One step forward, two back as policy loses to practice

28 June 2015 - 02:00 By CHRIS BARRON

Manufacturers say some regulations actively disadvantage them, and others fall between the cracks The Competition Appeal Court has allowed Sasol to maintain import parity pricing of propylene and polypropylene, but the chemicals and energy giant is giving local manufacturers a further kick in the teeth by charging barely affordable prices for gas, says Coenraad Bezuidenhout, executive director of Manufacturing Circle.Sasol has a monopoly over natural piped gas, and government regulations allow it to exploit this to the detriment of local manufacturing, he says.Manufacturing Circle has formed a gas users' group, which is taking the National Energy Regulator of South Africa to court to challenge the regulatory framework for the pricing of natural gas.story_article_left1"The current framework allows Sasol to put a huge mark-up on the price of natural piped gas that it makes available to the domestic market, while it is able to hold on to gas for its own usage at a subsidised price," says Bezuidenhout."The distribution network and the pipeline here is also under the Sasol monopoly, so you sit in the same kind of situation as with the Eskom debacle where they exploit the source but also own the distribution network."Falling global energy prices have put local manufacturers at a significant disadvantage, he says. Many of them converted to gas because they expected it to be cheaper, but it hasn't worked out that way.The regulations allow Sasol to apply for price increases relative to the expected price of a basket of alternatives. These include electricity and coal, which are clearly going to increase in price more steeply over the next few years than gas."This makes it an unfair system," says Bezuidenhout.The government blames the high input prices local manufacturers are charged by the likes of Sasol for the sector's lack of competitiveness, but its own regulatory framework is a large part of the problem.He says that although it is "politically much easier" for departments such as trade and industry, which lodged the initial complaint against Sasol's pricing practice, "to attack the private sector for uncompetitive pricing", such behaviour by state-owned enterprises such as Eskom and Transnet goes unchallenged."To tackle administered pricing you need buy-in from across government, which we have not seen," he says.block_quotes_start Getting government to comply with its own policies on preferential procurement is a battle block_quotes_endThe disastrous effect of Eskom's tariff hikes on the sector has been well documented.Less attention has been given to the devastating impact of Transnet's port tariffs, which are 360% higher than the global average.Manufacturing Circle, which represents the top 42 manufacturing companies in South Africa, including SABMiller, Bell Equipment, Sappi and Nampak, as well as many smaller companies, has been banging on government doors to get it addressed for years.In his state of the nation address three years ago, President Jacob Zuma said he had directed that there should be a solution. But other than "some sort of discount negotiated for fully built-up cars being exported", nothing has happened."There, once again, it's an issue of a traditional cost structure that must be addressed and changed, but if you bring it up you get a long lecture from some official on what the history is behind it," says Bezuidenhout. "But we don't know that there has been concerted action to drive the tariffs lower."In fact, last year they went up, again, by almost 10%."It's one of those situations where you need co-operation across different government departments, and that's where it starts to fall down every time."story_article_right2Port tariffs are "just one of numerous instances" where regulatory frameworks impede domestic and export competitiveness, which the Department of Trade and Industry is supposedly trying so hard to facilitate with its trumpeted industrial policy action plans and incentive schemes.If alignment between various government departments is lacking, then so, too, is alignment between the government and manufacturers. Bezuidenhout says it is the intention of the Manufacturing Indaba, which starts in Gauteng tomorrow, to "improve" this alignment.What also needs to be addressed is the alignment of government departments with government policies. Local and preferential procurement policies are a glaring example."Getting government to comply with its own policies on preferential procurement is a battle," says Bezuidenhout.The major problem is that too many entities and officials are doing their own thing in pursuit of their own agendas when it comes to procurement.Before 1991, there were seven "procurement points" in the government. Now there are 2000, he says. "And not all of those doing the procurement are qualified. There's political stuff, there's nepotism, there are individual interests and so on. There is not enough local procurement happening."A current example is the failure of the Passenger Rail Agency of South Africa to give local manufacturers a bigger slice of its R51-billion-plus rolling stock fleet renewal programme.Bezuidenhout rejects Prasa's argument that local manufacturers don't have the capacity.Many of those who were overlooked are making, and exporting to countries such as Russia and the US, the components that are needed, he says."I recently took the concerns of five or six domestic companies to the Department of Public Enterprises to approach Transnet to discuss the inclusion of local manufacturers."These companies were not even given the chance to bid, he says.The department said it would "revert back to us", but has not done so. "Local procurement is not ... an internalised concern," he says.There were 160 cases of noncompliance with its own procurement laws by the government last year, "but at least they are starting to monitor it".Bezuidenhout, 38, is leaving Manufacturing Circle to do a PhD on institutional versus ideological obstacles to business in South Africa.sub_head_start Opportunities aplenty but factories are falling silent sub_head_endLocal manufacturing contributed 25% to South Africa's GDP in the '60s. By 2010, this had dropped to 15%. It is now contributing less than 12%. The sector employs 1.6million people.In a country with South Africa's level of development, manufacturing should be contributing 25% of GDP and providing 2.5million jobs, says Coenraad Bezuidenhout, executive director of Manufacturing Circle.story_article_left3Market opportunities are being created by changing global dynamics such as structural changes in China that are pushing up costs there.Globally, manufacturers are trying to diversify their supply chains to avert the disruptions they had after the natural disasters in Asia a couple of years ago.Environmental concerns are placing a growing emphasis on proximity to market manufacturing. Technological advancements are making it cheaper and more feasible for small manufacturers in South Africa and elsewhere in Africa to exploit this trend.So why aren't they?A combination of attitude - "they're not competitive enough, they need to do more to drive efficiency, they don't use foresight, don't push themselves, don't innovate enough, don't do enough research and development" - and government, he says."An environment where you face annually the kind of labour instability that we do, uncertainty about future electricity pricing and availability, and the fact that we basically have no energy policy to tell us what Eskom and electricity distribution is going to look like in 10 years' time, is not going to make somebody put down R200-million or R1-billion for a factory with any amount of confidence," says Bezuidenhout."We've got guys who have negotiated with a municipality for electricity supply and built a business case around that. Then, when they've committed themselves and spent a lot of money, the municipality steps in and says: 'Sorry, we can't honour our supply contract any more.'"So it's not necessarily that locals are not stepping forward to seize these markets quickly enough, but that investing in the necessary capacity requires an ecosystem that we just don't have in South Africa."story_article_right4Manufacturers are relocating, many of them in sections and stages as challenges arise. For example, a particular input that they used to manufacturer locally they now procure from overseas.It's difficult to measure the extent to which this is happening, he says, "because guys are not going to stick their heads above the parapet while they're still running their business here".Bezuidenhout says the "diplomatic stuff-up" around Sudanese President Omar al-Bashir will have done South Africa's faltering manufacturing sector no favours.It will undermine relationships in the US and eurozone that have been built painstakingly over many years."It definitely has and will impact on how South Africa is seen in these US and euro export markets," he says.It creates uncertainty about what South Africa's relations with such important export markets will look like in 10 years, and about the rule of law in South Africa."I brief institutional investors and they want to know what the situation here is going to be like in 10 years. If they're going to face a situation where the courts don't have a say over what they should, then obviously that's a huge concern."..

There’s never been a more important time to support independent media.

From World War 1 to present-day cosmopolitan South Africa and beyond, the Sunday Times has been a pillar in covering the stories that matter to you.

For just R80 you can become a premium member (digital access) and support a publication that has played an important political and social role in South Africa for over a century of Sundays. You can cancel anytime.

Already subscribed? Sign in below.



Questions or problems? Email helpdesk@timeslive.co.za or call 0860 52 52 00.