SDIs are aimed specifically at boosting employment and black empowerment, but, asks Hein Marais, will they have the necessary finances?
Right now the multi-billion rand Mozal smelter is just two holes in the ground – 3m deep, a kilometre apart, several football pitches wide – gouged out of a patch of pasture in Matola, outside Maputo. A decade ago, this was no-man’s land, the scene of horrific massacres as Renamo rebels pushed on to the outskirts of the Mozambican capital
You’ve got to use your imagination to see Peter Cowie’s dream. He’s the general manager of the smelter and says that in 28 months’ time, workers will be hauling 245 000 tons of aluminium ingots from this plant.
Mozal is the centrepiece of the Maputo Development Corridor and is the biggest single investment in the country’s history. Operational, it will double the value of Mozambique’s exports and create 900 permanent jobs.
Stretching from Gauteng’s industrial nerve centres through Mpumalanga, across Komatipoort and on to the Mozambican capital, the Maputo Corridor is the flagship of the Department of Trade and Industry’s (DTI) most concerted bid yet to tilt our economy into the global market.
Another acronym is probably the last thing South Africa needs. But “SDI” does roll off the tongue more easily than “Spatial Development Initiatives”, the phrase coined for a programme of ventures aimed, as DTI’s Paul Jourdan puts it, at “unlocking the inherent and under-utilised economic development potential of certain locations”.
Together with a team of energetic project managers, Jourdan is the brains behind a trade strategy which dreams of jobs and black economic empowerment that stretches beyond the Johannesburg Stock Exchange to the engine room of the economy.
Ten SDIs are envisioned, several breaking out of the confines of South Africa’s borders and linking with neighbouring economies – a practical fillip to the philosophical “African renaissance”.
Each hinges on industrial activities, agri- tourism or a mix of the two. All either hug or end at the coast – testament to the government’s determination to rebuild the economy via internationally competitive exports which, it hopes, will enable South Africa to snare a larger share of the rising volume of global trade.
According to the DTI, “the initiatives are the practical implementation of the government’s economic strategy as set out in its growth, employment and redistribution (Gear) policy”.
Compressed into the ideological and fiscal frame of the Gear plan, SDIs rely on minimal financial inputs from the state, massive infusions of private capital and emphasise projects that can produce commodities for export. The state’s role, explains Jourdan, is to build a “platform of infrastructure”, vision and skills that can attract private investment into a designated area.
The process begins with workshops to assess the potential of a planned SDI. Then bottlenecks are identified – the need, say, for better transport routes, more water or electricity, or a container terminal.
Partnerships between the public and private sectors are cobbled together to remedy those hitches. Occasionally, when the private sector turns a cold shoulder, the state might step in and splurge on an essential new road – as it is doing to kickstart the Lubombo agri-tourism SDI that straddles northern KwaZulu-Natal, Swaziland and southern Mozambique.
Here ideology – specifically Gear’s deficit targets – threatens to undermine SDIs’ impact. The shallow pool of state finances available to develop SDIs ultimately leaves them at the mercy of market forces. The rule of thumb has government contributing no more than 10% of the total investment value of an SDI programme, says Jourdan.
There is ample evidence to back Keynesian economists’ view that, when linked to a cogent industrial strategy, greater government capital expenditure becomes a prime catalyst for economic growth and job creation.
“Cuts in government’s investment,” argues Azghar Adelzadeh of the National Institute for Economic Policy, “go against all cross- country evidence that higher public social and infrastructural investment leads to higher private investment”.
The Ministry of Finance believes the opposite to be true. And it has pegged out the fiscal pen in which Jourdan’s team of SDI managers have to operate. The gist of their work is to design so-called “investment clusters” for an area – an ensemble of projects that potentially reinforce one another, making it easier and more attractive for a firm to set up office there.
Part of Jourdan’s work is to identify these overlapping outputs and requirements, and design a cluster of projects accordingly.
“We try and place industries in an optimal place,” says Jourdan. “We’re not trying to make capital go somewhere for political reasons, but helping them go where it makes economic sense.”
The climax of state involvement is usually the launch of the SDI by way of a large investor conference where projects are pitched and, hopefully, initial deals are pencilled in.
To date, 518 investment opportunities valued at R115,4-billion have been identified in this manner. If realised, says the DTI, they could create some 118 000 new jobs. But it’s early days still. The bulk of SDI projects are still in the “pre-feasibility” stage – glints in their designers’ eyes.
Like riding a bicycle, SDIs are liable to wobble unless momentum can be maintained. “Government calls its role in SDIs an `exit strategy’,” says Business Map’s Jenny Cargill. “But drawing in investors isn’t done with one conference. It requires consistent marketing – it’s like starting a new business. What’s unclear is how they’re going sustain momentum in the SDI projects.”
In the short to medium term, says Jourdan, South Africa will have to achieve international competitiveness mainly on the basis of its natural resources.
Thus the showcase SDI projects tend to be based on mineral extraction and processing. Hugely capital-intensive, these “anchor projects” create few new jobs. Each permanent job generated by the Mozal smelter, for instance, will cost about R90- million.
The hope is that once “anchor projects” take off in an SDI area, they will exert a gravitational pull on other investors, particularly those willing to set up “downstream” industries with greater job creation potential.
Richard’s Bay is a monument to the possible pitfalls of this logic. Its Bayside smelter cast its first aluminium ingot in 1971. Around the port today are other mega-plants the apartheid government had hoped would lure secondary industries. They didn’t. Today the town is a tale of smoke-belching mineral extraction or processing plants and a compact retail and service sector that feeds off the disposable income of the small band of workers who’ve landed jobs.
Richard’s Bay’s SDI chair Glen Martin says a container terminal would go a long way towards drawing manufacturers. So, too, could the envisioned “one-stop” investment facilitation centre that has to grease investors’ paths through the legislative maze by creating what SDI project manager Claudia Manning calls “a bureaucratic freeway”.
But complicating the SDI dream is the fact that, internationally, firms tend to set up shop where a high degree of industrial concentration already exists. In South Africa, these zones lie in Gauteng (which produces about 43% of the country’s gross manufacturing output), KwaZulu-Natal (21%) and the Western Cape (14%).
Industrial SDIs, particularly, have to reproduce some of their attractions if they’re to avoid becoming arrested around a few mega-projects. Yet, even if they don’t, we’re wrong to judge their job-creating performance by only tallying the workers clocking in at the new plants.
“There’s a three to five times multiplier effect,” says Jourdan, referring to conventional employment/output ratios. But new studies suggest the employment trigger effect is, in fact, considerably lower in South Africa’s economy. Each new job created in the chemical and base metals industries, for example, leads to 1,5 to 2,5 other formal jobs – not the three to five customarily touted.
It’s on the jobs front that SDI projections seem most vulnerable.
According to John Mitchell, an economist advising the Mpumalanga government, “seeking to attract `conventional’ capital intensive investment into the Maputo Corridor will result in an acceleration of economic growth, but not create enough jobs to impact significantly on the local labour market”.
In most sectors of our economy, it takes about R1,2-million of capital investment to create a single permanent job. This means the R9-billion of investment committed to Mpumalanga’s stretch of the Maputo Corridor (80% of it from the private sector), would generate about 7 000 permanent jobs. The province currently has 350 000 unemployed workers. Somehow, SDIs have to stimulate far greater levels of labour-intensive investment if they are to achieve one of their key objectives: job creation.
Another objective highlighted in the SDI strategy is local black economic empowerment. The early indicators are drab. Mitchell’s studies in Mpumalanga reveal an equally desultory pattern there. Practically every tourism facility in the province is still white-owned, leading Mitchell to lament that “the `first generation’ of Maputo Corridor projects … have not significantly changed patterns of ownership in Mpumalanga”.
Formidable obstacles still separate SDIs from their objectives. Many, though, are imbedded in policies ensconced beyond the reach of SDI architects and managers. Foreign investors are centrally guided by the enthusiasm of their local counterparts to sink money into productive sectors.
An unpleasant feature of our transition has been domestic capital’s marked reluctance to invest in the “real economy”, causing an ever-growing reliance on foreign direct investment (FDI). The result is a reinforcing aversion to make long-term investments. FDI flows have see-sawed since 1994 – rising impressively in 1995, plummeting in 1996 and recovering again last year (thanks, in large part, to the partial privatisation of Telkom).
But an ominous trend emerged in 1997, when volatile, short-term capital inflows began outstripping FDI.
Part of the problem lies in the “sado- monetarism” pursued by the Reserve Bank, whose high interest rates make capital extremely expensive and deter domestic private investment: monetary policy is a decisive factor in SDI strategy. So, too, is the government’s persistence along a path of fiscal austerity which drastically narrows the state’s role as a catalyst for SDIs.
Fiscal and monetary policies have to be synchronised with our industrial strategy. Instead, as Ben Fine of London’s School of Oriental and African Studies states, “exactly the opposite is happening in South Africa”.
Hein Marais is the author of South Africa: Limits to Change – The Political-Economy of Transition, published by UCT Press and Zed Books