'Time to get policy ducks in a row'

Policy uncertainty and the lack of government coherence are major factors in South Africa's failure to industrialise at the required rate, says the country's industrialisation tsar, Garth Strachan.

Government industrialisation programmes are barely scratching the surface of South Africa's 27.1% unemployment rate.

"They're not creating jobs as quickly or on the scale that is required," says Strachan, 65, a veteran ANC and SACP cadre who is the Department of Trade and Industry's deputy director- general in charge of industrial development.

His frustration boiled over while he was addressing a World Bank seminar at the University of the Witwatersrand's business school last week.

"The lack of policy coherence and programme alignment in government actually is a very big constraint," he said.

His remarks came after then Eskom CEO Brian Molefe torpedoed the government's independent power producer procurement programme last year. He shocked investors, not to mention Strachan himself, when he announced that the utility would sign no further agreements to purchase renewable energy from independent power producers.

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The government has frequently cited South Africa's renewable energy programme as a shining example of how well industrialisation is working.

Strachan says it is now in danger of collapsing.

This will have a devastating effect on foreign investment, the development of local component manufacturing businesses - most of which are black-owned or at least BEE-compliant - and job creation, he says.

"It is a critical vehicle for foreign direct investment and is needed to create demand for locally manufactured components in wind and concentrated solar."

After Eskom's announcement, SMA, one of the world's largest solar inverter manufacturers, shut its factory in Cape Town, and at least three other component manufacturers are likely to follow suit.

"The closure or impending closure of companies in the sector is a matter of great concern," says Strachan. The department is "engaging" with the departments of public enterprises and energy to reverse Eskom's decision.

He has also been engaging with independent power-producing companies to persuade them not to close, but says reversing the damage that has been done will not be easy because a lot of trust has been lost.

"We believe the independent power producer procurement programme is critically important, and policy alignment has to be secured, which essentially boils down to connecting those producers to the grid.

"The same applies to gas. Soon we're going to have a gas industrialisation programme which will be labour intensive, and we've got to ensure that there is policy certainty and programme alignment around that as well."

Government attempts at industrialisation have been heavily criticised. But although Strachan admits that they have been inadequate he does not take the criticism lying down.

"If industrialisation was easy everybody would do it," he says.

But it becomes considerably more difficult when government departments work against each other, he adds.

Although he doesn't specifically mention it, the most notorious example of this has been the Department of Home Affairs wreaking havoc with attempts by the Department of Tourism to boost what many see as an even more important sector, in terms of potential contribution to GDP, than renewable energy.

"It is critical to ensure that there is intra-governmental policy coherence and programme alignment."

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As things stand, however, "policy uncertainty and lack of policy coherence is a serious problem. In the renewable energy sector there is no policy alignment."

This extends "across all sectors", says Strachan.

"If you don't get that alignment, the outcomes of your industrial strategy - which will be job creation, investment, economic growth, exports and so on - will be adversely affected."

Unless the problems bedevilling industrialisation are confronted openly and dealt with, there will be little chance of attracting the necessary foreign investment for it to succeed.

"That's precisely why I stuck my neck out. Policy coherence and programme alignment is non-negotiable. It's one of the absolute prerequisites for industrial development. When you don't have it you are going to have suboptimal outcomes across your production sectors - mining, agriculture and manufacturing."

Closer collaboration with the private sector is another essential component of industrialisation. But business leaders won't invest in programmes if they believe they are likely to be undermined by conflicting political agendas.

Strachan won't comment on a common fear among business leaders - although few openly express it - that 2017 is going to be a particularly bad year for conflicting agendas and, indeed, general government paralysis, with ministers more concerned about personal survival than industrialisation.

As a "humble civil servant" he cannot comment, he says.

His minister, Rob Davies, recently told investors in London that South Africa was open for business. Strachan echoes this, which is puzzling given Eskom's apparent determination to chase investors from the renewable energy sector.

How can the country be open for business when, by his own admission, policy uncertainty and conflicting government agendas are driving investors away?

"Issues of sentiment and political uncertainty are clearly a barrier to a labour-focused industrial strategy," he says.

"Policy certainty is absolutely critical for driving industrialisation and investment. Lifting business confidence is absolutely critical to securing investment in the production sectors of the economy."

block_quotes_start Lifting business confidence is absolutely critical to securing investment in the production sectors of the economy block_quotes_end

How can South Africa be open for business when these "absolutely critical" conditions for investment are being undermined by the government?

"We're facing multiple challenges. Domestically, we have to secure policy certainty. There are other enormous challenges: rail and port charges and inefficiencies, electricity and what we would refer to as rent-seeking. Those are all obvious barriers to industrialisation."

Strachan is not entirely happy with Transnet's controversial handling of its R50-billion locomotive renewal programme.

"Any departure from the law, and the competitive supply development programme which applies to the procurement of those locomotives, needs to be investigated and action should be taken."

Is he concerned that there wasn't more local procurement?

"We work closely with Transnet and have never hidden the fact that we would like to see optimal outcomes with respect to supply development and localisation. We are concerned about that."

But let's not forget, he adds, that state-owned enterprises have had to cut back on their procurement schedules because of the global recession.

He admits, however, that most of the problems preventing state-owned enterprises from playing more effective roles in industrialisation have been self-inflicted rather than the result of global factors.

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"Rent-seeking behaviour constitutes a serious brake to industrial development."

Strachan's industrialisation programme involves a tricky balancing act, if not outright contradictions.

To qualify for government incentives companies need to "raise their competitiveness" but be more labour intensive.

They need to invest heavily in technology. This usually means employing fewer and more skilled staff. But while investing more in technology they also need to be more labour intensive.

"We can't fall behind the technology curve, but we have to look at labour intensity across the value chains."

He accepts that labour reforms might be necessary to encourage companies to become more labour intensive.

"We're not opposed to labour policy reform. But a race to the bottom, which is to further deregulate the labour market, is, we think, the wrong way to go."

Companies need to be labour intensive, but the jobs they create must be good jobs.

"We're convinced we have to create quality jobs, decent jobs."

He denies being overambitious about what government industrialisation programmes can achieve, even while admitting that essential preconditions such as policy coherence and programme alignment don't exist.

One of his department's goals is to create 100 black industrialists by 2020.

The number of black industrialists who have been "supported" since the inception of the programme is "in the lower teens", he says.

But he is confident the target will be reached in three years.

"What you find with incentives is that it's a very slow start and then the graph goes steeply upwards."

Many economists question whether the government should be in the business of picking winners to throw taxpayers' money at - whether individuals, companies or sectors - at all.

Doesn't the market do this more effectively? "We characterise it as government steering but not rowing. We leave a great deal to the market, we accept the market. But there are market failures. We intervene in collaboration with the private sector to overcome market failures."