the government’s targets requirements. As a result, OEMs’ compliance on growing employment, value-added and localization declined from Level 5 in 2015 to Level 8 in 2016 is relatively weak capacity of local suppliers, linked to and 18. International Tier 1 suppliers also struggle deficiencies of the education system and low prevalence to achieve the ownership requirement and it may of R&D in South Africa. While OEMs can overcome discourage joint ventures between international some of the skills constraints by large investments 78 DEEP DIVES in in-house training and sending employees to their demand due to slow economic growth and high poverty global excellence centers, the local component industry and inequality. South Africa’s local market is small is struggling to compete with rivals from other compared to other BRICS countries and a large share developing countries that have access to stronger talent of cars is imported: 73 percent of passenger vehicles pools. Investing in upgrading supplier capabilities are imported compared to 20 percent of LCVs (the and identifying further opportunities for component LCV market is much smaller, however, relative to the localization would thus be the key measure to increase passenger market) (Barnes et al. 2017b). The regional industry competitiveness, which could be acted upon market is also relatively small and highly fragmented; in the short-medium term. Lastly, deficiencies in the new car sales in SSA countries are below 30,000 units investment climate and high logistics costs increase a year. Used vehicles imports (mostly from Japan and the costs of doing business for all firms in the industry the United States) present strong competition for and reduce the attractiveness of South Africa as an potential South African exports; this is because only investment destination for the manufacturing industry. the elites are able to afford new passenger cars, often in the luxury segment. There is also no regional value Small domestic market and weak regional chain that feeds the automotive industries in ASEAN, integration—impede production growth NAFTA, and Central Europe/Turkey. The resulting lack of economies of scale discourages the growth of South Africa has a small domestic market with stagnant the components industry. FIGURE 27 SOUTH AFRICA’S DOMESTIC MARKET IS RELATIVELY SMALL Total new vehicle sales* 702 610 669 419 649 216 644 257 630 541 617 649 619 733 599 277 578 877 581 715 565 002 564 851 557 697 547 547 532 318 492 795 449 675 393 405 367 130 368 504 350 180 341 085 295 787 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Impact of financial crisis Source: Lightstone Auto, Econometrix. Excluding re-exported imports Shortages of skills and labor costs increase during interviews than OEMs. Domestic MSMEs find production costs, which has a negative it hard to afford large in-house training programs, impact on component manufacturers similar to MSMEs in other countries. Product development and component manufacturing often As is the case with other knowledge intensive also involve higher skill levels than mere assembly. industries, skills shortages are a challenge in the Skills shortages therefore have a strong negative automotive industry. Local component manufacturers impact on component localization and domestic were more likely to identify skills as a constraint value addition. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 79 Lack of skills combined with the rigid wage setting Salaries are typically negotiated at the subsector mechanisms also contribute to the relatively high level every three years. This rigidity hurts small and labor cost provides the average wages in the industry. medium suppliers. TABLE 3 AVERAGE SALARIES IN THE AUTOMOTIVE INDUSTRY Total Share of Average annual wage employment formal employment per employee 2017 Manufacturerof motor vehicles 39 335 100 % R 377 406 Manufacture of bodies (coachwork) 7 980 91,6 % R 172 730 for motor vehicles Manufacture of vehicles components 43 081 96,1% R 234 911 Motor trade, maintenance and repair 401 203 56.2% R 180 820 Source: Adapted from Econometrix 2018, based on STATsSA data. Employees with engineering, management and select are barely recognized by the industry. In addition, artisanal skills are in high demand but the supply completion rates in engineering fields have been low of graduates with these qualifications has lagged. (Figure 29). Many of the skills in high demand by In particular, there is strong demand for engineers, the industry can also be acquired through vocational especially with degrees in mechatronics. Furthermore, training. For example, merSETA’s list of skills in high there is significant variation in the quality of demand, compiled with inputs from the industry, university education. While some universities offer show over 1000 vacancies for motor mechanics and world class curricula, the degrees awarded by others welders (Table 6). FIGURE 28 FIRST DEGREES AWARDED IN SELECTED ENGINEERING FIELDS, 2013-16 1,400 1,200 Number of 1,000 graduates 800 600 400 200 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Chemical engineering 309 327 361 363 511 533 588 515 521 653 671 703 428 Electrical engineering 627 637 712 799 852 853 858 884 865 934 1092 1174 528 Mechanical engineering 328 338 345 401 506 615 754 619 934 1025 1124 1160 802 Industrial engineering 167 221 275 332 387 400 482 344 389 431 510 569 221 Metallurgical engineering 38 51 86 79 109 99 157 135 151 140 170 179 54 Source: merSeta. 2017. 80 DEEP DIVES TABLE 4 MANY OF THE TOP TEN SKILLS REQUIRED BY THE INDUSTRY CAN BE ACQUIRED THROUGH VOCATIONAL TRAINING Rank OFO Code Occupation Relative demand 1 2015-653101 Automotive Motor Mechanic 1305 2 2015-651202 Welder 1285 3 2015-312201 Production/Operations Supervisor (Manufacturing) 1261 4 2015-832901 Metal Engineering Process Worker 904 5 2015-651302 Boiler Maker 783 6 2015-671101 Electrician 771 7 2015-721901 Product Assembler 689 8 2015-653306 Diesel Mechanic 624 9 2015-653303 Mechanical Fitter 618 10 2015-214101 Industrial Engineer 574 Source: merSeta 2017. The TVET institutions suffer from several replacements) and some lecturers demanded weaknesses, including an outdated curriculum with additional remuneration to their college salary poor links to industry needs, a lack of qualified for industry exposure (merSETA 2017). professors and a lack of industry exposure for students and lecturers. Traditionally, TVET college Apprenticeships can provide useful industry exposure programs in engineering had a narrow content and and have a positive impact on employment, but were designed to meet the demands of manual low completion rates are low. Apprenticeship programs skill industries. Today, the main fields of studies are aimed primarily at entry level employees with offered by TVETs in manufacturing include: high school degrees. merSETA data shows that about electrical engineering, boilermaker, diesel mechanics 84 percent of those who completed the program were and engineering-related design. The importance employed. Despite good employment prospects, on of TVET education for skills development and average about a third of participants who registered youth employability has been recognized by the for apprenticeships in the past three years did not government. In particular, merSETA has partnered complete the program (merSETA 2017). with 39 TVETs across the country and offers: (a) bursary support for TVET lecturers to strengthen The industry responded to skills shortages through qualifications through university training, (b) heavy investments in in-house training. A recent on-the-job training for TVET learners, and (c) merSETA report shows that even small firms in the funding for TVET lecturers who are not trade- automotive (“motor”) industry provide training to certified artisans to spend 18 months in the over a third of their employees while all workers benefit workplace (with the option of the trade test from training in large firms (Figure 30). The OEMs after the intervention). The latter program had are also making significant investments in training and a low uptake, however: some colleges could not have collectively spent R 1.5 billion in training and release lecturers (due to difficulties in finding development during 2015–17 (Econometrix 2017). SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 81 FIGURE 29 TRAINING TO WORKERS IN THE AUTOMOTIVE RELATED INDUSTRIES Training intensity (percent of employees who are trained by size of business in each subsector) Firm size Auto Metal Motor New tyre Plastics Small firm 80.2 47.4 41.3 38.0 36.0 Medium-sized firm 65.0 73.4 53.4 - 100.0 Large firm 45.8 100.0 0.0 94.8 Source: merSETA 2018, based on Bhorat and Naidoo, 2016. Note: Auto refers to the after-market segment. merSETA programs address some skills gaps but the and safety standards along with tight production impact seems to be uneven. merSETA (similar to other deadlines. Profitability trends are correlated with SETAs) is funded through a levy paid by employers. company size: firms with over €10 billion revenues Employers whose total annual salaries to employees have higher margins than smaller suppliers (Berger exceed R 500,000 have to pay a 1 percent levy of 2017). Relations with OEMs are often transactional the total amount paid in salaries (including bonus (OEMs change models every seven to eight years, payments). merSETA conducts a survey of employers making it hard to have a long-term plan for suppliers. on a regular basis to identify key skills gaps and Component manufacturers for new models are facilitates access to training through grants. Some selected through global competition and typically are interviewed stakeholders believed that merSETA not changed in the middle of the cycle. Furthermore, offers useful services and expressed appreciation physical proximity to OEMs is also often important for its work. However, others felt that the type of due to the expectation of no defects and pressure to training offered was too general and did not respond reduce working capital cost by reducing inventories. to the needs of specific sectors or enterprises. Some In fact, the agglomeration effects are so strong of the component firms felt that OEMs benefit that South African suppliers often need to operate disproportionately from the training opportunities and in four locations. Thus, distance to automotive that the perceived bureaucracy of accessing merSETA manufacturers in other regions disadvantages South funding discourages small firms to apply. These issues African suppliers. were also recognized in the recent merSETA report. Lastly, some interviewees felt that firms would spend Weak capabilities in component manufacturing more on training if they did not have to contribute limit the spillovers from OEM investment, value the 1 percent levy (that is, if a firm has paid the levy added and employment in the industry. This also and did not benefit from it, they would not allocate weakens South Africa’s position as an automotive additional resources for skills development). investment destination due to the time and costs associated with importing components. Most of Weak capabilities of suppliers and low the components sourced locally are basic products localization limit the value added of the industry (Figure 32). The value-addition in the supply chain is also skewed toward OEMs, which is different from The global automotive component industry the situation in the global OEM supply chain (Black is characterized by high barriers to entry, low and Barnes 2018, Figure 32). Technology transfer margins and transactional relations with OEMs. could happen through joint ventures between the The automotive component industry is knowledge established foreign suppliers and local firms (as in and capital-intensive (particularly at the Tier 1 Eastern Europe), yet the BBBEE requirements on level) and suppliers have to meet strict quality equity transfer discourage this arrangement. 82 DEEP DIVES FIGURE 30 BREAKDOWN OF LOCAL CONTENT WITHIN COMPONENT SUPPLY TO SIX OF SOUTH AFRICA’S SEVEN OEMs, JANUARY-MARCH, 2017 Other Exhaust systems 3,2% 4,0% Drive train 5,8% Foundry/Forge 6,2% Safety systems 2,1% Harnesses/Electronics 7,9% Tyre & rubber 1,8% Plastic moulding 7,9% Metal form/press 27,1% Components 12,8% Automotive Trim 21,1% Source: Black and Barnes. 2018. FIGURE 31 OEMs IN SOUTH AFRICA ACCOUNT FOR DISPROPORTIONATE SHARE OF VALUE ADDITION Value addition breakdown SA OEM auto supply chain OEM OEM 20% 40% T1 T1 30% 40% Tn 50% Tn 20% Global OEM auto supply chain Source: Black and Barnes. 2018. The government has recognized the problem and coordinate supply chain development activities at the several supplier development programs were put national level, (b) improve supplier capabilities and in place in collaboration with the private sector. efficiency of production; and (c) promote localization Some of these programs are of world class quality. (including through the identification of opportunities South Africa has a broad range of SME support for raw materials beneficiation). ASCCI is supported programs and incubators open to all sectors. In by dti, the two industry associations (NAAMSA and addition, the automotive industry benefits from NAACAM), and labor. several sector-specific programs implemented at the national and provincial levels. For example, the ASCCI had a positive impact on suppliers’ Automotive Supply Chain Competitiveness Initiative productivity while achieving progress in localization (ASCCI) was established in December 2013 to (a) proved to be more challenging. ASCCI’s World Class SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 83 Manufacturing Program initially focused on improving facilitated the linkages between an OEM and productivity of Tier 1 companies, but later also a potential supplier. As a result, Ford will be incorporated Tier 2 and aftermarket firms. The first two localizing drive shaft production with Dana Spicer phases of the program implemented during 2015–16 Axle South Africa for its next model, which will and 2016–17 benefited 33 suppliers. As a result of the bring in a combined investment of R 51 million program’s intervention, customer return rates improved across Tier 1 and 2 suppliers and about 40 new jobs by 39 percent, time lost due to machine breakdowns (ASCCI Annual Report 2018). Localization of other improved by 40 percent and time lost due to machine potential components identified by ASCCI has not changeovers improved by 39 percent. The average materialized yet. manufacturing value added (MVA) growth per firm increased by R 2.5 million and average productivity There are also provincial government programs (MVA per rand employee cost) increased by 3.5 percent that aim to improve supplier capabilities with (ASCCI Annual Report 2018). Despite ASCCI’s best a particular focus on black-owned companies: efforts, increasing localization proved difficult.77 Indeed, Gauteng Automotive Industry Development localizing components requires advanced planning (for Center (AIDC), Durban Automotive Cluster example, several years before a new model is launched, and Eastern Cape Automotive Industry Forum. collaboration with OEMs and Tier 1s and often pre- Although the scope and type of support programs existing supplier capabilities). differs by province, each of the provinces has interventions to nurture black owned suppliers There is only one promising case to date. ASCCI and runs some productivity improvement identified an opportunity to localize drive shafts initiatives. Box 10 summarizes the activities of using domestically available technology and Gauteng’s AIDC Center. BOX 10 SPOTLIGHT ON GAUTENG AUTOMOTIVE INDUSTRY DEVELOPMENT CENTER (AIDC) AIDC provides comprehensive support to development facilities will incorporate a university, a school, a hotel, a of the automotive industry in South Africa. It has three shopping center, houses, and apartments. key initiatives to promote supplier development, nurture black owned startups and encourage knowledge sharing Incubation programs with two OEMs provide broad and technology transfer: an automotive supplier park, two ranging support to beneficiaries and are implemented in incubation programs and a learning center. close partnership with the private sector. Each AIDC program is managed by experienced industry experts, housed at the The Automotive Supplier Park spans 130 hectares OEM facilities and run in close collaboration with Tier 1 and houses multiple Tier 1 companies as well as local suppliers. The program is targeted to black engineers with component manufacturers supplying BMW, Ford, and at least five years of management experience. In addition Nissan. Factories are developed to tenant specifications. to technical skills, the applicants must pass a psychometric Suppliers benefit from shared infrastructure and services, test. Participants are selected in collaboration with Tier including centralized security, logistics, conference 1 companies and work with them closely throughout the facilities, canteen, and healthcare facilities. The ASP five-year incubation period. Only six participants take part also provides a wide range of ICT services, including in the program at a time. Incubatees supply components broadband internet, server access, back up, and data directly into the OEM production lines under the technical recovery. Furthermore, tenants benefit from warehousing guidance and supervision of Tier 1 firms. AIDC provides and distribution services offered by independent service mentorship, human resources, finance and payroll services providers and a container depot which handles in and at a nominal fee to incubatees. The OEMs cover the utility outbound container traffic. There are plans to further costs as the facilities are located on their premises. The expand the infrastructure through the establishment of the income earned by incubatees over the five-year period is Tshwane Automotive City, which in addition to production accumulated in their bank accounts and they receive it 84 DEEP DIVES after graduation from the program, which provides them with an OEM provides state of the art equipment and with start-up capital. Only one round of participants has training for staff of the OEMs, component manufacturers completed the program. Based on the interviews with and dealer networks. It offers computer assisted component AIDC staff, all are running their businesses, although not design and a simulation line where one can practice vehicle necessarily serving the same OEM. assembly, along with a welding simulator and a spray simulator. The Centre was recently accredited by the U.K.- Automotive Learning Centre established in partnership based Institute of the Motor Industry (IMI), Sources: Interviews with AIDC staff and AIDC website http://www.aidc.co.za/. Industry support programs may have contributed trends in supplier performance on such important to the improving performance of South African parameters as changeover time and customer return suppliers, yet they remain behind competitors from rate (Table 7). Yet, capital expenditure has been the emerging economies on sales growth, profitability, stagnating and is almost twice as low than for the and value-added. The analysis recently carried out average suppliers in comparator emerging economies by B&M Analysts examines the performance of the (Table 7 and Table 8). Operating profitability and South African component manufacturers during average sales during 2015–17 have been improving 2015–17 and compares it to that of suppliers from but are lower than in comparator economies (Table other developing countries. The study shows positive 8) (B&M Analysts 2018). TABLE 5 SOUTH AFRICAN SUPPLIERS IMPROVED THEIR PERFORMANCE ON MANY INDICATORS Indicator 2015 2017 Changeover time (% of production time lost) 4.49 3.38 Customer return rate (parts per million) 424 150 Operating profitability (% of sales) 5.64 7.2 Absenteeism rate (%) 3.5 3 Spending on training (%) 1.24 1.5 Capital expenditure (% of sales) 3.62 3.58 Source: Adapted from B&M Analysts, 2018. TABLE 6 COMPARATIVE PERFORMANCE OF SA SUPPLIERS RELATIVE TO OTHER EMERGING MARKETS, 2017 Indicator South Africa Emerging economies Growth in average sales adjusted for inflation (2015–17) 13% 18% Employment growth (2015-2017) 8.7% 5.9% Operating profitability (% of sales) 7.2% 15.9% Capital expenditure 3.5% 6.7% Absenteeism rate 3% 6.8% Spending on training % 1.5% 1.44% VA per unit of total employee cost (including capital expenditure) 2.69% 4.32% Source: B&M Analysts 2018. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 85 The top quartile of South African suppliers Weak R&D and metrology limit opportunities perform below the average for emerging economies to move up the value chain on capital expenditure and value-added per unit of employee cost. At the same time their record on South African firms invest little in R&D and the sales growth and operating profitability approaches automotive industry is no exception. About 6 percent the average for emerging economies. This shows of medium and large South African manufacturing that even the best South African suppliers need to firms invest in R&D compared to 3 percent of firms catch up with their competitors on productivity. in the automotive industry (Annex 12). This is in sharp There are also significant differences in contrast with the global trends; the global automotive profitability between the lowest quartile of South industry is one of the most R&D intensive. For example, African suppliers, whose profitability reaches 1 the automotive industry ranks first in Europe in terms percent of sales, and the upper quartile, whose of R&D expenditure, well ahead of pharmaceuticals, profitability reached almost 15 percent of sales aviation, or engineering goods.78 Unlike other emerging (B&M Analysts 2018). Similarly, sales growth economies (such as India, Turkey, Czech Republic), was 0.15 percent among the lowest quartile of there are no private automotive R&D and product suppliers versus 15.75 percent among the top development centers in South Africa. Although product quartile during 2016–17 (B&M Analysts 2018). design and R&D centers are often located close to the A great deal can be learned from the good OEM’s headquarters, several emerging economies have practices already available in the country. managed to break into this space (see Box 11 on Turkey). BOX 11 AUTOMOTIVE R&D IN TURKEY Turkey has nine automotive R&D centers, which R&D sector in 2015, and 1,325 patent applications were support not only local operations but also production filed. Several factors may have contributed to Turkey’s in other plants belonging to parent companies. Some success in developing R&D capabilities: (a) relatively Tier 1 suppliers and local component manufacturers large production volumes (1.7 million units as of 2017) are also engaged in product development and there and the fact that Turkey is the leading manufacturer for are international firms specialized in R&D consulting, some of the models; (b) a large pool of engineers (over testing, and certification for the automotive industry. 47,000 university graduates in the automotive fields); Over 4,000 specialists were employed in the automotive and (c) government support programs. Source: Republic of Turkey Prime Ministry Investment Support and Promotion Agency. http://www.invest.gov.tr/en-US/infocenter/publications/Documents/ AUTOMOTIVE.INDUSTRY.pdf. The government offers R&D incentives to the and are skewed towards product rather than process industry, but the selection criteria and bureaucracy innovation. Furthermore, the long and cumbersome associated with the application process may be application process discourages applications from discouraging applications from the component MSMEs. Box 12 discusses the experience of one of suppliers. Similar to OECD economies, the the local Tier 1 firms supplying coils, leaf springs, government offers R&D incentives but they tend to torsion and stabilizer bars for the OEMs based in prioritize new-to-the-world products and services South Africa in obtaining the R&D incentive. 86 DEEP DIVES BOX 12 INTERVIEW WITH A COMPONENT SUPPLIER The company developed a new method of applying paint, science, the government official had little understanding which reduces waste and results in environmental and cost of the automotive industry’s technological requirements, benefits. The firm succeeded in receiving the R&D incentive including the fact that most R&D in the automotive industry but had to go through a long and cumbersome process and is process rather than product focused (OEMs dictate which in the words of the firm “submit a thesis rather than an products they need and what materials/steel grades to application form.” It took 16 months to obtain the approval. use). The DST officer initially requested that the firm apply The head of the firm’s R&D department felt that while for a patent to receive the government incentive although the DST officer had a good background in chemistry and the requirement was eventually abandoned. Several South African universities are doing relevant manufacturers test their vehicles on public roads. research but there is little collaboration with Development of a common testing facility could industry. Nelson Mandela University is known potentially strengthen South Africa’s position as for its research on batteries and electric vehicles, an automotive investment destination and create Stellenbosch university for work on connected additional jobs, including in the tourism industry. vehicles and University of Pretoria for research on vehicle dynamics and safety. While these universities Deficiencies in the investment climate increase collaborate with international researchers, there is operating cost insufficient cooperation with the domestic industry. The general deficiencies in the investment climate, Furthermore, lack of certified metrology institutions including red tape, unreliable electricity supply disadvantages South African suppliers that need to incur and high trade logistics costs, have an adverse high costs for testing, which is usually done abroad. impact both on the automotive industry and other Although some testing is OEM specific and will not be manufacturing industries. Although South Africa has feasible to localize, many general tests could be done in some SEZs that perform well (such as Coega), most South Africa but are not currently available. The Bureau manufacturing firms are located outside the zones. of Standards provides a limited number of general tests. Firms face administrative costs related to compliance Its ISO testing is not recognized by the OEMs. Although with government regulations and obtaining permits. some universities have well equipped laboratories (for Reliability of electricity supply is also an issue in example, Nelson Mandela Bay, University of Pretoria) some places, to the extent that it influences suppliers’ and offer testing services, not all industry players location. For example, some of the interviewed (particularly MSMEs) are aware of these opportunities. suppliers chose to locate close to an OEM to be on A few of the interviewed component manufacturers the same grid, so that if there is an interruption in that have done testing at the universities were happy the electricity service, it impacts both the supplier with the quality of service but felt that the process took and the OEM. too long. A specialized vehicle testing facility operates in Gauteng but it is mostly targeted to the OEMs. South Africa compares poorly to other emerging economies on the time and cost of getting electricity. It South Africa’s unique climate and good public roads takes on average 114.2 days and costs 391.5 percent offer potential to turn South Africa into a global of income per capita to connect a business to the grid, center for hot weather car testing. Upington—a which is a month longer and three times costlier than town in the Northern Cape Province—is already in the BRIC economies (Brazil, the Russian Federation, a prominent place on the global map of vehicle India and China), where it takes 84.1 days and testing. Most major international manufacturers test costs 137.2 percent of income per capita on average new car models in this town during the European (World Bank 2018b). South Africa also performs winter (South African summer) due to its extremely worse than the BRIC economies on the reliability hot climate and good-quality roads. Volkswagen of electricity supply as measured by the World Bank has constructed its own testing facility while other Doing Business report. Indeed, the country scores SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 87 1.6 points on a (0–8 scale) on the Doing Business among South African cities. For example, it takes 91 reliability of electricity supply and transparency days to obtain electricity connection in Cape Town of tariffs index, compared to 6.6 points for BRIC compared to 190 days in Nelson Mandela Bay. The and 7.4 points for high income OECD economies. costs of obtaining electricity connection and monthly There are significant differences in performance electricity consumption. TABLE 7 SOUTH AFRICA HAS THE HIGHEST EXPORT COSTS RELATIVE TO COMPARATOR ECONOMIES Country Cost to export (US$), Cost to import (US$), Border Compliance Border Compliance Argentina 150 1,200 Brazil 958.7 969.6 Colombia 545 545 Czech Republic 0 0 Hungary 0 0 Indonesia 253.7 382.6 Malaysia 321 321 Morocco 156 228 Poland 0 0 Slovak Republic 0 0 Turkey 376 655 Thailand 223 233 South Africa (Durban) 1,257 676 Source: World Bank. 2018 b for South Africa and World Bank 2018 a for other countries. Note: The costs include cargo dues levied by Transnet Ports Authority, terminal handling charges imposed by Transnet port terminals, and other port service fees charged by the shipping lines. Recommendations for growth given the continent’s rising population, growing urban middle class, the new continental Government efforts to increase the industry’s free trade agreement and the fact that this market competitiveness could focus on four priorities: has not yet been actively targeted by manufacturers (a) expanding exports to the Africa region and from other major automotive destinations. maintaining market access to the United States and Geographic proximity and experience of South the European Union, (b) strengthening skills and Africa’s investors in the region also gives the supplier development (building on good practices that country a competitive edge. It will be important to already exist in the country), (c) strengthening R&D build on the African Continental Free Trade Area and metrology, and (d) improving the business climate. (CFTA) to reduce tariff and non-tariff barriers to trade, particularly with economies that are trying Expand exports to the Africa region and grow to develop their own automotive industries—such market share in the United States and the EU as Nigeria, Rwanda, and Kenya. Furthermore, supporting university-industry collaboration on The Africa region presents a good opportunity for adapting vehicles to African road conditions can export growth, but it is not a low-hanging fruit. help South Africa become a preferred supplier for Indeed, the African market offers opportunities the African market. 88 DEEP DIVES Proactive engagement in trade diplomacy with modules into the supplier development programs. the United States and the European Union will be important to maintain and grow exports in South The establishment of the Venture Capital Fund Africa’s traditional markets. It will be important to can provide additional opportunities for skills and continue policy dialogue with the United States over supplier development. The resources could be used the post-AGOA trade regime, maintain the Economic to incentivize development of components with Partnership Agreement with the EU and negotiate a higher value added, co-fund university-industry post-Brexit deal with the United Kingdom. collaboration, and develop technical partnerships with other African economies. Strengthening skills and supplier development Improve R&D and metrology Skills development is a long-term agenda that involves increasing the quantity and quality of labor. The government may consider building on pockets It will involve strengthening primary and secondary of excellence at some universities to support research education to equip school graduates with better skills on adapting vehicles to African countries’ conditions and to increase the availability of qualified university and incentivizing universities to offer testing services applicants. It will also entail development of incentives to component manufacturers. Several universities for students to major in technical and engineering are already doing research in areas relevant to the fields that are in high demand in South Africa. industry and have quality labs and equipment to do testing. However, university staff focus mostly on In the medium term, the government can consider teaching and research while work with the industry, strengthening the quality and relevance of TVET particularly local MSMEs, is not necessarily their education, particularly in locations close to the four priority. Creating incentives for industry-university automotive clusters. Private operators can expand the collaboration could help increase the economic course offering, improve the relevance of curriculum benefits of the expertise already available in the and create some competitive pressures on the public country. Furthermore, it will be important to TVETs to improve the quality of teaching. merSETA’s strengthen the capacity of the Bureau of Standards ongoing initiatives to provide TVET lecturers and to expand the range and quality of services it offers students with industry exposure are a step in the to the industry. right direction and should be continued. At the same time, merSETA’s outreach and impact on The government may also consider reforming R&D strengthening skills in Tier 2–3 suppliers could be tax incentives to better account for the needs of improved by simplifying the application process and the industry and the economy at large. Extending providing training that is better tailored to individual the eligibility criteria to allow for investments in companies’ needs. technology absorption and incremental R&D as opposed to new-to-the-world innovation will make Evaluating and scaling up good practices in supplier the incentive more relevant for a large number of development programs is another important priority. domestic firms. Simplifying the application process Each of the provinces is currently running a supplier for the R&D tax incentive can encourage greater development program with the support of the uptake by MSMEs. It is good practice to limit the provincial government. Distilling and scaling up some time for government officials to issue decisions on of the good practices (such as AIDC’s incubation applications and for this period not to exceed a program) across the three provinces could support year. Some OECD countries provide an option for the government’s drive to promote localization and an immediate refund to small companies that tend to transformation. ASCCI’s initiative to identify the be more financially constrained (World Bank 2017). materials, which could be used in the automotive industry (such as aluminum, chrome) and develop Improve the business climate Tier 3 suppliers is also worth exploring further, along with ASCCI’s current efforts to localize certain parts Regulatory reforms aimed at reducing the time based on the interest of OEMs and availability of local and cost of regulatory compliance will benefit all expertise. Lastly, given the upcoming Carbon Tax businesses. The government’s reform agenda can Bill, and high energy costs in some locations, it will be informed by some of the good practices already be worthwhile incorporating green manufacturing available in select municipalities (see World Bank SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 89 2018 b for more information). Improving reliability interconnectivity and data exchange. Several pilot of electricity supply and reducing the costs associated initiatives on interconnectivity of customs systems with getting electricity will be important to sustain with a few countries in the region are under way, but the competitiveness of manufacturing industries. more can be done in this regard (World Bank 2018b). Similarly, it will be important to reduce trade logistics costs, given South Africa’s distance to major markets as well as its aspirations for becoming the gateway How the World Bank Group of manufacturing exports to other parts of Africa. can help Several measures can be implemented to improve the ease and cost of obtaining electricity connection. The focus on the automotive industry is relevant Specifically, the government can consider for the World Bank Group program given its streamlining and fully automating the approval importance for the South African economy, current process for obtaining the electricity connection and engagements in the country and World Bank Group’s reducing the time limits for connecting customers experience in designing support programs for the to the grid by at least 30 percent to optimize automotive industry in other countries. Given the utilities’ performance. To reduce the costs of linkages of the automotive industry, particularly getting electricity connection, utilities may consider component manufacturing, with other sectors of lessening the burden of the security deposit. For the economy, its growth can serve as a springboard example, the deposit could be returned after one for manufacturing. Increasing the competitiveness or two years if the customer is current on its of South Africa’s automotive industry will require a payments rather than at the end of the contract. The multi-pronged approach and results will depend not government can also strengthen efforts to measure only on addressing sector specific challenges—skills, power interruptions and their duration more supplier capabilities and investment climate issues— effectively by installing an advanced distribution but also on maintaining duty free access to key management system or an outage management markets and decisions by OEMs to grow production system. Significant improvements in the quality volumes. The latter is of fundamental importance for of power supply require substantial investment to component localization. In supporting the growth of reduce transmission losses and increase generation the South Africa’s automotive industry, the World capacity (World Bank 2018b). Bank Group can build on IFC’s recent investment in in the automotive sector and the ongoing work with Reducing trade logistics costs will entail infrastructure the Department of Trade and Industry on investment upgrades, increasing the use of electronic transaction policy and promotion. systems and strengthening regional cooperation. Durban is South Africa’s most congested port and The World Bank Group can offer a menu of improving its performance will require expanding interventions to support the growth of the automotive investment in infrastructure and equipment industry in South Africa. Possible options include: (Durban’s key export products are vehicles and advisory work on improving supplier capabilities and components, so improving its performance is potential IFC investment in promising component particularly important for the automotive industry). manufacturers; TVET reform; support in development South Africa may also consider introducing an of regional value chains (given the strong interest electronic single window concept to link all relevant of other SADC countries) and fostering technical government departments electronically. Lastly, as a partnerships with African economies that wish to leading economy in the region, South Africa can develop their automotive industries; investment play a stronger role in regional integration through climate reforms and development of special economic leadership in harmonization of necessary documents zones; and support in structuring the programs of the and procedures and establishment of customs Venture Capital Fund. 90 DEEP DIVES In Summary Factors affecting Policy options World Bank Group role private investment outlined in the report Automotive: Size of the domestic market and Assess the impact and cost-benefits of the Advisory support to develop regional integration: The domestic Automotive Masterplan to ensure that it can regional value chains and cross- market is small and imports account meet volume and localization targets. border trade in components. for a significant share. There is no Enable expansion of exports to the Africa region regional value chain. through trade negotiations; university-industry collaboration to adapt vehicles to African roads. Trade diplomacy with the United States and the EU to maintain South Africa’s exports in its current markets. Skills and supplier development: Improve merSETA’s outreach and the impact of Advisory support to upgrade TVETs, Skills are in short supply in the training to suppliers. assess and strengthen supplier engineering, management and Evaluate and scale-up good practices in development programs and select artisanal professions. TVET existing supplier development programs. localization potential, share expertise institutions suffer from outdated Continue ASCCI’s initiatives to localize certain in structuring, management and curriculum with poor links to parts based on the interest of OEMs and deployment of the planned Venture industry needs. Capabilities are weak availability of local expertise. Capital Fund. in component manufacturing. Incorporate skills and supplier development Potential IFC investment in private programs into the activities eligible for support TVET schools, instruments for from the planned Venture Capital Fund. short-term and long-term financing needs of suppliers, equity finance for existing and new JVs/M&As; Capex for expansion, modernization, greenfield investment, corporate finance, and working capital; support establishment of pooled funds and blended finance facilities. R&D and metrology: Firms in the Create incentives for industry-university Advisory support to support industry- automotive industry are less likely to collaboration, with a focus on MSMEs. university collaboration programs, invest in R&D than other manufacturing Incentivize universities to offer testing services R&D incentives policy, strengthen firms. Domestic suppliers incur high to component manufacturers. public metrology institution. costs of testing abroad due to lack Strengthen the capacity of the Bureau of Standards. of accredited metrology institutions. Reform R&D tax incentives to encourage OEMs R&D tax incentives prioritize new to and domestic suppliers to invest in innovation. the world innovation and involve a long application process. Investment climate: Deficiencies exist Reduce the costs of obtaining electricity Advisory support to improve the in the investment climate, including red connection and improve reliability of supply. investment climate at the local level, tape, unreliable electricity supply, and Improve trade logistics by introducing electronic upgrade SEZs based on the best local high trade logistics costs, and scope single window and further harmonization of practices, improve interconnectivity to strengthen the design of support documents and procedures. of customs systems; and improve programs to minimize market distortions. the design of support programs to minimize market distortions. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 91 3.3. Information and Communication exports and investments in ICT are close to 3 percent of Technologies deep dive GDP (StatsSA 2017). An assessment using a digitization index shows that a relatively conservative broadband South Africa is well-positioned to profit from a vibrant investment figure of R 65 billion in the next 10 years digital economy and to become a regional digital hub. could result in the creation of more than 400,000 jobs It enjoys several strengths from a regional perspective: and more than R 130 billion being contributed to a relatively strong manufacturing base, deep and GDP in South Africa. Attracting further investment diversified financial and capital markets, competence would allow South Africa to bring more reliable and in research & development, and internationally affordable internet services to its citizens and to reap recognized universities. Already the sector’s impact is the full benefits of the digital economy in terms of growing: ICT contributes about 17 percent of service employment, productivity, exports, and service delivery. FIGURE 32 ICT CONTRIBUTION TO GDP ICT contribution to GDP ICT contribution to GDP Contribution to Gross Value Added (R billion) by subsector (R billion) by sector 114 109 3,1% 3,0% Finance 20,1% 2,9% 0,2% 95 0,2% 0,2% Government 17,2% Trade 14,7% Manufacturing 13,4% 2,0% 1,9% 1,9% Transport 10,3% Mining 8,4% 0,3% Personal services 5,7% 0,2% 0,2% 0,2% 0,2% Construction 4,1% 0,2% 0,5% 0,5% Utilities 3,6% 0,3% Tourism 3,1% 2012 2013 2014 2012 2013 2014 ICT 2,7% Manufacturing Telecommunications Computer services & activities Agriculture 2,4% Content & media Trade & related industries Source: STATS SA ICT Satellite account. 2017. FIGURE 33 ICT AS A PERCENTAGE OF SERVICE EXPORTS 60 56.43 50 40 30.36 26.87 30 23.31 16.9 20 11 10 4.43 0 Zambia South Africa Bulgaria Korea Chile Brazil 2002-2010 2013 2015 Source: World Bank Group. 2018. 92 DEEP DIVES However, policy and skills constraints impede private added ICT segments. President Ramaphosa announced sector participation and investment—particularly that his government will work closely with the private delays in adopting critical policies and legal reforms, sector to implement relevant ICT reforms. Despite some and problems in the design and implementation of new progress, much remains to be done. regulations. Policies and regulations are very important to advance the economy’s digitalization and enable the To return to a regional leader position, South Africa introduction of new technologies. South Africa suffers will have to accelerate the pace of policy decisions to from a persistent digital divide, with almost half the match the speed of industry and technology change. country still not using the internet on a regular basis and Policies should ensure competitive broadband and supply-side constraints in the provision of skills make it data markets, allocate broadband spectrum, and difficult to close this divide or move into higher value- improve network performance. FIGURE 34 THE DIGITAL ECONOMY Digital Education Smart Energy Digital Transport Smart Agriculture Digital Citizen Digital Health DIGITAL eCommerce ECONOMY Digital Digital Government Private Sector Digital Culture Industry 4.0 Digital Finance Digital Entrepreneur Digital Platform Digital Infrastructure Digital Skills Source: World Bank Group. 2018. Global trends in ICT and in internet access due to a variety of reasons. implications for South Africa These include (a) regulation, (b) infrastructure, (c) affordability, (d) consumer readiness, and (e) In a growing world, connectedness is becoming content. In South Africa, the internet access gap has increasingly vital. Of the 7.4 billion people in the spatial and demographic dimensions. For instance, world, 4 billion still do not have access to the in rural South Africa, female access to internet internet. The people locked out of this connectedness lags male access by 14 percent. Africa is where are disproportionately rural, elderly, illiterate, female, the impact from closing the digital divide will be and do not earn much. greatest—and South Africa should be leading the charge. It is estimated that every $1 invested in ICT Mobile phones are the main source of connectivity infrastructure between 2016 and 2018 could yield in the developing world. But large gaps remain $5 in GDP growth by 2025. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 93 FIGURE 35 MOBILE PHONE AND INTERNET ADOPTION (2014) Mobile Phone Adoption Internet Adoption (2014) 0-19 20-39 40-59 60-79 80-100 No data Adoption rates (%) Source: WDR. 2016. BOX 13 WHERE THE WORLD IS HEADED Worldwide, technologies are emerging that will affect 4. Digital finance: Cash payments are on the decline people’s lives in ways we cannot imagine. This emerging around the world. Digital, mobile, and crypto fourth industrial revolution will be characterized by a fusion payments have led the charge in providing more of technologies that blurs the line between the physical, secure, connected, and inclusive finance options. digital, and biological spheres. 5. Education: The emergence of online universities 1. Leapfrogging: Rapid development of ICT allows has made getting an education easier than before. countries that were behind in technological With a vast array of top-shelf institutions offering infrastructure to “leapfrog” by skipping the previous free courses, it is easier for individuals to upskill technical phase and implementing only newer themselves and stay on top of the rapidly changing technologies. Kenya is a prime example of a country mix of demand for skills. that has taken advantage of leapfrogging. 6. Cloud computing: The pace of cloud computing is 2. Mobile expansion: Mobile data traffic is expected continuing to accelerate. In offering stronger solutions to continue its surge, so 5G is becoming a crucial for the processing of big data, and complicated development. While the world is discussing 5G algorithms, cloud computing is a major driver in development and deployment, South Africa is still technological growth. Microsoft has opened cloud arguing about how to assign spectrum for 4G services. operations in South Africa, with Amazon announcing This is keeping the country locked in the past. a similar venture for the new future. 3. Digital services: Rapid disruption of traditional 7. Edge computing: Edge computing provides information services continues. Technology has already replaced processing and content collection delivery devices that traditional instruments such as GPS, standalone are located close to the source of data, rather than at cameras, pulse oximeters, etc. Disruption of extremities. It is an approach that reduces latency and healthcare, transportation, shopping, and other improves productivity. Amazon has already opened two services is expected to continue at a rapid pace. Edge servers in South Africa. 94 DEEP DIVES 8. Internet of things: The increasing interconnectivity live, and play. The effects of the internet of things of devices around the world continues to drive change, can already be seen in everyday life from general create solutions, and transform the way we work, transportation, to healthcare, and other areas. The state of South Africa’s digital 78 in the 2002 ITU ICT Development Index to infrastructure 92 in 2018, it remains ahead of its regional peers. However, the country is trailing behind emerging South Africa has the potential to recapture its market competition such as Brazil, Mexico, regional front-runner status and achieve the Turkey, and India. The figures below unpack how “Digital Moonshot,” putting everybody into the South Africa fares on some of the dimensions of digital space by 2030.79 While it has slipped from digital development. FIGURE 36 NETWORK PERFORMANCE80 FIGURE 37 SPECTRUM 77 59 55 43 38 36 33 28 28 27 26 31 25 25 24 20 15 15 13 15 14 7 TUR BRA MEX SA NM AG ZW ZA IN NG CO AG TUR BRA NG MEX ZW NM SA CO ZA IN Definition: Mobile latencies, download speeds and Definition: Spectrum digital dividend and allocation upload speeds per operator This is one the poorest performing metrics in South Spectrum remains one of the worst performing metric Africa due to the issues with spectrum allocation. in the Mobile Connectivity Index (MCI). FIGURE 38 NETWORK COVERAGE FIGURE 39 OTHER ENABLING INFRASTRUCTURE 95 93 67 66 62 90 89 59 82 51 47 59 57 40 47 35 35 44 28 28 36 31 TUR BRA SA MEX IN NG NM AG CO ZW ZA BRA TUR MEX SA IN NM NG ZW AG ZA CO Definition: Extent of 2G, 3G and 4G coverage. Definition: Access to electricity, international internet bandwidth per user, servers per million of population. South Africa has adequate network coverage, but there is room for improvement to higher bandwidths. The enabling infrastructure of South Africa is on par with other emerging market competitors. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 95 The South African broadband market is the most mid-2015 was above 150 percent, driven by the mature in sub-Saharan Africa; it has many large popularity of multiple card use, in the wake of the operators when compared with other markets in the launch of third generation (3G) and 4G LTE services. region. The market has become more competitive Two operators have South African roots and have over time as more competitors find inroads to a dominated the country’s mobile landscape for many previously high-barrier market. Rivalry within the years. Both companies secured as many new users as internet access market is intensified by large players possible before the government awarded the third benefitting from economies of scale. The fact that mobile license in 2001. In 2003 the government many market players offer internet access as part assessed the feasibility of licensing a fourth mobile of a diverse range of communication services means operator. Instead of an infrastructure-based fourth rivalry is moderate. Customers within this market operator, Virgin Mobile entered the market as a range from individuals to large corporations. Mobile Virtual Network Operator (MVNO) in 2006, using network infrastructure. In 2008, in Entering the market can involve significant capital response to declining demand for fixed voice services outlay, necessary to build infrastructure that covers and in preparation for a long-term shift towards the geographic area of interest. Gaining permissions convergence, the wireline incumbent sought to gain from local governments and public utilities to deploy traction in the mobile market and became the fourth new broadband infrastructure is expensive and mobile operator. complex. A potentially lower cost mode of entry is to buy access to telecom networks. This reduces The introduction of broadband based on 3G, HSPA, and the capital requirements for market entry, although LTE technologies has elevated the mobile operators as customer demand for ever-increasing bandwidth may the leading providers of broadband services. Under the mean that investment in infrastructure will be needed new service-neutral regulatory framework, MNOs are for future growth. branching into fixed-lines, fiber networks, international connectivity, mobile banking and entertainment. The South African broadband market is comprised of However, delays in spectrum auction have limited the two basic arms: (a) the fixed-line market, and (b) the operators’ ability to expand their LTE networks and mobile market. Both offer a similar purpose in terms provide faster speeds on existing networks. As a result, of connectivity. But their constraints and possibilities a large share of users need to connect with 2G and 3G are fundamentally different. technologies rather than LTE. South Africa’s fixed-line broadband market has FIGURE 40 FIXED BROADBAND PENETRATION recently taken off after years of being held back AND GROWTH by an expensive operating environment. South Africa has the largest fiber footprint in sub- Saharan Africa (with about 180,000 kilometers 3.50 4.7% 5.0% 4.1% 4.5% deployed). However, fiber infrastructure is largely 3.7% concentrated in already-connected areas in large 3.00 4.0% 3.3% 2.65 3.5% cities. Until recently, there was a quasi-monopolistic 3.0% 2.50 2.7% 2.33 3.0% position in the market with one major provider 2.5% 2.06 2.5% of transmission services for the entire voice and 2.00 1.82 2.0% broadband transmission value chain. In the last five 1.63 1.47 1.5% years alternative networks have been established 1.36 1.50 1.0% and there are now several private companies as well 0.5% as an SOE operating in the fixed-line broadband 1.00 0.0% market. Certain municipalities in South Africa also 2014 2015 2016 2017 2018 2019 2020 provide wholesale broadband services. Subscribers (Mn) Penetration South Africa’s vibrant mobile broadband market has grown rapidly since competition was introduced to Source: World Bank Group. 2018. the sector in the 1990s. SIM card penetration by 96 DEEP DIVES Priority constraints to private The Department of Telecommunications and sector development and Postal Services (DTPS) and the Department investment of Communications had important areas of authority, which has led to a fragmented regulatory Several factors are holding South Africa back in its framework. The merger of the two departments that bid to become a regional digital leader. These include will be implemented in 2019 should create a better its regulatory environment, a lack of incentives for environment for the private sector. investment and innovation—exemplified in the country’s troubled attempts to allocate spectrum— One major consequence of the fragmented regulatory and issues of affordability and access. This lack of environment has been the delay in agreeing on the affordability and access exacerbates inequality and mechanism for assigning high-demand spectrum, keeps the poorest members of society locked out of which is critical to the expansion and lowering of technological advancements in financial inclusion, costs of telecommunications networks. For over a healthcare, education, and other platforms. A lack decade, network operators have been requesting of digital skills is another area of concern. an auction of high demand spectrum, which is one of the established ways to assign spectrum Regulation and competition globally. The shortage of spectrum has had two main effects, namely: (a) creating challenges for There is a consensus that the regulatory environment new network operators looking to enter the market, has slowed the development of South Africa’s ICT and (b) imposing tight capacity constraints on sector, and the government is defining steps to resolve operators (contributing to higher prices and lower this. Indicators as shown in Figures 41–43 above speeds). However, the South African government suggest that South Africa has not yet converted has concerns that auctioning spectrum to private a favorable legal environment into network companies would result in existing operators readiness or into impact to the same extent as other becoming more entrenched and lead to the competing, developing nations. However, there have duplication of infrastructure. new efforts on behalf of government to improve the ICT space—the most notable developments being In 2018, as part of the amendments to the Electronic the study conducted on spectrum (CSIR 2018), and Communications Amendment Bill published by the introduction of the ECA Amendments. the DTPS, the proposal for a wholesale open- access network (WOAN) was put forward. The As a network industry, South African ICT is subject proposal was approved by the cabinet as part to extensive regulation. The network sector is subject of the National Integrated ICT Policy, a white to the Electronic Communications Act (2005) under paper that provides direction for the development the regulator, the Independent Communications of electronic communications in South Africa, Authority of South Africa (ICASA). The authority including the alignment of existing legislation. was established in 2000 by the ICASA Act to regulate The Bill itself This listed more detail about the both the telecommunications and broadcasting roll-out and implementation of a WOAN, which sectors. The act compels it to work in the public would have made use of the high-demand spectrum interest. ICASA’s autonomy is protected by the South that currently remains unassigned. The WOAN African Constitution, although telecom observers would have been an instrument to facilitate a contend that the regulator’s independence and transition towards a new paradigm of services- capacity has weakened for a variety of reasons over based competition. The proposal of the WOAN the past few years. The sector is also subject to the was opened for public comment in late 2018 and Competition Act, which prevents anticompetitive was met with a mixed-to-negative sentiment from behavior and controls anticompetitive mergers. private industry players. Subsequently, the ECA bill In some areas, the two sets of regulators have was withdrawn in early February 2019. overlapping powers and mandates, requiring coordination mechanisms to manage concurrency.81 The ECA bill will now be subject to further deliberations between both public and private The government is taking steps to improve the overall industry. These deliberations will take place parallel institutional framework to promote faster decision to an assessment of what is required to drive the making and clear mandates for each stakeholder. fourth industrial revolution in South Africa in terms SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 97 of both policy and regulations. This new approach comparisons, South Africa ranks 111 out of 196 seems to indicate that government is relying more countries for having the most expensive broadband heavily on the private sector to drive the advances packages, with the cheapest one-gigabyte mobile in telecommunications and will only focus its efforts broadband product costing $7.67. This lag is on regulatory and policy matters—a move which has significant when compared to developing countries been lauded by private industry experts. Finally, this elsewhere in the world and in the region, such move gives rise to hope that the telecommunications as Kenya. But the comparison of prices across sector will become more investor-friendly, promoting companies and countries is not straightforward innovation and competition. in the ICT space, as services are often bundle. It is also important to consider issues such as the Affordability and access speed and quality of connections, the time before data will expire following purchase, the difference Affordability of ICT services and data prices has between pay-as-you-go and long-term contracts, emerged as a major concern. According to global and adjustments for inflation over time. FIGURE 41 CHEAPEST 1GB MOBILE BROADBAND PRODUCT Q2 2017 (US$) 9 8 7.67 7 6.35 6 4.9 5 4 3.15 3 2.04 2 1.25 1 0 Egypt Kenya Nigeria South Africa Namibia Tunisia Source: Broadband League Price Table. While pricing has stabilized in nominal terms, and to the market has affected data prices, for instance. In have come down in inflation-adjusted terms, significant the years that have followed, mobile data pricing has reductions in package costs have yet to be seen. Since stabilized. With the entry of one more mobile network the launch of mobile data, competition in this space operator, it can be expected that there will be an impact has increased. The entry of two additional operators on prices—but what form this will take is not yet clear. 98 DEEP DIVES FIGURE 42 SOUTH AFRICAN DATA PRICING OVER TIME Phase 1 Phase 2 Phase 3 Phase 4 700 Mobile data Limited competition, Competitor data network rollout, Prices have stabilised introduction stable pricing aggressive pricing strategies 600 500 400 300 “Data Must Fall” 200 Campaign 100 - 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1G Bundle 5G Bundle Source: Published operator data price points, 2005–17. In August 2017, the Competition Commission argument. There is also a Catch-22 in that (a) announced that it was launching an investigation there is limited incentive for private investment in into alleged competition issues in the market for infrastructure in areas where individuals cannot data services. ICASA also introduced new rules afford data services, and (b) the areas that cannot in April 2018 that required telecoms operators to afford data services have to pay a higher cost to send usage notifications to consumers when data access, as the infrastructure is not available. usage reaches various intervals. The regulation also specifies that operators will not be allowed Lower access and affordability has a knock-on effect to charge consumers out-of-bundle rates for data on private investment in other segments. By having when their data has run out, without consumers’ poorer households and regions left behind in the prior consent. In the same period ICASA backed digital divide, other digital opportunities such as down on a previous proposal suggesting that eCommerce, digital finance, and digital platforms unused data bundles should not expire for a period cannot prosper. This dampens private investment of three years and is now proposing that a rollover in these services, particularly in areas that already be offered to consumers. The decision on rolling suffer from inequality and disproportionate service over data bundles now rests with the National delivery. This effect is not limited to an individual Consumer Commission. level, but also affects public institutions in less wealthy areas—thus government has to pay for The relatively high mobile broadband tariffs by local the connection of hospitals, schools, and other purchasing power standards, low fixed broadband institutions where the private sector would typically penetration, and slow Internet speed directly affect expand if the opportunities and incentives were the poorest households. It makes it more difficult large enough. and costlier for citizens to access e-government, education, and e-health services, and these effects Digital skills are more pronounced for the poorer segments of the economy. This inefficiency has been noted by South Africa is far from making optimal use of the South African public. Public campaigns such its human capital potential and is under-prepared as Data Must Fall have reinvigorated the pricing for the impending disruption to jobs and skills SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 99 brought by the Fourth Industrial Revolution. The other related fields have been recognized as priority World Bank Group Human Capital Project placed areas for skills development. South Africa towards the bottom globally and close to the average for the region. Similarly, the Many jobs in South Africa are becoming more WEF’s Human Capital Index, which measures the intense in their use of digital technologies, but at extent to which countries and economies optimize the same time there are risks of job losses due to their human capital through education and skills automation. Average ICT intensity of jobs in South development and its deployment throughout the Africa increased by 26 percent over the last decade; life-course, finds that South Africa currently only currently trending professions in the country include captures 49 percent of its full human capital the creative industries, software and IT services, potential. This compares unfavorably to a global agriculture, and finance workers, according to average of 65 percent. LinkedIn Digital Data For Development. In the longer term, there is strong job growth potential There is an acute shortage of a skilled workforce in in hard and soft infrastructure, green jobs, and ICT in South Africa. This has been acknowledged by the ICT sector through new work formats. The the South African government in its annual critical South African government is aware of this. Roles skills list. Based on the LinkedIn Digital Data For in areas such as VR, Robotics, Internet of Things, Development that was analyzed in a recent World Cyber Security, and Big Data are being placed on Bank Group study, the top five most in-demand the skills prioritization list by institutions such as ICT skills are currently (a) Java development, MICT SETA. At the same time, it is predicted that (b) Microsoft application development, (c) data 41 percent of all work activities in South Africa are engineering and data warehousing, (d) database susceptible to automation, although this is likely management, and (e) web programming. With most moderated by comparatively low labor costs and skills in demand falling into the ICT sector, ICT and offset by new job creation. FIGURE 43 SECTOR SKILLS BY MICT SETA Future and current Contribution of top 10 hard to fill Hard to fill jobs in the supply side skill blockages occupations in South Africa ICT internationally 50,636 4,6% Security engineering 4,8% 4,0% IT architect 5,7% 3,5% 6,3% Data scientist 2,7% 12,0% Software engineering 43.0% 13,4% Data analytics Software developer Cloud integration 6,000 Computer network & systems engineer Application development ICT systems analyst Software development Programmer analyst ICT security specialist Internet of Things Future supply side skill blockages Business analyst DevOps engineer Current supply side skill blockages Multimedia designer Advertising specialist QA engineer Telecommunications network engineer Mobile developer Database architect Source: MICT SETA. 2017. Sector Skills Plan 2018–2023; MICT SETA. 2016. Sector Skills Plan 2017–2022; The CIO. 2018. Amazon Web Services; Forbes. 2017. “In-demand Tech Jobs Employers are Struggling to Fill.” 100 DEEP DIVES The lack of digital skills is explained by several science councils, government, and the private sector factors. It will be hard to find a one-size-fits-all to participate in open collaboration platforms—and solution. The most notable failing is the access to the barriers that prevent participation. high-quality education in South Africa as a whole, as outlined in the enabling sectors. This gives rise to a lack of digital skills by not having enough Recommendations graduates with skills in the science, technology, engineering, and mathematics (STEM) fields. In the ICT space, there are quick wins that could Secondly, the curricula taught at most public boost investment and growth, but also a long-term institutions is outdated—the skills supplied by agenda around the provision of digital skills. The these institutions do not match those that are recommendations will be laid out in accordance with being demanded by the private sector. This lack the three main constraints that have been identified of curricula coordination is driven partially by a by this report. lack of experts with the ability to teach, as well as the lengthy times that are required to change curricula due to regulatory burdens. 1 Further discussions on the policy directions and specific provisions of the ECA bill is positive, In the short term, public-private partnerships have but there is a need to move faster to address emerged as a solution to of the ICT skills shortage. A policy uncertainty. It has been acknowledged large number of public, public-private and private skills that more analysis and public-private dialogue development initiatives exist, with significant investment is needed to develop a WOAN given limited from the private sector including several multinationals. number of success stories around the world. Boosting and expanding these partnerships is key. There are several alternative measures which It is essential that the South African government could contribute to achieving the South African continues to explore opportunities for universities, government’s policy goals (see Box 14). BOX 14 POTENTIAL ALTERNATIVES South Africa could aim to strengthen the capacity and using unlicensed spectrum as a means to boost downstream enforcement of the country’s existing infrastructure innovation and lower barriers to entry and expansion in the regime. MNOs can pool the different components of their ICT sector. networks, whether these are passive or active. This can reduce costs and barriers, allowing smaller players to enter Market entry can be actively promoted in wireless and penetrate the market. However, since infrastructure communications through widely tested measures. sharing rules can be hard to enforce and there is a risk that Instruments that foster market entry include spectrum set- larger incumbents will avoid entering into such types of asides, caps and band plans, which hinder the aggregation agreements, strong enforcement of regulatory obligations of spectrum rights by incumbents: on sharing is often required. South Africa already has a regulatory framework in place with infrastructure sharing • Set-asides remove the incumbent from the bidding obligations, but there have been challenges in enforcement. process and one or more blocks of spectrum are reserved for a specific type of bidder such as a The government could implement alternative new entrant, a smaller operator or a designated regulatory measures such as the adoption of spectrum entity or group (such as minorities, SMMEs, and caps or spectrum set asides that encourage market so forth). This approach has been widely used in entry by operators with lower access to capital, and the the United States and Canada. It is generally highly setting of coverage requirements by existing MNOs, which effective in attracting participation in the auction may be the object of government subsidies. Concurrently, the because it guarantees that a new entrant will win at government could also push for the development of networks least the set aside block. However, this approach can SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 101 also result in market entry by operators with higher incumbents. But this approach can also be conducive to costs and less attractive offerings than incumbents. an inefficient aggregation of spectrum by incumbents. • Spectrum caps limit the maximum quantity of • Band plans partition spectrum by geographic spectrum that can be held in a specific geographic areas and block size. Band plans slice radio area. Caps can be applied either to an individual spectrum into blocks and divide it by geographical auction or, in more general terms, to a category of radio areas. Risks to be aware of include that if auctioned frequencies. In the EU, most Member States capped the areas are too broad, smaller and local operators may number of blocks that could be won by an individual firm be excluded; if the areas are too narrow, it becomes during 3G auctions. Spectrum caps allow entrants to more difficult for larger operators to aggregate all the bid for larger quantities of newly available spectrum, licenses necessary to develop more expansive and and limit “excessive” concentration of spectrum by transformative business plans. 2 Clearer mandates, better coordination, and more There is also a need to ensure broadband access technical capacity of the government departments also in rural areas by working with non-profits and sector regulator are needed. There may be and public organizations. Subsidized programs value in allowing for stronger ex ante regulation. could be used to get coverage at decent speeds in It is not uncommon in regulated sectors in other areas of economic exclusion, such as townships. countries for a competition authority to, at times, Infrastructure sharing could be key to expanding play what could be seen as an ex-ante role, for decent network coverage, without the doubling of instance mandating access to certain facilities. efforts and investment. Normally, competition authorities would only become involved when a gap in ex-ante regulation Developing basic and vocational curricula that arises because technology moves faster than deepen the digital fluency and ICT literacy skills is regulation—the rest should be left up to of the critical. This can be done in a multitude of ways, sector regulator, ICASA—allowing them to be both at a public and private level. As discussed above, well-resourced and empowered. TVETs (and public institutions in general) need to be better aligned with industry needs. Curricula are often outdated or incorrectly focused. This could Specifically, ensuring the regulator’s independence be fixed through better dialogue between industry and confirming its field of play should help expedite and the TVETs, as well as by making it easier for stalled actions such as 4G licensing. Ultimately, institutions to update said curricula. ICT’s importance lies in its role in facilitating innovation in the economy. Clear directions for PPPs are turning out to be essential tools for the spectrum assignment would be an important step fostering of digital skills and should be encouraged, to support these objectives. A further complication together with initiatives that focus on inclusion. is the absence of local loop unbundling. This could Private institutions know what skillsets they need; create incentives to upgrade the speed of the existing PPPs are one way of providing these. An NPC fixed-line network and secure third-party access to focused on youth and technology, mLab, has a variety the new fiber networks. of programs aimed at up-skilling young people, particularly in digital skills. One of mLab’s programs, Further investment in broadband infrastructure CodeTribe, has already trained 217 programmers; to create more network connections, upgrade those of whom have entered the workforce have technologies, and create more competition is an reported an increase in household income of 250 important part of the story. By solving some of the percent, which has lifted them out of poverty. By regulation and competition issues, it is possible working with both the public and private sectors, that the affordability and access issue South Africa mLab has managed to secure the funding it requires faces may rectify itself, however, there are additional while being able to properly align itself with the measures that can be taken to speed up the process. skills needed by companies looking to hire. There 102 DEEP DIVES are an increasing number of programs training young bearing of the affordability and access of ICT people with digital skills, but these are mainly in services within the country. On the skills agenda, key urban areas and not in rural or other provinces, introducing programs that expand the availability where there are limited interventions. of specific digital skills demanded in the market would be a way to generate ICT employment The focus on the ICT industry is relevant for the in the short term—this can be achieved through World Bank Group program given its importance public-private partnership programs, letting the and high impact on the South African economy. private sector lead the development of the skills Not only is the ICT sector crucially important it demands. As a long-term goal, the reform of the when considered in isolation, but the cross-cutting South African education system with a larger focus effects of the industry are also pronounced and spill being placed on skills that are needed in the fourth over into other sectors. For the purposes of this industrial revolution, has been acknowledged by the report, ICT will be discussed mainly in terms of government and will require investments in areas (a) regulatory and competition issues that hinder such as school infrastructure and teacher training. infrastructure deployment, as this foundation is critical and because there are potential quick wins, and (b) digital skills, a crucial agenda to catalyze How can the World Bank Group the benefits for the whole population and sustain support this agenda? long-term growth of the sector. Additional topics, such as digital finance, digital platforms, and digital The government has recognized the sector’s entrepreneurship will be covered by a forthcoming potential as an enabler for productivity and World Bank Group project, the Digital Economy growth. South Africa’s National Development for Africa Diagnostic. Plan notes that the ICT sector underpins “the development of a dynamic and connected information society and a vibrant knowledge The World Bank Group can offer a suite of economy that is more inclusive and prosperous” interventions and advisory services to support the by 2030. It is broadly recognized that the digital growth of the ICT industry in South Africa and economy has enormous potential to enhance unlock its potential. Restoring policy certainty productivity, incomes and well-being. The digital and trust with the private sector are a necessary economy intersects with an unlimited number of condition for the ICT sector to attract investment Global Value Chain (GVC) linkages within the in larger volumes. The World Bank Group is well- global economy, impacting manufacturing and equipped to provide technical advice to the line service sectors. The South African Department departments and regulators responsible for ICT, of Trade and Industry has identified ICT and especially with regards to spectrum regulation, electronics among 11 priority sectors that have competition framework—all of which have direct the highest growth and investment potential. In Summary Factors affecting Policy options World Bank Group role private investment outlined in the report Information and communication technologies: Infrastructure development: Policy Different regulatory approaches would encourage Advisory support on the regulatory uncertainty holds back investment. better use of existing fiber infrastructure, for environment and implementation example, facilities sharing regulation. based on WBG experience in other Programs to get coverage at decent speeds countries. in areas of economic exclusion could be Potential IFC investment to mobile implemented, for example, in townships using network operators (MNOs) with the Universal Service Fund (USF). funding needs at their various SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 103 Factors affecting Policy options World Bank Group role private investment outlined in the report subsidiaries, potential acquisitions or deployment in both the wholesale and retail broadband markets, support MNOs as they position themselves as consolidators in the FTHH space, acquisition of towers in the market, selectively available in the market, selectively support data center operators in South Africa that need funding for deployment and expansion project into the rest of Africa. Price of data and quality of service: Clarify the policy direction and develop a plan Advisory support on methods for Gaps in the legal and regulatory on the assignment of high-demand spectrum spectrum assignment in light of the framework has been a critical to gives certainty to the industry. World Bank Group’s experience in bottleneck, and a major reason Accelerate the digital migration by providing a countries such as Mexico; review the for the limited availability of high- policy directive on the process. regulatory framework and options demand spectrum to upgrade Strengthen the independence and capacity of for accelerating digital access and broadband networks to 4G and 5G. ICASA, the regulator responsible for ICT, and promoting competition. implement pro-competition provisions in the ECA Bill. Explore regulatory approaches to promote data affordability for example, through more innovative use of the USF. Digital skills: Low basic literacy Promote digital literacy at schools. Advisory support to conduct a and numeracy skills among large Foster PPPs as a tool to deliver digital skills that Digital Economy for Africa (DE4A) segment of students which are are directly needed within the private sector. diagnostic to identify interventions necessary for acquiring the digital Reform TVET system (programs, curriculums, in areas such as digital financial skills. Inadequate and insufficient labs/workshops, professional development of services, digital skills, and digital digital literary programs and instructors) to better align with industry needs. platforms; scale up XLAfrica, a curriculum which are not aligned Explore possibility of PPPs for development of Digital pan-African accelerator for digital with labor market/industry needs. Skills at basic education and TVET institutions. startups, and mLab on digital skills; Continue to attract students into STEM subjects. conduct a Digital Economy for Africa (DE4A) diagnostic to identify interventions in areas such as digital financial services, digital skills, and digital platforms. Potential IFC investment to increase investment in digital skills PPPs: scaling up state of the art rapid skills development models, for example, through competitive processes and blended finance. APPENDIXES SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 105 APPENDIX A SECTOR SCAN Many sectors in South Africa exhibit both a (“desirability”) and “attractiveness” for investors high degree of potential development impact based on WBG analysis with FeverTree Consulting: FIGURE 44 SECTOR PRIORITISATION Desirable, Top prospects: More but not attractive Health S Attractive and Desirable Desirable Film & S Water & I Tourism Media Automotive Green I ICT/ Sanitation M S I Mineral M Industries Communication Agro-processing A S Technology Beneficiation BPO(1) Geological E Pharmaceuticals M Prospecting Chrome E Transportation I Natural Gas I Desirability Solar Energy I IT & S Infrastructure S (good prospects Education & Training E Software Wind Energy I & they would be PGMs(3) MRO(4) S Industrial Machinery M Housing I Finance & S welcome) & Equipment Defence M Insurance Boat Building M Advanced M CTLP(2) M Agriculture A Manufacturing Retail S A Technology Commercial Farms Attractive, but Less Bottom not desirable Desirable prospects Attractiveness Less More (Attractive Market & Attractive Attractive Competitive) A Agriculture M Manufacturing S Services I Infrastructure E Extraction/Mining Source: WBG sector scan, 2019. Note: (1) BPO - Business Process Outsourcing; (2) CTLF - Clothing, textiles, leather & footwear; (3) PGM’s - Platinum Group Metals; (4) MRO - Maintenance, repair and Overhaul 106 APPENDIX B APPENDIX B REVIEW OF SOUTH AFRICA’S LAND MARKETS Overview 2016)—and limited administrative and management capacity. This has become inadequate amid a mandate South Africa is the 25th largest country in the world that has expanded to include production support with 122 million hectares of land. Land has a variety to agricultural beneficiaries (Kepe and Hall 2016). of uses, with a concentration in the agricultural Moreover, restitution and redistribution proved to be sector. Around 25 percent of South Africa’s land is expensive and were rife with legal complications, such used for urbanization, industry, mining, privately as multiple claimants, burden of proof, price setting, and publicly owned conservation areas and national and general implementation (Kepe and Hall 2016). parks. Agricultural land in South Africa today represents approximately 76 percent of the total Performance and key challenges land use, declining from 79 percent on the back of the expansion of urban areas, conservation areas, South Africa’s land administration is inefficient. forestry and mining (Agri SA 2017). The Doing Business 2018 report ranks South Africa at 107 out of 190 countries for the efficiency of Land in South Africa is mostly privately owned. registering property. It takes seven procedures and According to the Land Audit (2017), 94 percent (114 23 days to register property at an average cost of 7.6 million hectares) of South Africa’s land is registered percent of the value of the property. The report gives with the Deeds Office. Around 90 percent of this South Africa a score of 13.5 out of 30 on the quality registered land is privately owned. The remaining of land administration. 6 percent is owned by the state through trusts. The total for privately owned land is made up of Land markets have low volumes of transactions and individuals, constituting 39 percent of ownership, large variations in prices across the nation—even while trusts and companies own 31 percent and 25 across regions that have similar levels of economic percent respectively (Land Audit 2017). development. For instance, while the Western Cape is among South Africa’s agricultural hubs, only 5 Land reform policy has failed to address historically percent of agricultural land was transacted in the skewed ownership patterns. According to the 2017 province between 2003 and 2014 (Nowers, 2014). In Land Audit, white South Africans make up around 10 2011, Western Cape farm land prices were estimated percent of the population but own 75 percent of all to differ by more than four orders of magnitude, from agricultural land. Land reform policies implemented $15 per hectare to $178,000 per hectare of farmland by the democratic government since 1994 have failed (Osano et. al. 2011). And in 2014, the price for a to address this. The target of transferring 30 percent hectare of land in Western Cape ranged anywhere of arable land to black landholders by 2014 was not between R 10,000 and R 70,000 for similar regions achieved, and there is limited information on the current (Nowers 2014). level of transfer. Factors impeding effective land reform include inadequate resources—the average budget for South Africa has a strong constitution, but property land reform is 1 percent of the national budget and has rights are weak. Weak property rights also extend to been on a decline over the past decade (Kepe and Hall land tenure, where security of tenure in the former SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 107 homelands is fragile. Tenure security is still governed In November 2018, the Joint Constitutional Review by the Interim Protection of Informal Land Rights Committee recommended that Section 25 of the South Act (IPILRA). This stop-gap legislation has been in African Constitution be amended to allow for land place since 1996. The act aims to secure the rights of expropriation without compensation. people occupying land without formal documentary rights, such as rights to household plots, fields, grazing Whatever the outcome of these constitutional land, or other shared resources. Yet its effectiveness and parliamentary discussions, there are several is limited because there is no land administration ways for South Africa to increase its capacity for system underpinning it. This means there are no land reform. At the same time, it must strengthen proper processes for clarifying and documenting extension services, financing, training, access to rights or resolving disputes (World Bank 2018a). As inputs and capital equipment, and marketing and a result, even where the poor hold land, the value transport infrastructure for small-scale and emerging of these assets is limited. Moreover, this lack of farmers. Quickly resolving issues around land reform land tenure rights impedes emerging farmers from in a way that redresses historical injustices without accessing finance and production support programs undermining livelihoods of rural communities is a from government (Kepe and Hall 2016). critical challenge for South Africa—both to reconcile with past injustices and to promote greater certainty Additionally, the IPILRA requires proper around ownership so as to encourage much-needed community consultation in cases where external investment in agriculture. investors wish to access communal land. However, some external investors violate these provisions, South Africa should strengthen property rights with while other potential external investors decline regards to RDP houses and land tenure. Assignment to invest either because they are unsure how to of RDP deeds should be fast tracked, and the general negotiate leases of communal land or are anxious property registration and transaction processes about whether the arrangements will be respected should be improved. eGovernment platforms can (World Bank 2018a). be used in this regard. Legislation and institutions to strengthen tenure security in the former homelands Recent policy developments is urgently needed, but the 2004 Communal Land and recommendations Rights Act was annulled by the Constitutional Court, and the current Communal Tenure Bill may suffer Government is currently discussing new approaches to a similar fate. At the heart of the long-standing land reform. Until now, land reform policy has largely stalemate regarding tenure reform in communal areas been based on the “willing buyer, willing seller” model. is the significant power given to traditional leaders. 108 APPENDIX C APPENDIX C REVIEW OF SOUTH AFRICA’S HEALTH SECTOR82 Overview determinants of mortality. Diseases such as diabetes, hypertension, and cardiovascular diseases, among South Africa has what has been termed a two-tier others, are increasingly affecting poor and vulnerable health system fractured along socio-economic lines. groups. A study by Bradshow et al. (2008) estimated There is a private sector, predominantly financed that overall, HIV accounted for 39 percent of the through medical schemes, which covers 8.8 million total number of years of life lost in South Africa; people, or 16.2 percent of the population; the public trauma (violence and road accidents) for 10.5 sector covers the rest. Total health expenditures are percent; tuberculosis for 4.7 percent, and diarrheal evenly split between both populations, indicating diseases for 4.2 percent. substantial inequity in both access and financing of health care (National Department of Health 2017). Performance and key challenges The National Development Plan comments that the health system’s overall performance since 1994 has The bimodal health system has entrenched stark been poor, notwithstanding development of good inequalities. The inevitable result is that socio- policy and relatively high spending as a proportion economic status becomes the main determinant of of GDP. access to quality health care services. A key cause of disparities in access to health care services is the Despite spending 8.5 percent of GDP on health, South fragmentation of health financing, with poor and Africa has an excessive burden of preventable illness rich utilizing separate revenue collection and pooling and premature death. Over the last two decades mechanisms. Even though such fragmentation is a some significant improvements have occurred in common feature in low-middle income countries, it maternal and child health and HIV/AIDS testing and is more starkly pronounced in South Africa. treatment. But health indicators remain poor and are not on par with South Africa’s levels of socio- While primary health care is provided free of charge economic development and health expenditure. Life in the public sector, public hospitals levy user fees that expectancy is approximately 62 years, lower than the can be onerous for low-income employees to cover average for lower middle-income countries. on an out-of-pocket basis. In terms of the patient payment policy, patients who are South African In terms of disease burden, South Africa is affected citizens are eligible to receive care free at the point of by the simultaneous occurrence of infectious diseases care, subject to them proving their status as destitute. and non-communicable diseases. In addition, there They need to satisfy a means test criteria, contained is a still a heavy burden of perinatal and maternal in the Uniform Patient Fee Schedule (UPFS). disorders and trauma. While the leading cause of death in South Africa is tuberculosis—mostly Per capita health expenditure among those who have associated with the HIV/AIDS epidemic and affecting medical aid scheme coverage is more than five times over 7.2 million people—there is an increasing larger than among those who exclusively rely on the dominance of illnesses that have conventionally public sector. The unequal distribution of finances been classified as diseases of affluence among the translates to a highly unequal distribution of medical SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 109 assets and personnel. Approximately 6 out of 10 design strategies to attract good risks: those who general doctors, two thirds of specialists, and 9 out 10 are healthy and less likely to utilize health services. dentists and pharmacists practice in the private sector. Another shortcoming of medical scheme membership This means they cater for only the privately insured is that health coverage is often lost when people leave population or the very small minority of uninsured employment or retire and can no longer afford to patients who pay on an out-of-pocket basis. make contributions. It is thus possible for people to make substantial private contributions while Affordability is the main barrier to medical scheme employed, but then be left without access to private membership for poor households. As in other health care when they are much older. countries, private medical aid premiums are based on expected health costs rather than income, which Market failures in the private health care sector have tends to be positively correlated with age, but loosely led to a cost spiral. This can be attributed to moral correlated with income. As a result, lower income hazard and excessive concentration in the market for earners need to spend a significantly larger proportion hospital services. A working paper published by the of their income on premiums to become part of OECD in 2016 concluded that private hospitals in a private medical scheme. Most poor households South Africa are more expensive than in other OECD cannot afford this. Premium payments account for countries, in relation to the country’s income. The over 6 percent of all household incomes, as compared study blamed the high concentration and the barriers to general tax which accounts for about 5 percent to access in the hospital industry as key contributors (Ataguba et al. 2017). to high hospital care prices escalation. However, the OECD results have been contested by the industry, Because of higher income groups enjoy and can which claims that the OECD article reached flawed afford higher coverage, expenditure on medical conclusions based on a non-representative sample. aid schemes overall is progressive (higher income They argue that most of the cost escalation of quintile households spending over 8 percent of privately financed health services in South Africa is their total incomes on medical scheme premiums, due to the evolution of demand side factors (adverse as opposed to a negligible expenditure by the two selection and progressive aging of the insurance lowest income groups). It is estimated that the sub- pools), and to the depreciation of the rand, because population which voluntarily enrolls in one of the most medicines and medical equipment used in South private medical schemes has an income roughly 2.7 Africa are imported. times the average population’s income (Discovery Health 2016), equivalent to a GDP per capita of Recent policy developments approximately $35,000 (PPP). and recommendations Consumption of healthcare is characterized by Several plans to reform the health sector in South Africa market failures. These often stem from asymmetries have not been implemented. One of the key focus areas of information between patients and health providers, of policies enacted over the past 25 years has been to which lead to suboptimal market equilibria (Mooney redress the disparities in health outcomes and access & Ryan 1993). The imperfections extend to the to quality health services described above. The ANC market for health insurance, where behaviors such Health Plan released in 1994 emphasized development as adverse and risk selection limit the number of of a publicly funded, publicly-provided and decentralized people who purchase health insurance—for any given health system. The idea of creating a universal National level of the premiums—to those who have higher Health Insurance first emerged in this document. self-perceived risk of using health services. The Taylor Committee, which published its report in 2002, and the Ministerial Task Team on Social Health Adverse selection is somewhat mitigated since Insurance created thereafter, also proposed a radical those with medical scheme coverage mainly get it reshaping of both the public sector and the medical through their place of employment and not on an schemes environment. The NDP acknowledged the role individual basis, but can be seen, for example, in of universal health access in driving inclusive growth. The the age structure of those privately insured, which plan also pointed out that access to healthcare services is tends to underrepresent youth. In turn, medical among the key determinants of health, alongside social scheme providers counteract potential adverse determinants such as poverty and poor sanitation, lack selection by structuring their marketing and product of education, and others. 110 APPENDIX C In 2018, the National Health Insurance Bill was Health for further review in December. prepared, but the approval and implementation is delayed. The introduction of the NHI bill was In 2018, the National Health Insurance Bill was followed by a three-month comment period, which introduced. The introduction of the NHI Bill was allowed key stakeholders and the public to provide followed by a three-month comment period, which input. After consideration of the input, a further allowed key stakeholders and the public to provide revised bill will be published. The process is currently input. After consideration of the input, a further ongoing but there are indications that the revised revised Bill will be published. The process is currently bill will once again envisage a substantially reduced ongoing but there are indications that the revised Bill role for medical schemes—a contentious issue. The will once again envisage a substantially reduced role Cabinet sent the NHI bill back to the Department of for medical schemes—a contentious issue. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 111 APPENDIX D REVIEW OF SOUTH AFRICA’S MINING SECTOR of R 420 billion (PWC 2017). JSE listed mining Overview companies’ revenue from ordinary mining activities was R 371 billion while the net profit was R 17 South Africa’s mining sector has historically played a billion in 2017. The African Exploration & Mining pivotal role in the country’s economic development. Finance Corporation (AEMFC) is a state-owned But over the past few decades the sector has been in mining company and a subsidiary of the Central decline. In 2017, the mining sector’s real GDP was Energy Fund. In 2017–18, the AMFC made revenues 3.9 percent lower than in 1994 (Chamber of Mines of R 458 million and a net profit of R 64.9 million. 2017). In 2016, mining’s contribution to GDP was 7.3 percent (World Bank 2018b). The contribution Investment into the mining sector has been on a decline to government revenue declined from a peak of since 2007. It reached a historical low of R 60.7 billion nearly 29 percent in 1981 to just 2.5 percent in in 2016 but improved to R 80.9 billion in 2017. Low 2014 (World Bank 2018b). Nevertheless, mining investment was in part driven by infrastructure issues continues to play a major role in South Africa’s in energy, water and logistics, weak demand and policy balance of payments. Between 2007 and 2016, total uncertainty. South Africa has a rich mineral wealth, mining exports increased from R 160 billion to R and the mining sector is thus driven by a wide range 294 billion, which represented 23.8 percent of South of commodities. This has helped South Africa in Africa’s total export basket over this period (ibid). smoothing the effect of global demand and supply Mining is a relatively capital-intensive industry and in specific sectors. At a combined contribution of 63 has low employment multipliers. percent, coal, PGMs and gold are the three largest contributors to mining output in South Africa.83 In The sector employs 464,667 workers representing three key sectors the following dynamics are impacting only 3 percent of total employment in South Africa’s on investment and output: formal sector (Chamber of Mines 2017). However, employment is partially based in areas where there • Platinum Group Metals: Slowing global demand isn’t much economic activity: mining provides jobs and rebalancing of supply to align with demand in areas where opportunities are thin. has resulted in lower platinum prices (in U.S. dollar terms), while the cost of production has been Mining in South Africa is comprised of privately- increasing rapidly in South Africa. Without firmer owned mining companies and a state-owned mining global Platinum prices, recovery may be muted. company with a small market share. As of 2016, • Coal: Almost 50 percent of the sector’s output there were a total of 53 mining companies listed is sold locally (mostly to Eskom), so increases on the Johannesburg Stock Exchange (JSE), down in the cost of production are likely to be passed from 160 in 1994 (FTI Consulting 2017). Of these onto Eskom internally. However, international listed companies, 29 have a market capitalization of sales are placed in the context of falling global more than R200 million (PWC 2017). In 2017, these demand for coal. companies had a combined market capitalization • Gold: The gold sector has been under threat for 112 APPENDIX D a number of years due to declining yields, deeper capital in the sector). seams, and rapidly increasing production costs. • The rejection of the “once-empowered, always- empowered” principle. Performance and key challenges • A proposed dividend of 1 percent of turnover to be paid out to BBBEE shareholders annually. The Fraser Institute’s annual survey of mining • Increased socio-economic investment companies shows the attractiveness of South Africa’s requirements (such as the requirement to spend mining sector has been on the decline. The survey a minimum of 70 percent of total mining goods assesses how mineral endowments and public policy procurement spent on goods manufactured in factors such as taxation and regulatory uncertainty South Africa, with at least 21 percent from Black affect exploration investment. Under this measure, Owned Companies) as well as various enterprise South Africa ranks relatively poorly, at 74 overall, development requirements. down from 64 (out of 122 jurisdictions) in 2014 and 60 (out of 79 jurisdictions) in 2010. The poor rank is Policy uncertainty has also been exacerbated by the partly due to policy uncertainty, and a lack of publicly Mineral and Petroleum Resources Development available information about South Africa’s mining Amendment (MPRDA) bill. For instance, the sector impairs transparency and accountability. bill requires any person who intends to export “designated” minerals to be granted written consent Indeed, while South Africa has a favorable tax regime, from the Minister subject to “conditions” that the survey evidence suggests that mining companies do Minister may determine. However, these designated not generally view the country’s investment climate minerals are not clearly defined, and it is not clear positively compared to other jurisdictions. Between whether it applies to both raw or value-added 2000 and 2010, mining investment was more minerals, what the “conditions” are and whether responsive to changes in commodity prices, with a 1 this applies to current exporters. Other concerns percent increase in prices resulting in a 3 percent uptick relate to compulsory beneficiation even when it is in investment (after accounting for depreciation) not economically viable, doing away with the first (World Bank 2018b). However, between 2010 and come-first assed principle in processing applications 2016, mining investment was far less responsive to for mining rights and a lack of clarity around the changes in commodity prices, increasing by only 1 “free-carried interest” that government would be percent with every 1 percent increase in prices. Since entitled from oil and gas operations. In 2012, the 2010, South Africa has underperformed relative to Cabinet approved the draft MPRDA Bill, but it was its peers in investment, both overall GFCF and in not signed into law. Industry also raised concerns over exploration, and following this, in output (ibid). the constitutionality of the Bill and suggested a court challenge was possible as there had not been sufficient Since being introduced in 2010, the Mining Charter consultation with industry and affected communities. has created policy uncertainty which has in part led to The MPRDA Bill has since been withdrawn. underinvestment in the sector. This was exacerbated by the draft of the third Mining Charter in 2018. Recent policy developments The initial draft of the third mining charter outlined and recommendations more stringent targets for which, it is proposed, will be legally enforceable for the first time. Moreover, President Cyril Ramaphosa’s administration has as discussed below, the initial draft had a range of committed to addressing policy uncertainty. After areas which were uncertain in nature and difficult being disputed and suspended in court, the third to measure. The new charter could have an impact Mining Charter has been revised and the most recent on emerging sectors, such as manganese, and the version (released in August 2018) considered some of revitalization and further growth of others such the industry’s concerns. For instance, the minimum as chrome could be limited. The initial draft of the black ownership for existing mine rights has not been new charter would have a higher cost of compliance increased and will stay at 26 percent, preserving the particularly, from the following provisions: “once-empowered always-empowered” principle and abandoning the requirement for companies to pay • Increased Broad-Based Black Economic BBBEE shareholders an annual dividend of 1 percent Empowerment (BBBEE) shareholding (which of turnover. The final Mining Charter was gazetted may have to be funded by the current owners of in September 2018, after a long engagement process SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 113 with stakeholders, thereby providing a greater degree facilitate a transition from increased transparency to of policy certainty to the industry. improved accountability by bolstering a number of governance measures. These range from measures to As the Word Bank (2018b) report argues, South increase public and private accountability, corporate Africa should consider joining the Extractive Industry compliance with sector laws, improved mineral tax Transparency Initiative (EITI). The EITI is a global administration, as well as improving the investment standard with a robust yet flexible methodology climate (World Bank 2018b). for disclosing company payments and government revenues from oil, gas, and mining at the country Because of its tripartite (government, industry, and civil level as well as other information about the extractive society) representative model, the EITI can be leveraged sector. This includes the legal framework and fiscal to build trust and inform more constructive debates regime, contracts, licensing practices, state-owned about the management of a country’s natural resources companies, production, exports and so on (World (ibid). To date 51 countries have joined the EITI; they Bank 2018b). When the data disclosed through the are part of a growing consensus that have all recognized initiative is properly leveraged, it can be used to the being part of the EITI provides benefits. 114 APPENDIX E APPENDIX E REVIEW OF SOUTH AFRICA’S TOURISM SECTOR84 Overview is government-owned and has long been in crisis. The other major state-dominated tourism product South Africa is regarded as a regional leader for is the protected areas network, which comprises the tourism sector but is in danger of stagnation. 19 national parks and hundreds of public nature As a relatively mature destination it welcomed reserves managed by national and local government. 10.3 million foreign tourists in 2017, nearly 8 million more than Sub Saharan Africa’s second most-popular destination, Zimbabwe. Most of Performance and key challenges these international arrivals (7.6 million) come from the Africa region. A further 17.2 million trips were taken domestically. In 2017, the sector Demand-side performance: directly contributed 2.9 percent to GDP.85 Direct contribution reflects economic activity generated Growth in international arrivals is modest, and by, for example, hotels, travel agents, airlines and domestic trips are falling. Growth in foreign arrivals transportation services and restaurants. The total has been consistent but low over the last 10 years, direct and indirect contribution 8.9 percent of GDP averaging around 2 percent (compared to the sub- in 2017 and could reach 10.1 percent by 2028. Saharan average of 4 to 5 percent). The year 2015 saw a 6.8 percent decline, but the sector is resilient Tourism employed 4.5 percent of South Africa’s and has now recovered its modest growth trajectory. workforce86 in 2017, with a high proportion of All domestic trips, however, have been in steady women. If direct and indirect jobs are counted, the decline; overnight trips have fallen dramatically sector supported about 1.5 million jobs in 2017—9.5 by 41 percent between 2016 and 2017.88 This is percent of total employment. There is potential to primarily due to economic decline at the national grow employment in the sector to 2.1 million jobs level and less disposable income for travel. by 2028.87 The tourism sector also plays a larger role in job creation than other major industries. Between This pattern is reflected in almost all the other 2014 and 2017, tourism created just over 64,000 indicators used by SA Tourism to measure demand- net new jobs, outperforming larger industries such side performance of the sector: spend, length of as transport and communication, mining, utilities, stay, bed nights, seasonality, and geographic spread. and manufacturing. Inbound tourism direct spend (or tourism receipts) reached $5.73billion in 2017, a 6.9 percent increase The market is made up of many diverse products and on the previous year.89 This contrasts with a domestic services, driven by the private sector. Products and spend decline of 16.6 percent in 2017, to $1.57 services capitalize on the country’s strong physical billion. Average length of stay for internationals was and cultural endowments (landscape, mountains, 12.2 nights in 2017 (up from 9.2 nights in 2016), cities, wildlife, climate, and gastronomy). Almost all compared to just 4.1 nights for domestic travelers products and services are owned and operated by (down from 4.3 in 2016). Bed nights increased by the private sector. South African Airways, however, 36.7 percent in 2017 to reach 120.6 million for SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 115 international tourists and declined by 32.2 percent (23), and a conducive business environment (21), to reach 70.1 million for locals. characterized by minimal red tape and a modest administrative burden. Supply-side performance: Despite these strengths, sector growth is dependent The National Department of Tourism tracks supply on demand factors which are severely under strain. side indicators which focus on the performance of “Insufficient demand” was cited as the primary the hotel industry, air travel and meetings industry. driver of poor performance by over 50 percent of While some products are performing better than tourism business respondents in the TBI 2018.94 others (for example, income generated by the food The weak economy is destroying domestic demand, and beverage industry was up 7.8 percent first while simultaneously providing a small competitive quarter of 2018 compared to Q1 2017), overall advantage to the international market. This business performance in the sector has reached international demand is fragile, however, and is being a record low, according to the Tourism Business eroded by the following failures: Council of South Africa (TBCSA). TBCSA has been surveying tourism businesses since 2001 for their • Visa policy: The private sector has highlighted Tourism Business Index, and the first half of 2018 stringent laws introduced in 2015 to combat reveals an index score of 57.9 (against an index of child trafficking and terrorism as deterring 100). This is much lower than the 72.4 forecast and international arrivals. The government is in is notably lower than the 71.4 experienced in the the process of reforming these requirements, last half of 2017. including more visa waiver agreements, and installing a biometric movement-control system Business respondents are pessimistic about performance at busy ports of entry. for the year ahead, particularly the accommodation sector where 66 percent of respondents anticipated • Air transport: Poor connectivity and expensive worsening performance.90 This is backed up by fares limit demand, particularly from the region. National Statistics data that show a 0.3 percent decline Liberalizing air access through an ‘Open Skies’ in income for accommodation in the first quarter of policy could mean a 30 percent drop in airfares this year compared to Q1 of 2017, and weakening on the continent.95 South Africa has integrated hotel occupancy rates across the country (tracked by the principles of the “Open Skies” Yamoussoukro the STR Hotel Performance Index).91 Decision in its National Civil Aviation policy but implementation has been slow and should be In 2018, South Africa had the third largest hotel complemented by proactive route development. investment pipeline in SSA. Despite concerns over The Cape Town Air Access Initiative is one sector performance, branded hotel investment example of such route development. Seen as (a proxy for private sector investment in the global best practice, this is a public private sector sector) is still coming in, albeit behind the smaller initiative, established in 2015, and has so far tourism economies of Nigeria and Ethiopia. The established 13 new routes leading to more than pipeline amounts to 37 hotels (4,311 rooms) and 20 percent international passenger increase in an average size of 117 rooms per hotel (smaller 2017. In 2018 the success continued with the than regional average). The pipeline is 12 per cent connection of four more destinations and the up on 2017, and 335 per cent up from 2012,92 expansion of seven routes. For domestic air indicating longer term confidence in the country. transport, low economic growth, coupled with Brand penetration in South Africa, however, is the weakening rand and an oversupply of seats relatively low compared to leading destinations on domestic routes, has continued to put pressure worldwide, with many growing European or Asian on already squeezed airline margins. brands avoiding Africa altogether. • Safety: South Africa ranks 120 out of 136 Overall, South Africa has a relatively strong countries for safety and security on WEF’s 2018 competitive position for tourism. It leads the region Tourism Competitiveness Index, and 28 percent in terms of competitiveness and ranks 53 globally of TBI tourism business respondents indicated (out of 136 countries).93 It continues to rely on this as a negative factor contributing to poor cultural resources (19), strong natural resources business performance. 116 APPENDIX E International Airport are experiencing 25 year- • Image and product development: The image on-year growth, and the monthly occupancy rate or brand of South Africa has not significantly for accommodation is increasing every month of evolved over the last decade and is still seen as 2017 despite new supply (notably 15,000 Airbnb a value-for-money, soft adventure “Gateway properties).98 This contrasts to other provinces to Africa” destination. This is backed up by in the country where tourism is almost non- products that reflect this image. This lack of existent. Geographic spread is a key performance innovation and brand positioning affects market indicator tracked by the government and should demand over time. be encouraged to avoid “over-tourism” pressure on resources (Cape Town water crisis) and to Further coordination, government and market spread the benefits of tourism more equitably. This failures are affecting the supply side. inclusion agenda goes beyond spatial geography and extends also to socio-economic disparity. • Cost of inputs: The private sector cites cost of labor and cost of energy as contributing to the • Latent domestic and regional demand: With sector’s negative performance. Fuel taxes were domestic demand in decline and the vast increased in 2018 to 52 cents per liter. potential for greater regional demand largely unmet, 99 there is an opportunity for South • Skills/labor: Skills shortages appear to apply Africa to address its precarious demand base to the accommodation sector more acutely through greater diversification and orientation than the wider sector.96 The hospitality sector to these markets. is dominated by small businesses which are owner-operated and not affiliated with a chain. • Regional competition: Zimbabwe, the region’s With high seasonality and demands on staff, second most popular destination, has remained plus limited human resource infrastructure, resilient in the face of its own challenges, workers typically experience minimum training recording arrivals of over 2.4 million in 2017. investments, long working hours and poor With new leadership and potential re-engagement compensation. A career in the sector is not of the international community, the country is considered aspirational (except in branded or already positioning itself (through Victoria Falls high-end properties) and there is high turnover. and its new airport) as a new tourism gateway to the region. There is strong regional competition • Environmental sustainability: this competitiveness (Namibia, Botswana, Zimbabwe) to South Africa indicator ranks South Africa at 117 out of in the main product categories (wildlife, culture, 136 countries globally and is deteriorating.97 nature-based tourism, adventure). South Africa Deforestation and loss of habitat in South Africa will need to consider its future development have proceeded at a rapid rate since 2000. Global in light of new competitors and tourism hub demand for South Africa’s natural resources is development. The country’s loss of gateway increasing, but insufficient habitat preservation status is being compounded by the visa and air could prevent the country from benefitting from access issues mentioned above. this growing source of tourist attraction. • Land resource and benefit structure: Land use/ Future threats, failures, and opportunities: ownership and resource allocation across the country does and will play an increasing role in If not addressed, the following factors could have shaping the sector—especially the segments that an impact on the sector’s growth and performance. rely on land-based resource use (for example, wildlife and nature-based tourism). Control over • Growth and distribution is not even: While overall these assets is complex and intertwined with the picture of tourism in South Africa is one of the broader political economy; more equitable modest growth with a risk of stagnation, this benefit structuring and land rights for local story is not uniformly accurate. Some markets are communities will have a significant impact on doing better than others, and some destinations inclusion for tourism and is particularly relevant are doing exceptionally well. Cape Town, for in conservation areas (for example, National example, is booming: with arrivals to Cape Town Parks) where there are many pending land claims. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 117 New tools and approaches for addressing such Growth Path (NGP) includes tourism as one of the claims, and which go further in providing access six pillars of economic growth. The revised National to finance for MSMEs, training, or risk sharing Tourism Sector Strategy (2017) seeks to make facilities may support greater benefit sharing and international and domestic marketing more effective, are a good opportunity to be explored by the facilitate easier travel to South Africa, improve the World Bank Group. visitor experience, better manage the destination, and spread the benefits of tourism to more South Africans • Digital divide: With much of the industry moving (black people, women, youth and rural communities). online and consumer decision-making becoming SA Tourism—the national tourism board—received heavily disrupted by the digital economy, the an 8 percent budget increase in 2018 from $90 tourism sector in South Africa needs to remain million to $97.3 million. competitive. This means also investing in infrastructure and capacity building to ensure that There are opportunities for World Bank Group to potential service providers are able to maintain support the enabling environment for growth of the and expand market access, including in remote or sector and better inclusion. The Environment and marginalized areas and parts of society. Natural Resources Global Practice is developing a GEF-funded program to support communities around selected Protected Areas (for example, Recent policy developments Kruger Park), and FCI is piloting a partnership with and recommendations Airbnb to promote livelihood opportunities for underserved communities. Through collaboration The National Development Plan (2030 Vision) with the Natural Sector Strategy, World Bank Group recognizes tourism as one of the main drivers of interventions could be considered to overcome employment and economic growth, and the New several of the main challenges and failures identified. 118 APPENDIX F APPENDIX F SOUTH AFRICAN LISTED FIRMS THAT OPERATE IN THE AGRICULTURE AND AGRIBUSINESS SPACE HAVE BEEN PERFORMING WELL IN RECENT YEARS Name of firm Revenue Profit Revenue growth Profitability (R, millions) (R, millions) (percent, (percent, 2017 2017 (avg. of 2015–17) (avg. of 2015–17)) Primary Astral Foods 12 351 2 570 8.33 123 Clover Industries 10 058.6 314.5 5.8 80.3 Crookes Brothers 664 261.8 15 30 RCL Food Group 24 950.7 1 747.6 8.9 105.4 Quantum Foods 4 052 794.1 4.4 130.7 Secondary AH-Vest Limited 165.5 56.8 10.5 50.8 Entyce Beverages 3 757.1 735.1 11.1 18.6 Rhodes Food Group 3 680 358 29.5 14.1 Tiger Brands 31 298 10 442 -0.1 6 Tongaat 17 915 2 333 4.5 4.8 Snackworks 3 956.2 666.4 9.1 12 Tertiary Pick n Pay 83 504.8 15 250.3 6.5 19.7 Shoprite 141 000 33 826 11.2 9.3 SPAR 65 074.4 2 005.3 16.4 4.7 Source: WBG estimates based on JSE annual reports. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 119 APPENDIX G REVELANCE OF CORE CONSTRAINTS FOR CITRUS AND YELLOW MAIZE Yellow maize Citrus Emerging farmers Exports are subject to WTO set protocols and Government has a number of support generally SPS matters are not obstacles except programs but officials that interface at farmer in the case of China, which requires certain development level have limited capacity. inspection, even in-field during production, whereas in South Africa, quality and health Access to international markets is heavily inspections take place from when the grain influenced by SPS requirements and the limited leaves the silo. This issue with China is seen capacity of the failure of DAFF to provide the more of a technical barrier, the resolution of public goods that emerging farmers need which is dependent on DAFF capacity. to meet SPS requirements limits access to foreign markets. Commercial farmers As Africa becomes more self-sufficient in Large commercial farmers account for a yellow maize, alternate viable export markets majority of South Africa citrus exports. The are required. Citrus Growers Association invests in research and supports farmers in meeting the SPS requirements to access the U.S., EU, and far- east Asian markets. Adapting to climate change and water security Yellow maize Citrus Emerging farmers There is a longer route to becoming a scalable Larger, well-established commercial farmers commercial farmer in yellow and climate are exploring the concept of a JV with an change leads to production variability and emerging commercial farmer on the basis compounds the challenges. of a 51/49 percent shareholding on an area of about 200 hectares, where each partner Institutional weaknesses in getting water rights provides 100 hectares and the commercial and trading water rights also limit growth. farmer provides the development capital and management expertise. In this arrangement the water rights would be more easily accessed as the business would be a level 1 120 APPENDIX G Yellow maize Citrus BEE company. If six such growers were to be assisted a pack house investment would also ultimately be required with the six growers plus commercial farmer as shareholders. Commercial farmers Production declined on the back of the EL Exporters need to ensure they are always able Nino drought. A projected water deficit on to achieve a high pack-out of first-grade fruit. the back expected droughts and limited water Pack houses have a fixed capacity but climatic infrastructure and investment pose downside variability impacts daily production yields and risks to production. the start and end of a season; factors that are not always aligned to pack house capacity, especially if shared with other producers. Increasing affordable access to finance Yellow maize Citrus Emerging farmers Government support has been limited. Emerging farmers in citrus can take up to 10 Commercial banks typically require farmers to years of financial support before they break have access to land and water rights. Financial even. Access to bank debt is dependent on the support programs by industry associations collateral security value land and equipment, have had limited access due to design. For as asset classes can offer the financier. instance, the Maximum Food Production Thus, many emerging farmers cannot secure Programme was launched in 2003 to support finance due to land tenure not enabling emerging maize farmers in the Eastern collateralization. Cape but had limited success because of no formal training being offered to farmers and Emerging commercial farmers need specially weaknesses in the input procurement system structured finance products for long-term that government was suing in the program. orchard crops. In 2016, the banking sector, through its representative body, BASA, proposed a blended fund between commercial debts and government grants to provide a financial product that is affordable to emerging commercial farmers. Only in 2018 were discussions re-opened between BASA and government on the proposal. Commercial farmers Large commercial farmers typically have Finance for the industry is based on own access to finance, particularly from capital through accumulation of investors over commercial banks. long periods plus bank debt. Banks can borrow farmers up to 50 percent or 60 percent of total assets, thus commercial farmers who hold land typically have access to finance from commercial banks and own capital accumulation of investors over long periods. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 121 Skills and capabilities Yellow maize Citrus Emerging farmers Emerging farmers lack critical skills Emerging farmers account for 10 percent of particularly with regards to management citrus production. Skills transfer is required functions. Support programs such the MFPP to bring in more emerging farmers. Industry have not facilitated adequate training and associations such as the CGA provide technical skills transfer. support to farmers. Commercial farmers Commercial farmers have a long history of Industry associations such as the CGA provide farming, particularly white maize which is a technical support to farmers stable food for South Africa, and thus have skills and capabilities in yellow maize derived from experience. Land and water rights Yellow maize Citrus Emerging farmers Emerging commercial farmers are generally Many land reform beneficiaries of citrus located on land that was either part of, or estates have found it challenging to produce earmarked for inclusion into the apartheid-era the quality and quantity required to service homelands. The land within these homelands export markets, compounded by an inability or self-governing states are either communally to secure finance due to the land tenure not held, with rights conferred by the traditional enabling collateralization. leader or are either leased from the state or in some cases leases have had title conferred. Refer to the case study of the North West Province in what was once Bophuthatswana. Commercial farmers Large commercial farmers hold substantial Similar to citrus, policy uncertainty due to land that enables them to not only produce land reform might have a negative impact on at efficient scales but also enables them land prices and reduce the value of land as to borrow using land as collateral. Policy collateral. uncertainty regarding land reform might impact land prices negatively and reduce the Again, a weak water framework is constraining value of land as a collateral. growth. In Limpopo province for instance, Letsitele users haven’t received more than 50 Weak institutional frameworks for allocating percent of their allocation for the past 15 years. and trading water rights are a constraint. 122 APPENDIX G Barriers to competition Yellow maize Citrus Emerging farmers Emerging farmers face large high entry costs Quality is a main channel through which as maize production has become increasingly associations restrict market entry. Recent mechanized. The market is dominated by efforts by the CGA has seen a tendency to push large commercial farmers who are vertically for more stringent quality standards, which are integrated and can source inputs cheaper due naturally more difficult for new entrants to to economies of scale and networks. uphold, to gain market access. Both the CGA and the FPEF have close professional and Silos are a critical element of yellow maize personal ties to the PPECB, the main regulator marketing and access to silos is a crucial for export fruit standards. bottleneck in the market as the market for silos is dominated by large vertically integrated Despite land reform, the establishment of the agribusinesses. Silos are prohibitively costly to CGA-GDC and a range of private and third- construct and are seldom at full capacity, making sector initiatives, black participation in the it an imprudent investment for new entrants. citrus export market still appears to be low as the willingness of established actors to transform the industry appears limited. The market power of actors up- and downstream puts smaller farmers at a disadvantage when entering into contracts. Commercial farmers Often integrated into poultry/broiler Agricultural co-operatives enjoy a range of production and silos. There are industry privileges in the years before deregulation, associations that may have re-regulated the which enabled large regional players in citrus sub-sector and the sub-sector has been found (for example for processing) to emerge. to have a history of uncompetitive behavior through collusive practices. Vertical relationships, especially among firms involved in exports, are a common feature Competition may be impeded by high degree in the citrus value chain. In a similar spirit, of vertical integration, multimarket contact of long-term contracts are often in place where large silo operators and joint ventures. vertical integration is not possible. Both vertical integration and long-term contracts can make it more difficult for new entrants to find business partners or access pack house or storage facilities, along the value chain. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 123 APPENDIX H AUTOMOTIVE MANUFACTURING IS SPREAD ACROSS THREE PROVINCES The Eastern Cape has the largest concentration of second-largest concentration of the automotive industry: automotive manufacturing in South Africa: • 3 OEMs and approximately 40 percent of the • Port Elizabeth/Uitenhage: First Automotive South African automotive components industry Works, Ford, Volkswagen, Isuzu and about 30 percent of the automotive components industry KwaZulu-Natal (primarily Durban, but also • East London: Mercedes-Benz’s assembly plant Pietermaritzburg) is home to Toyota’s assembly and roughly 6 percent of the components industry plant, South Africa’s largest producer of vehicles, and approximately 20 percent of the automotive Gauteng (Rosslyn, Silverton and Ekurhuleni) has the components industry. Source: NAAMSA Automotive Export Manual 2018. 124 APPENDIX I APPENDIX I SOUTH AFRICA’S GLOBAL MARKET SHARE INCREASED IN VEHICLES BUT DECLINED FOR COMPONENTS FIGURE 45 SA DOUBLED ITS GLOBAL MARKET SHARE IN COMMERCIAL VEHICLES OVER THE PAST DECADE Final vehicles (Commercial) 4 10 5 3 0 2 -5 -10 1 -15 0 -20 ina il bia lic y ia ia d c y ine ca ar bli ke az lan es ys ub fri lom ra nt ng Br r pu ala on Tu Po hA ep Uk ge Hu Re Ind Co M hR Ar ut ak So ec ov Cz Sl Market share 2007 Market share 2017 CAGR 2007-17 Source: UNCOMTRADE GVC database. FIGURE 46 GLOBAL MARKET SHARE FOR PASSENGER VEHICLES INCREASED BY 86 PERCENT DURING THE PAST DECADE Final vehicles (Passenger) 3.5 20 3 10 2.5 0 2 -10 1.5 -20 1 -30 0.5 -40 0 -50 ina il bia lic y ia ia d c y ine ca ar bli ke az lan es ys ub fri nt lom ng ra Br r pu ala on Tu Po hA ep ge Uk Hu Re Ind Co M hR Ar ut ak So ec ov Cz Sl Market share 2007 Market share 2017 CAGR 2007-17 Source: UNCOMTRADE GVC database. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 125 FIGURE 47 GLOBAL MARKET SHARE IN COMPONENTS DECLINED BY OVER A THIRD DURING THE PAST DECADE Intermediate vehicle parts 4 25 3.5 20 3 2.5 15 2 10 1.5 5 1 0.5 0 0 -5 ina il bia c y ia sia ru d lic y ine ca bli ar rke az lan es Pe ub ri y nt lom ng ra Br pu Af ala on Tu Po ep ge Uk Hu Re Ind h Co M R Ar ut h ak So ec ov Cz Sl Market share 2007 Market share 2017 CAGR 2007-17 Source: UNCOMTRADE GVC database. 126 APPENDIX J APPENDIX J AUTOMOTIVE EXPORTS ARE CONCENTRATED IN PARTS WITH LOW VALUE ADDED FIGURE 48 TOP AUTOMOTIVE COMPONENT EXPORTS BY VALUE - 2017 (R MILLION) Catalytic converters account of 37.2% of total exports 1 Catalytic 2 Engine 3 Tyres 4 Engines 5 Radiators/ 6 Transmission 7 Automotive 8 Clutches/ 9 Gauges/ 10 Filters converters parts parts shafts/cranks tooling shaft Instruments/ couplings parts R million R18 702.0 R3 773.0 R2 516.00 R2 447.0 R1 525.0 R975.0 R839.0 R653.0 R626.0 R588.0 Source: Automotive Export Manual 2018. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 127 APPENDIX K SOUTH AFRICA’S LABOR COST IS HIGHER RELATIVE TO COMPARATOR ECONOMIES FIGURE 49 ANNUAL AVERAGE WAGES IN THE MANUFACTURING SECTOR - GLOBAL COMPARISON Mexico 4791 Thailand 4905 Brazil 7969 Russia 8064 China 9412 India 14301 SA 17365 UK 40604 USA 44448 Source: Automotive Export Manual 2018. 128 APPENDIX L APPENDIX L FIRMS IN THE AUTOMOTIVE INDUSTRY ARE LESS LIKELY TO INVEST IN R&D COMPARED TO FIRMS IN OTHER MANUFACTURING INDUSTRIES TABLE 8 R&D EXPENDITURE AND INTENSITY BY SECTOR (MEDIUM AND LARGE FIRMS) South Africa (2009–14) Sector Percent of Firms with R&D Weighted mean R&D expenditure by sector to sales ratio Paper and Printing 3.47 0.16 Chemicals 11.19 0.29 Rubber 6.41 0.19 Wood and Miscellaneous 7.15 0.48 Primary metals 5.51 0.19 Fabricated metals 4.88 0.33 Machinery 5.67 0.88 Electrical Machinery 9.78 0.27 Autos 3.04 0.37 Aircraft and boats 3.9 4.22 Textiles and leather 3.94 0.33 Pharmaceuticals 17.24 1.57 Food products 7.83 0.22 Computers and instruments 9.01 0.82 Oil products 4.05 0.45 Manufacturing 6.02 0.39 Source: World Bank. 2017. South Africa Economic Update: Innovation for Productivity and Inclusiveness. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 129 APPENDIX M THE COSTS OF OBTAINING ELECTRICITY CONNECTION AND ELECTRICITY CONSUMPTION DIFFER SIGNIFICANTY BY LOCATION FIGURE 50 A FIRM PAYS FOUR TIMES MORE TO CONNECT TO THE GRID IN CAPE TWON THAN IN JOHANNESBURG Average cost breakdown to Average cost of electricity in South Africa get electricity in South Africa (% of income per capita) Security Johannesburg South Africa deposit average eThekwini 391.5% 25% 20% Buffalo City Ekurhuleni 5% Tshwane 75% Msunduzi Lost interest earnings with Mangaung Connection the security Nelson Mandela Bay costs deposit Cape Town 0 100 200 300 400 500 600 700 FIGURE 51 A FIRM IN JOHANNESBURG PAYS NEARLY TWO-THIRDS MORE FOR MONTHLY CONSUMPTION THAN A FIRM IN CAPE TOWN Price of electricity (U.S. cents per kilowatt-hour) South Africa average 13.0 13.7 14.1 14.9 15.5 15.7 9.8 10.1 11.7 11.8 Cape Town Nelson eThekwini Ekurhuleni Msunduzi Tshwane Buffalo City Mangaung Johannesburg Mandela Bay Source: Subnational Doing Business 2018. 130 NOTES expensive for both consumers and firms. World Bank research Notes suggests that the real exchange rate is persistently undervalued. 1. SIMODISA. Accelerating the growth of SMEs in South Africa. 12. For instance, while the Western Cape is among South Africa’s agricultural hubs, only 5 percent of agricultural land 2. Recommendations relating to challenges in logistics have not was transacted in the province between 2003 and 2014 (Nowers been covered in this table; see transport recommendations below. 2014). Moreover, land prices vary substantially even across 3. Relevant publications include the Doing Business reports similar regions. For instance, in 2011, Western Cape farm from 2015 and 2018, and the World Bank’s South Africa land prices were estimated to differ by more than four orders Economic Updates (see references). of magnitude, from $15 per hectare to $178,000 per hectare of farmland (Osano et. al. 2011). And in 2014, the price for 4. Due to the high degree of capital intensiveness (a reflection a hectare of land in Western Cape ranged anywhere between of capital-intensive industries such as mining, commercial R10,000 and R 70,000 for similar regions (Nowers, 2014). agriculture, and heavy manufacturing; industrial policy; and capital substitution driven by rising labor costs), 12 percent of 13. MSME Finance Gap Report: Assessment of the Shortfalls GDP is used to replace depreciating assets, reducing the extent to and Opportunities in Financing Micro, Small and Medium which savings can drive new investment. Enterprises in Emerging Markets. 5. South Africa’s credit rating has also declined in recent 14. According to estimates, the revenue of major SOEs years. As of April 2019, Moody was the only rating agencies is equivalent to 8.7 percent of GDP. https://www.gov.za/ among the three main that had South Africa’s credit rating at sites/default/files/presreview.pdf, p. 2_50; not specified what investment grade. A downgrade by Moody’s could trigger severe constitutes a “major SOE”, but only says: “major SOES such consequences for South Africa, causing the outflow of money by as ESKOM; South African Airways; Transnet; the Industrial overseas investors and raising the cost of borrowing. Development Corporation; the Central Energy Fund; PetroSA; and the Airports Company of South Africa.” 6. For instance, the male unemployment rate is 25.1 percent while the female unemployment rate is 29.5 percent. 15. Here, enterprises are understood to be SOEs if (i) the government holds significant shares and/or has significant 7. For instance, MSMEs in some industries may be control over decisions made by the enterprises and (ii) the disadvantaged by the fact that wage negotiations have been done at enterprise carries out commercial functions, i.e. functions that the sectoral level through bargaining councils and may not reflect are remunerated through sales and fees. productivity levels of young or small firms. President Ramaphosa signed the National Minimum Wage Bill into law, making it 16. Nyman and Koschorke, 2019 forthcoming. The criteria effective on January 1st, 2019. At a minimum hourly wage at for the primary SOEs (i.e. those that are not a subsidiary of R20, the Bill will benefit over 6 million workers earning below another SOE) chosen for this analysis was that they must carry R3,700 per month but excluding domestic and farm workers, who out commercial activities. SOEs related to defence were excluded are expected to be covered at a later stage. Exemptions will also due to the strategic nature of the sector. Subsidiaries are defined be made for employers facing business constraints. A commission in the Public Finance and Management Act (PFMA). will be set up to review the minimum wage bill and make annual 17. Nyman and Koschorke, 2019 forthcoming. adjustments. While unions have welcomed the announcement, critics of the bill have raised concerns about the fact that it may 18. Cassim, Dauda, Nyman and Koschorke, 2019 forthcoming. lead to job cuts due to employers having to pay higher wages, 19. Nyman and Koschorke, 2019 forthcoming. adding to the cost of doing business and have unintended negative consequences on inequality, such as raising the prices of goods 20. 44 percent of schemes do not make eligibility criteria, consumed by poor households. contact details, approval procedures and application forms available online. Recipient lists appear not to be disclosed for any 8. For example, cartel cases in the cement and bitumen incentive scheme. See Nyman and Koschorke, 2019 forthcoming. markets were partially the result of firms continuing old patterns of behavior after legal cartels in these markets were 21. A 2014 review of one incentive scheme found that smaller abolished Bitumen: http://www.compcom.co.za/wp-content/ enterprises incur significantly greater costs than larger ones in uploads/2014/09/Bitumen-price-collusion-in-South-Africa- applying for the incentive because of the use of consultants 23Aug.pdf; Cement: See SAEU 8, 2016. in the application process. See Genesis Analytics. 2014. Implementation/impact evaluation of the Support Programme 9. Manufacturing output remained constant in real terms for Industrial Innovation. Presentation to the DTI Executive but declined as a percentage of GDP, as other sectors have Board of 28 August 2014, p. 11. outgrown it. 22. Cassim, Dauda, Nyman and Koschorke, 2019 forthcoming. 10. Underlying these trends, South Africa’s applied tariffs have come down substantially in recent years, from a trade- 23. For instance, see Delgado, M., Ketels, C., Porter, M. E., & weighted average of 16 percent in 2000 to under 7 percent in Stern, S. (2012). The determinants of national competitiveness 2015. Overall, tariff levels however remain above the sample of (No. w18249). National Bureau of Economic Research. comparator middle-income countries (except for Brazil). They 24. Launched in October 2018, the HCI measures the amount are significantly above those set by most high-income countries of human capital that a child born today can expect to attain and there is significant heterogeneity depending on product by age 18. It conveys the productivity of the next generation of type. For example, for consumer goods, only Brazil, Colombia, workers compared to a benchmark of complete education and and Egypt have higher trade-weighted applied tariffs. However, full health, through the combination of 5 indicators: (a) the since the establishment of the Southern African Development probability of survival to age five, (b) a child’s expected years Community (SADC) free trade area, applied tariffs for other of schooling, (c) harmonized test scores as a measure of quality SADC members are almost at zero. of learning, (d) adult survival rate (fraction of 15-year-old that 11. The divergence in productivity puts the rand on a will survive to age 60), and (e) the proportion of children who depreciating trajectory in real terms, making imports more are not stunted. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 131 25. Montenegro and Patrinos. 2014. ii) Fifth Freedom rights and iii) designations of carriers by the state in order to assess their level of liberalisation. The Air 26. Based on the narrow definition. Liberalization Index (WALI) measures the level of liberalisation 27. http://www.worldbank.org/en/country/southafrica/ of the air transport policy of a given country by calculating the publication/south-africa-economic-update-increasing-south- average of the indices of all the air service agreements concluded africas-tertiary-enrollment-requires-rebalancing-resources. by that country, weighted by the respective traffic they cover. It ranges between zero for the most restrictive, and fifty, for the 28. In 2008, there were around 22,000 ECD institutions most open. in South Africa, 17 percent were school based, 49 percent community based, and 34 percent home based. 40. World Bank databank. 29. Of the 10,661 schools needing sanitary intervention, the 41. National Treasury. Department of Basic Education has started implementation in 42. South Africa Reserve Bank. 2,175. Funds for the remaining facilities are yet to be mobilized. While the unit cost of R 44,000 per toilet seat is high, there 43. Act No.9 of 2017. are estimates that actual cost at sites is even higher at around 44. For the purposes of this section, we are focusing on the R 100,000 per seat. Thus, the total funds required to provide entirety of the agro-food system including “the ecosystems and facilities may be even higher than the current cost estimate of R all of the activities required for the production, processing, 6.8 billion. transportation and consumption of food, including the inputs 30. Another challenge to note in public tertiary education is needed and outputs generated by each of these activities” (FAO the limited success of the SETA model in improving the skills 2017). This includes broadly (a) the agriculture, forestry, and landscape in South Africa. SETAs are funded through the skills levy fisheries sector and (b) the food, beverage, and tobacco sectors and are responsible for rolling out skills programs, learnerships, according to most standard classifications or HS Chapters 1–24. internships and apprenticeships. R 15.2 billion in 2015–16 SETA 45. Agriculture has the potential to absorb many excluded funds amounted to R 15.2 billion but only around 180,000 people population groups such as females. As it stands, females were trained (Education Year Book 2017). only account for a third of employment in South Africa’s 31. These include the Council on Higher Education, the agricultural sector. Council for Quality Assurance in General and Further Education 46. In principle, a merger would not be allowed if it significantly and Training (UMALUSI), the Quality Council for Trades lessened competition without counteracting efficiencies. However, and Occupations (QCTO), the South African Qualifications this is not necessarily always the case in practice. Authority (SAQA), and SETAs. 47. These relate to measures for the control of plant diseases, 32. In 2017, then-President Jacob Zuma announced that particularly in agricultural crops. students from poor and working-class families would be entitled to fee-free higher education from 2018. In his announcement, 48. The aim in selecting these two crops was not to focus the threshold of financial eligibility was raised from a maximum on the two most promising sub-sectors, but rather to highlight family income level of R 122,000 previously under the National the heterogenous issues within the agribusiness sector, with Student Financial Aid Scheme (NSFAS) to R 350,000 to cover the citrus primarily an export crop and yellow maize generally “missing middle.” It also converted support from loans to grants. for domestic consumption and processing. This in turn should However, low-income students enrolled in private institutions provide a cross-section of sector constraints and opportunities are not eligible for government subsidies available under the new for integrating emerging farmers. tuition free policy. 49. The concentration of FDI is most likely in part a result 33. World Bank estimates that these power cuts cost 0.12 and of the fact that headquarters of FDI-receiving firms tend to be 0.06 percentage points of headline growth respectively. located in in Gauteng even if the actual investments take place in other provinces. 34. Load shedding is a process of temporarily cutting out electricity supply to some regions to manage capacity constraints. 50. RVAAC has emerged (or “is emerging”) as a tool for Stage 2 and stage 4 load shedding reduces national electricity implementation, expanding on the high impact indicators to supply by 1,000 and 4,000 megawatts respectively. Estimates are speed progress. that load shedding may have cost the South African economy 51. Strikingly in this regard, India just had its access to the $2 billion a day. Communicating a day-ahead of load shedding U.S. Generalized System of Preferences suspended. mitigated the negative impacts. 52. Based on import refusals data from the EU and the United 35. Afrox, Easigas, Totalgaz and Oryx. States, however, South Africa South has a low unit rejection rate 36. The cost of solar photovoltaic (PV) dropped from R3.65/ compared to other middle-income agriculture exporting countries kWh in bidding window 1 to R0.62/kWh in bidding window 4 and this rate has been in decline since 2012. Thus, the domestic expedited. Wind power dropped from R1.51 to R0.62 per kWh standards compliance system appears to be sufficiently robust to over the same timeframe. See https://www.itweb.co.za/content/ ensure that exported goods meet EU and U.S. SPS requirements. YKzQenvjVLyvZd2r 53. Anecdotal evidence from expert interviews. 37. Eskom argues, among other things that the IPPs 54. In most countries where agriculture insurance programs resulted in higher cost than can be recovered through tariffs have reached scale and insure a large number of small-holder paid by its customers. farmers, the insurance has been “bundled” with other services 38. http://www.competition.org.za/review/2015/5/25/muted- / products to increase the value proposition to the farmer and battle-for-the-regions-skies-competition-in-the-airline-industry. drive up volumes of premium. In India, under the national agriculture insurance program (PMFBY), the area yield index 39. The Air Services Agreement Projector (ASAP) is an insurance is bundled with agricultural credit for farmers. analytical tool devised by the WTO that analyses bilateral Air Services Agreements (ASAs) in terms of i) ownership restrictions, 55. The causes of this have been the focus of an enormous 132 NOTES body of research, including by the World Bank (see Deininger fall or appreciation in the value of the currency, it recommended 1999 and van der Brink et al. 2006). In a more recent analysis, that a new variable should be introduced into the formula viz Binswanger-Mkhize 2014 see the primary cause of the lack of the Real Effective Exchange Rate (REER) Index. Prior to this, success as attributed to the use group or co-operative farming; in 2005, ITAC had recommended that a switch be made to ad inadequate participation of beneficiaries; the absence, late valorem tariffs. However, subsequent to representations made arrival or poor quality of post-settlement support, and capacity by the National Chamber of Milling, Grain SA, and the DTI in problems in the civil service. 2008, ITAC recommended a return to the variable tariff formula. 56. This figure is, however, contested. Aliber (2018) estimates 65. ITAC Wheat Tariff Review, 2016. http://www.itac.org.za/ that as of 2016–17, about 8.1 million hectares (ca. 9.9 percent upload/document_files/20170623102216_Report-538.pdf. of total commercial farmland) had been made available via land 66. The tariff on maize has always been set at zero since the reform, of which 58 percent was through the redistribution reference price set for maize in 1999 ($110 per ton) was set at a programme. Sihlobo and Kapuya’s 21 percent also include the level at which the costs of maize production make it unlikely the equivalent area of land for which beneficiaries of restitution and tariff will be triggered. redistribution programs chose financial compensation, about 4 million hectares purchased by the state and approximately 4.8 67. https://www.agrisa.co.za/import-tariff-maize-can- million hectares purchased by black buyers from white sellers devastating-effect-livestock-industry/. through private transactions. 68. For example, in Australia retailers and wholesalers sign 57. Tenure security is still governed by the Interim Protection a written notice to the competition authority which binds them of Informal Land Rights Act (IPILRA). This stop-gap legislation to write down their supply agreements, act in good faith and has been in place since 1996. The act aims to secure the rights prohibit retailers from threatening suppliers with termination of people occupying land without formal documentary rights, of contracts without reasonable grounds. The Australian code such as rights to household plots, fields, grazing land, or other sets guidelines with regard to how retailers and suppliers ought shared resources. Yet its effectiveness is limited because there is to conduct business and stipulates that this information should no land administration system underpinning it. This means there be made available to all suppliers at all times. In South Africa, are no proper processes for clarifying and documenting rights or the Competition Commission has advocated for supermarket resolving disputes (World Bank 2018a). chains to facilitate entry of small suppliers by for example reviewing their procurement policies and proactively disclosing 58. On a related note, this situation of water scarcity and information on entry requirements. the need for effective management has a particular impact on efforts to expand irrigation. For example, the total water 69. This could include issues such as improved design of allocated to irrigation nationally has been capped in the blended finance facilities, supporting Land Bank in its strategy National Water Resource Strategy 2 (NWRS-2) at 60 percent of for reaching emerging farmers, risk sharing of commercial bank the total renewable resource, providing for water for a further lending to strategic partnerships supporting emerging farmers and 82,000 hectares of irrigation expansion nationally. However, this distinguish between potential IFC and IBRD support. It should expansion target conflicts with the long-term political vision of also address the dualistic nature of South African agriculture irrigation as a central instrument of rural development defined and services with the view of identifying specific private sector in the National Development Plan (NDP) of 500,000 hectares. opportunities in agricultural finance outside the scope of the key players (commercial banks). Here smaller regional private banks 59. SAEU 8, 2016. could play a role. 60. This can happen through several mechanisms. First, 70. This could build on previous study carried out by the World obligations to register with and provide timely information Bank on the agriculture insurance market in South Africa (“South to associations can constitute an extra cost for new entrants, Africa—Toward a National Agricultural Insurance Program”). particularly new firms. While regulations obligate associations to collect information which is “deemed crucial for the development 71. For example, in Australia retailers and wholesalers sign of the industry,” it the exchange of information between market a written notice to the competition authority which binds them players at a disaggregated level can facilitate collusion by making to write down their supply agreements, act in good faith and it easier to reach and maintain collusive agreements. Finally, prohibit retailers from threatening suppliers with termination given that the role of associations is to protect their members’ of contracts without reasonable grounds. The Australian code interests, they tend to by their very nature primarily represent the sets guidelines on how retailers and suppliers ought to conduct interest of incumbents. business and stipulates that this information should be made available to all suppliers at all times. In the United Kingdom, 61. Agricultural Policy Action Plan (APAP), 2015. following a retail market inquiry, a fair dealing provisions 62. The three largest contributors towards the gross value was included in the formal industry code of conduct and an of field crops in South Africa (with their proportionate value adjudicator was established to enforce the code through over five seasons prior to and until 2014) are maize (48 percent), administrative law mechanisms (particularly relating to followed by sugar cane (13.2 percent), wheat (9.7 percent) dealings with retailers above a certain size). In South Africa, (APAP 2015). the Competition Commission has advocated for supermarket chains to facilitate entry of small suppliers by for example 63. See, for example: http://www.saflii.org/za/cases/ reviewing their procurement policies and proactively disclosing ZAWCHC/2017/110.pdf. In 2016/17, South Africa mainly information on entry requirements. imported wheat from Germany (231,000 tons), Russia (184,184 tons) and the Czech Republic (150,378 tons). fhttps://gain. 72. Note: such arrangements may also hold efficiencies in fas.usda.gov/Recent%20GAIN%20Publications/South%20 that they incentivize investment by both the supermarket and Africa’s%20wheat%20import%20tariff%20decrease_Pretoria_ the property manager. There is therefore a need for enforcers South%20Africa%20-%20Republic%20of_9-19-2017.pd. to consider the balance between the anticompetitive and pro- investment effects. 64. In early 2016, ITAC conducted a review of the system. To address issues of over-protection, when there was an extreme 73. Econometrix. SOUTH AFRICA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 133 74. Estimates for employment differ depending on the source. wp-content/uploads/2018/09/TBI-Report-July-2018_08-V04.pdf. Data on employment provided by both industry associations 95. https://www.travelweekly.com/Middle-East-Africa- show a small increase in employment over the APDP period. Travel/Insights/Open-skies-will-open-doors-for-African-tourism StatsSA data shows a decline in employment in the component industry (Barnes et al 2017). 96. TBCSA, 2018 ‘Tourism Business Index’ 75. Interview with NAAMSA and NAAMSA PPT “South 97. World Economic Forum, 2017 ‘Travel and Tourism Africa: Competitive Global Supplier of Automotive Products.” Competitiveness Report’ 76. https://www.gov.za/speeches/minister-rob-davies- 98. Cape Ton Tourism, 2017 ‘Annual Report’ http://www. media-statement-south-african-automotive-masterplan- capetown.travel/annualreport/2017/ 2035-and-extension. 99. UNCTAD 2017 ‘Transformation through Tourism’ https:// 77. There is only one promising case to date. ASCCI identified unctad.org/en/PublicationsLibrary/aldcafrica2017_en.pdff an opportunity to localize drive shafts using domestically available technology and facilitated the linkages between an OEM and a potential supplier. 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