KZN Sector Assessment. Sector Policies, Objectives, Opportunities & Potential Review

Transcription

1 KZN Sector Assessment Sector Policies, Objectives, Opportunities & Potential Review 1

2 Contents Executive Summary... 4 Introduction... 7 The Project... 7 This Report... 8 Outline of this report... 9 Approach & Methodology General Approach Defining the Key Policy Objectives & ensuring alignment Conduct background research & compile statistics Compare metrics and assess sectors Conduct more detailed sector studies Definition and Alignment of Policy Objectives & Metrics Sector Comparison Introduction Comparison of Sectors by Policy, Funding & Incentives Comparison of Sectors by Current Economic Metrics Comparison of Sectors by Market Attractiveness Comparison of Sectors by Multipliers Overall Comparison of Sectors Review of Specific Sectors & Cross-Cutting Policies Sector 1: Agribusiness Sector 2.1: Manufacturing Metals fabrication Sector 2.2: Manufacturing Automotives Sector 2.3: Manufacturing - Clothing and Textiles Sector 2.4: Manufacturing Forestry, timber pulp and paper Sector 2.5: Plastics and chemicals Sector 3: Tourism Sector 4: Cultural and creative industry Sector 5: Transport & logistics Sector 6: Mining Sector 7: Construction Industry Sector 8: Call Centres & Business Process Outsourcing (BPO) Economy Structure & Indirect Impacts What is a SAM What does the KZN SAM look like? So what do the multipliers look like? What is the difference between the Investment & operating phase? How good are different sectors at targeting poverty and the unskilled? Appendix

3 Table of figures Figure 6: SA Provincial GDP (2010) and growth rates ( ) Figure 8: Employment by skills level in KZN Figure 7: KZN Province GVA per sector Figure 9: An Example of a Value Chain: Maize Processing Figure 10: Output & growth: Food & beverage industry for KZN, 2005 prices Figure 11: Compensation of KZN Food & Beverage employees, constant 2005 prices Figure 12: The KZN Metals & Metal products Output & Growth, constant 2005 prices Figure 13: Compensation of KZN Metals & Metal products employees, constant Figure 14: Output & growth: Transport equipment for KZN, constant 2005 prices Figure 15: Employee Compensation in KZN Transport Equipment, constant 2005 prices Figure 16: Output & Growth: Clothing & Textiles in KwaZulu-Natal, constant 2005 prices Figure 17: Employee Compensation: Textile & Clothing in KZN, constant 2005 prices Figure 18: Textile, Clothing and Leather Exports from KwaZulu-Natal, constant 2005 prices Figure 19: Output & Growth: Forestry, Wood, Paper & Pulp in KZN in constant 2005 prices Figure 20: Employee Compensation: Forestry, Wood, Paper & Pulp, constant 2005 prices Figure 21: Wood and paper exports from KwaZulu-Natal, nominal Rands, Figure 22: Output & Growth: Petroleum, chemical, rubber & plastic (constant 2005) Figure 23: Employee Compensation: Petroleum, chemicals, rubber and plastics Figure 24: Output & Growth: Catering & Accommodation in KZN, constant 2005 prices Figure 25: Employee Compensation: Catering & Accommodation KZN, constant 2005 prices Figure 26: Output & Growth: KZN Mining Industry, constant 2005 prices Figure 27: Employee Compensation KZN Mining industry, constant 2005 prices Figure 28: Output & Growth: KZN Construction industry, constant 2005 prices Figure 29: Employee Compensation: KZN Construction industry, constant 2005 prices Figure 30: Circular Flow of Funds in an economy Figure 31: Ratio of Inputs to total inputs per sector in KZN Figure 32: Ratio of outputs to total outputs per sector in KZN Figure 33: Use of Sectors Output in Downstream Industries as Intermediate Inputs (KZN) Figure 34: Proportional Destination of Outputs per sector in KZN Figure 35: Output Multipliers in KZN Figure 36: National Output Multipliers Figure 37: GDP Multipliers in KZN Figure 38: Income multipliers in KZN Figure 39: Employment to GDP and Capital in SA (jobs per constant 2005 R million) Figure 40: Employment multipliers Figure 41: Percentage growth in Employment to GDP and Capital Ratios from 2000 to

4 Executive Summary In order to support the goals and tasks of the overall project, this report provides economic intelligence on the key sectors that exist and/or have been identified for catalytic projects, their current status and their future growth potential. This includes an examination of the different national and local industrial policies, and the sectors that these policies look to stimulate or support, as well as the growth potential of the different sectors in terms of output and jobs, as these are underlying objectives of the department, the project, and of the national policies that the DEDT wishes to align itself with. In addition the report identifies the linkages between key sectors, and the indirect impact on broader growth in output and jobs. The final analysis therefore compares sectors against 4 key areas, namely: Alignment with policy, funding sources, and other government incentives Economic size, employment Market and growth potential Economic linkages and multipliers The report starts by examining sectors alignment with a) the national policies identified as guiding policies (IPAP and NGP), b) the existing KZN policies and strategies, c) financial institutions, investment promotion agencies & deal brokers and their requirements, particularly for development finance and d) other incentives (tax etc) that may exist. In addition to the IPAP and the NGP we chose to include ASGI-SA objectives and those of the Millennium Development Goals (MDG) from the World Bank. Once we had compiled the information we created a matrix on which we could compare the alignment of the different industrial and development policy plans/frameworks. The large funders selected were the Industrial Development Corporation (IDC) and the Development Bank of South Africa (DBSA), and the other investment incentives we looked at were those of the Department of Trade and Industry (DTI) and the South African Revenue Services (SARS) or National Treasury. Whilst it is evident from the analysis that broadly the development priorities of the KZN DEDT are in line with those nationally, it is also clear that some sectors are more appropriate than others. Clothing & textiles, tourism, automotives and business process outsourcing, for example, are key sectors which are mentioned often across both policies and different incentive classes. Other broader enablers are also stressed as being very important in the national policy space, including infrastructure, skills development, promotion of trade, and the green economy. KZN DEDT appears to align quite well with these enablers as well. In terms of current economic performance the most labour intensive sectors, the metal sector, and those service sectors that have grown strongly in recent times performed well. Agriculture, Tourism, Clothing & textiles and Furniture have particularly good employment to GDP ratios, whilst Clothing and construction have high employment to capital ratios and lower barriers to entry. Agriculture has the highest proportion of semi- or un-skilled employees, followed by Clothing, Textiles & footwear, Mining and Construction. Metals, Mining and automotives are the most successful for imports, whilst wholesale & retail, communication and business services have performed the best from a GDP perspective in recent times. Overall, however, the best sectors for employment have not been the best performing sectors. In terms of market potential; Tourism, Communication, Business Services 4

5 (BPO), automotives, Food and plastics appear to have the best prospects, whilst Forestry, Wood, Paper & pulp appears to have relatively weak prospects. From an industry value chain, linkages and multiplier perspective, the clear overall winners are agriculture, tourism, food, construction and furniture. This ranking comes from a combination of different multipliers and linkages. The sectors with the strongest backward linkages in KZN are the food, construction, metals, automotives, clothing and furniture sectors. These sectors use a larger proportion of the inputs sourced from local producers in other sectors. In terms of forward linkages in KZN plastics and chemicals, metals, construction and automotives tend to have the strongest linkages with sectors in downstream industries. More sectors in KZN use the outputs of metals and chemicals as inputs into their own processes, than the outputs of all other sectors, and hence stimulating or investing in the metals and chemicals sectors might alleviate supply constraints and/or stimulate the downstream industries. If nothing else these sectors need to continue growing in order to provide inputs into other expanding sectors. Sectors Policy, Funding, Incetives Current Economic Market Attract Multipliers & Linkages Overall Ranking Selected Total Total Total Total Agriculture Manufacturing Metals fabrication Automotives Clothing and textiles Forestry, paper and pulp Plastics and chemicals Food (Agro-Processing) Beverages Machinery Electrical Machinery Furniture Electricity, Gas & Water Tourism Cultural (Crafts,music and film) Transport & logistics Mining Construction Communication Financial Services Wholesale & Retail Trade High level services (BPO) Overarching Green economy 4.15 Infrastructure 4.40 Trade 3.85 Skills Development 4.15 Import leakages, and to a lesser extent other types of leakages (taxes, profit repatriation to other provinces or abroad, and wage remittances) are key to the knock-on effects, or multipliers, that a province experiences following a stimulus. The higher the leakage - the smaller the multiplier. KZN is by no means self contained, and relies a lot on imports for many of its sectors; hence its output and GDP multipliers are smaller than the equivalents multipliers for the SA economy as a whole. The automotive sector, for example, suffers from this, as much of a stimulus would effectively be shipped 1 2 5

6 abroad, to the Eastern Cape, or wherever the producers of the intermediate inputs, and/or the owners of capital, are located. At a national level the highest output multipliers are in sectors like automotives, clothing, textiles & footwear, chemicals, metals, food processing, and machinery,. However in KZN some of these multipliers are far smaller. In KZN the biggest output multipliers are construction, agriculture, furniture, food, communication and tourism. The biggest GDP multipliers, on the other hand, are Financial Services, Agriculture, a few of the other service industries and food processing. This is because these sectors tend to have more value add, and in some cases, higher profits. Income multipliers, overall are generally quite small, and show that agriculture, forestry, wood & paper and furniture rank the highest. These sectors either have a higher proportion of wages or are linked to those sectors that do. Finally employment multipliers really boost the case of Tourism, Clothing & Textiles, agriculture, culture & arts and furniture. From this analysis, we selected 12 sectors that are both aligned with local and national industrial policy and incentives/funds, and also scored highly on the different economic metrics designed to evaluate potential. The report then examines these 12 sectors in greater detail, as well as explaining the multipliers in more depth. The 12 key sectors selected are: Agribusiness (including food processing); Metals Fabrication; Automotives; Clothing & Textiles; Forestry, Wood Products, Paper & Pulp; Plastics and Chemicals; Tourism; Cultural & Creative Industries; Transport & Logistics; Mining; Construction; and call centres and Business Process Outsourcing. 6

7 Introduction Context The KZN Department of Economic Development and Tourism strives to promote the KZN economy as a competitive economy that improves the lives of its people. The aim is to achieve this through the development and implementation of strategies that encourage participatory sustainable economic development. The DEDT is aligning itself with the New Growth Path and the Industrial Policy Action Programme II and their current overarching focus on sustainable job creation. This endeavour requires a focused approach to Economic Development, and the department through its review of the Industrial Development Strategy has prioritized sectors to deliver growth and job creation. More broadly the KZN DEDT has a mission and mandate to develop and implement strategies that encourage participatory sustainable economic development. The DEDTs objectives include: To facilitate globally competitive and sustainable industries and services To support the development of sustainable small, micro and medium and social enterprises that contributes to food security, wealth and job creation To facilitate integrated planning that ensures effective implementation of sustainable economic development policies, strategies and programmes To effectively promote and package KZN as THE choice destination To strengthen compliance with relevant legislation and government policies To be the centre of excellence through effective and efficient administration that promotes service delivery and good corporate governance In order to ensure growth the DEDT requires catalyst projects that will generate expansionary growth or provide impetus to Greenfield projects and investments. Whilst the private sector is primarily responsible for many such initiatives, government still needs to facilitate and encourage this growth through creating the supportive conditions that allow these initiatives to flourish. The creation of the conditions necessary to facilitate these nascent programmes inevitably relate to economic, financial and legislative support and flexibility. The Project The Department s objective of facilitating inclusive and sustainable economic growth has resulted in the need to have the required capacity to unlock economic opportunities. This process is to enhance the specific sectors prioritized in the provincial industrial development strategy, which show the potential to stimulate growth and job creation. National Government has recently made a variety of funds available to stimulate and support such catalytic projects and the province is determined to access such funds aggressively. The department is faced with the challenge of not having adequate skills in this regard and in order to access such funding a suitable service provider with the requisite skills, experience and expertise to package such funding investment opportunities and conclude on such deals for the province has been appointed. This service provider is Deloitte, and this report forms part of the overall project. 7

8 In order to facilitate and execute the strategy, the DEDT needs to understand at a broad but deep level, the complex opportunity that the National Priorities and associated funding streams represent for an ambitious and determined Provincial Administration. As all provinces have access to these funds and there is some urgency in developing, or obtaining through an appointed consultancy, the required capacity to access the funds as quickly as possible. The project has emerged from these requirements. What tasks and activities does the project entail Amongst other things the project will: Develop an inventory of all funds available at a national level for funding of economic projects, and provide a portfolio to access such funding Package in a proactive manner, catalytic projects in the province. Key facets that will enable successful execution of these projects would include : o Economic intelligence of key sectors and future growth potential o The strategic location of investment potential o Interaction with financial institutions, investment promotion agencies, deal brokers etc, who have qualifying projects which require some form of financial support available through the national funds o Interaction with certain public entities who have engaged with project promoters Support the project promoters with packaged investment opportunities in restructuring deals in order to gain access to the National funds Represent the department and project promoters in presenting applications to the national departments in order to access the variety of funds for the projects packaged, and assist in enquiries on the funds and the required processes/requirements for application. Ensure consistency of Provincial economic goals with the selection and execution of the projects Development a Provincial Investment Strategy/ Plan referring to targeted projects linked to policy and private sector and provincial and local government investment priorities This Report In order to support the goals and tasks outlined above the economic stream of the project is required to provide economic intelligence on the key sectors that exist and/or have been identified for catalytic projects, what their current status is, and what their future growth potential. This needs to include an examination of the sectors growth potential in terms of output but also in terms of jobs as this is an underlying objective of the department and project. In addition the report will need to identify the linkages that the identified projects or sectors might have with other sectors in the economy, and thereby, what the indirect impact on broader growth in output and jobs might be. Critically the report must also examine the sectors and ensure alignment with a) the national policies identified as guiding policies (IPAP and NGP), b) the existing KZN policies and strategies, c) financial institutions, investment promotion agencies & deal brokers and their requirements, particularly for development finance and d) other incentives (tax etc) that may exist. This report therefore examines individual sectors, with specific reference to their structure, size and operation in the KZN province, and in South Africa, their alignment with the policies, incentives and funding sources, their potential 8

9 for growth and job creation, and through their linkages their potential for growth in related sectors. Ultimately the report concludes on which sectors exhibit the most potential and shows the greatest alignment with identified policy/funds/incentives. Outline of this report In section 2 the methodology and general approach to the report is explained, including how we examine the policy context, different industrial policy plans and incentives schemes and define the objectives with which different sectors are evaluated for their investment potential. In Section 3 the report explores the focus of different policies, funding and incentive schemes. In Section 4 the report examines and tabulates different metrics, placing ratings and weightings on different sectors, and assessing which sectors are more appropriate for investment and growth. In section 5 individual sectors are then examined in more detail, describing the sector and its linkages, listing applicable policies and current projects, examine global trend and drivers, and itemizing and quantifying key metrics. Finally in section 6 the report concludes and notes further research and action required from the economic stream of the project. 9

10 Approach & Methodology General Approach Purpose This purpose of this report is to: To produce a KZN economic sector research paper, with specific focus on the key development sectors for KZN DEDT To ensure the alignment of the project and sectors focussed on by the KZN DEDT with the Industrial Policy Action Programme II and the New Growth Plan To assess economic growth and job creation potential of key sectors, including inter-industry linkages and economic impact multipliers Basic Approach Sector studies or investment assessments require a clear understanding of the different economic benefits that might accrue as a result of the projects being undertaken: the economic activity the investment/project creates (GDP), the jobs created, and the impact of funds flowing into the country or region in question, as well as the impacts on other key macroeconomic variables where relevant (eg: inflation). However investments also need to be assessed according to a wider range of criteria when considered from a public perspective, particularly their: Alignment with national and regional priorities and policies (key strategic initiatives or targeted sectors), Alignment with key national/regional goals (i.e. alleviate poverty, create employment), Alignment with national/regional spatial development programmes (i.e. to create employment in a certain district municipality), Alignment with key/strategic value chains (i.e. transport hubs/existing infrastructure) and also, Ability to address a range of other socio-economic metrics not explicitly mentioned (eg: increased accessibility for marginalised communities to employment opportunities, health, education). We therefore create a matrix when initially examining the eligibility of investment projects which is informed by stakeholder consultation, and rate projects according to this. This may include initial high level estimates of GDP and employment impact, including indirect impacts calculated through the use of multipliers, but will specifically factor in the alignment with specific goals, target sectors, spatial requirements and value chains, as detailed in industrial-, spatial-, provincial- development plans or through stakeholder consultation. It is also important to measure not only direct benefits from an investment, but also indirect benefits. Economic effects are measured not only for the initial change in business activity but also for related subsequent economic transactions through the use of economic multipliers. Direct economic impacts are those recorded directly at the company/project/industry in question (the capital value of a project, the amount of turnover of the company, the number of people that 10

11 company employs, the amount of tax it pays etc). Indirect impacts are those which are as a result of the activities of that company, but not measured directly (financially or another metric) i.e. when an employee spends his/her money elsewhere thereby increasing demand for another company/sector s output. Indirect multipliers measure business-to-business transaction while induced multipliers measure the effects of employee spending. And whilst a more detailed computation of the benefits, as informed by detailed project plans, business cases and forecast financials, is an important step, for the purposes of this report we will examine only high level multipliers and perform no computations or overall evaluations. The calculation of multipliers, forward and backward linkages per sector is then combined into a table and assessed for each sector. Additional information collected on each sector in terms of GDP growth, employment creation, economic structure (inputs, imports, exports, value add) etc are also combined into table of economic measures. Finally we also collect information on market outlook. The final analysis therefore has 4 components Alignment with policy, funding sources, and other government incentives Economic size, employment Market and growth potential Economic linkages and multipliers All of these are then analysed to assess the suitability and alignment of chosen key sectors. These tables are backed up by a more detailed section on each of the chosen sectors. Defining the Key Policy Objectives & ensuring alignment The first step is to define the key policy objectives and to ensure alignment. This process was undertaken by examining all relevant documentation that we obtained from the KZN DEDT through consultation with members on sector strategies and general development strategies. We compiled all the documentation and summarised the key sectors focussed on under the different initiatives, including cross-cutting policies. We then performed a similar process with firstly the two important national industrial policy frameworks, namely the Industrial Policy Action Plan 2 (2011/ /14) and the New Growth Path (of the DED), and secondly any other policy plans/strategies we felt were relevant. In addition to the IPAP and the NGP we choose to include ASGI-SA objectives and those of the Millennium Development Goals (MDG) of the World Bank. Once we had compiled the information we created a matrix on which we could compare the alignment of the different industrial and development policy plans/frameworks. To this we then added an analysis of relevant large funders and any specific targeted funds they have, as well as any other incentives which development, catalytic or industrial projects/investments are able to access. The large funders selected were the Industrial Development Corporation (IDC) and the Development Bank of South Africa (DBSA), and the other investment incentives we looked at were those of the Department of Trade and Industry (DTI) and the South African Revenue Services (SARS) or National Treasury. Although there are many other sources of funds that have been identified in the project by the other streams (See appendix) we felt that these two large institutional development finance institutions were representative, and although not exhaustive by any means, would give an indication of the overall alignment of sectors/policies. 11

12 Typical incentives from SARS include tax rebates for R&D or sector specific investment, accelerated wear and tear allowances and/or tax holidays for qualifying projects. Selecting key metrics The next step in the report was to select the metrics upon which we would measure and rank the different sectors. The first set of metrics was informed by the previous step: i.e. the alignment of sectors to the different policy, targeted funding and incentives. These were therefore included automatically. The second set of metrics we decided upon were the current economic metrics which included such basics as size of the sector by GDP in both SA and KZN, the number of people employed in the sector, the current employment intensity (jobs per GDP or jobs per Rm of capital stock), and the % of output destined for exports. This set of metrics also included skills intensity or the number of unskilled individuals employed in the sector as a proportion of total employed individuals, as unskilled individuals are disproportionately represented amongst the unemployment, and this aligns directly with key overarching objectives of both KZN DEDT and national industrial policies as represented by IPAP2 and NGP. The third set of metrics included measures designed to assess market attractiveness, and the general trends that can be observed in the different sectors. It was hoped that these metrics would form an adequate way of assessing the future potential of different sectors, however this is, as always, a complex undertaking as there are a multitude of variables which may or may not affect the ultimate pattern of growth in a sector and how successful it is. And attempting to achieve perfect foresight is a fool s errand. Added to this is the difficulty of identifying universal measures that are equally meaningful across sectors. Nevertheless the metrics chosen do give some indication of the changes, and the direction thereof, that different sectors have experienced and are expected to experience over the medium term. Finally it must be noted that forecasts have inherent opinion embodied in them. The third set of metrics included the growth performance over the period , international forecasts for different sectors 2, and the change in jobs per GDP and per capital stock over the period from This last measure is intended to examine in slightly more detail, and with a little more context, the employment-to-output ratios of some sectors and whether generally they are stable or if they are undergoing change. For if they are changing then the direction in which they are changing is an important consideration for policy makers when estimating the likely job creation of investments and future growth in that sector. Finally the set includes a set of metrics around the identified underlying drivers of a particular sector and what the current and medium term trends look like in these sectors. The final set of metrics is the industry and value chain linkages, and the calculated multipliers. Specifically these metrics include a one for backward linkages, forward linkages, import leakage, and then output, GDP, income and employment multipliers. 1 The longer period was included to get a sense of a slightly longer trajectory that wasn t unduly biased by the recent global recession that South Africa was unable to escape 2 2 These international forecasts were based on the 5 year sector forecasts of the Economist Intelligence Unit These international forecasts were based on the year sector forecasts of the Economist Intelligence Unit 3 Again the period from was chosen to give a slightly longer view of the change in employment intensity over the past decade and to avoid any particular business cycles which may afflict a sector. 12

13 The table below outlines key metrics that have been used in the project, a brief description of the metric and why it has been selected. No. Criteria Description Relevance 1. Alignment with national policies including: IPAP NGP AS-GISA MDG 2. Alignment with key development finance institutions: IDC DBSA 3. Alignment with various investment incentives: SARS DTI See which sectors best fit the development & industrial policy objectives of various industrial policy frameworks and plans. Measured sector alignment with specific targeted funds and initiatives, and closely related cross-cutting funds SARS has numerous tax & R&D incentives, import & export duties, tariff rebates etc. DTI has specific targeted projects, sector funding and support IPAP and NGP are leading industrial policies for SA and the KZN DEDT needs to ensure alignment with them. AS- GISA although partly supplanted by NGP is still ongoing till 2014 and lays out a broad set of goals addressing issues across society. The MDG (also for 2014) represents an international standard. These are the 2 biggest institutional funds in South Africa with the broadest array of funds for specific projects. They also has a comprehensive and well established project evaluation in terms of development impact These two national departments play a key role in the overall sector development and investment landscape in South Africa, hence it is important to ascertain alignment of sectors to their projects/programmes 4. Size of the sector for: KZN SA Measurement of the gross value added, as recorded by national statistics and/or Quantec This gives an indication of the current size of the sector and how established it is. 5. Number of employees per sector for: SA KZN (est.) Employment in each sector, derived from LFS & industry surveys for SA. For KZN the employment is estimated based on employment to GDP ratio at national level This gives an indication of the number of people who currently work in the sector. Some sectors are very important as job creators. KZN estimates are just for comparative purposes (to be used cautiously) 6. Employment intensity: Jobs per GDP Jobs per Capital stock Number of jobs per R1m of GDP or Capital Stock in each sector in 2005 constant prices These metrics give an indication of labour intensive sectors are and how many jobs they might create when growing. Jobs per GDP shows roughly how many direct jobs a sector might create when it grows, and/or demand for its output grows. The capital stock ratio is more analogous to investment and how many Rands on average needs to be spent in order to create additional jobs 7. Skills Intensity The % of unskilled labour out of the total employment in each sector in 2010 (i.e. excluding highly skilled and skilled labour) Unskilled labour is the most vulnerable and most likely to be unemployed. In order to reduce unemployment, stimulating sectors which create jobs for unskilled labour is critical. Unskilled labour is also overrepresented in certain geographic locations with high levels of poverty and low economic activity 8. Exports KZN per sector Rand billions of exports from Increased Exports is identified as an objective for KZN DEDT and DTI/DED s industrial policies. Exports are also 13

14 No. Criteria Description Relevance KZN Province 9. Export % of Output Export % of Output for national sectors good nationally for earning forex (and therefore for macroeconomic reasons) Same reason as above but some sectors are already established and hence export large absolute amounts. The % of output gives a better estimation of sectors which might still be developing. (It must be remembered however that higher exports means lower forward linkages) 10. Fixed Capital to output Fixed Capital to output Some sectors are more capital intensive than others, therefore require larger investments per unit of GDP, which is less desirable in a capital constrained country. However the corollary of this is that capital intensive sectors are harder to start up in (& therefore require assistance especially SMEs) 11. Market growth: KZN SA International % change (CAGR) in GVA per sector from for KZN and SA. International Forecasts from EIU per sector Shows the current trajectory of a sector, and how this differs from KZN to SA (May be specific factors/reasons). Gives better perspective of opportunities in the sector than just current size and employment. The longer period was included to get a sense of a slightly longer period that wasn t unduly biased by the recent global & local recession. International forecasts give a picture of how the sector is developing and growing internationally SA may or may not follow this pattern. 12. % Change in jobs intensity: GDP Capital CAGR % change in jobs per R1m GDP and Capital from Examine the employment-to-output ratios over a period of time, to determine whether they are stable or if they are undergoing change. If they are changing then the direction in which they are changing is an important when estimating the likely job creation of investments and future growth in that sector. 13 Drivers & Trends Identified demand drivers for each sector and the global & local trends in these demand drivers. For example: BCI Housing prices Commodity prices Inflation (forecasts) Real wage rates (forecasts) EIU industry sectors Energy prices S&I industry surveys A less straight forward measure with some judgement embodied in it. Growth rates don t tell the full story and there are many drivers that influence whether a sector is likely to be a success or not many of these drivers might be specific to KZN or SA but this can only be examined in detail at a later stage in the report. 14 Industry Linkages Backward Forward Backward linkages from the % of intermediate inputs purchased from other key sectors. Forward linkages Backward and forward linkages are critical for creating broader (indirect) impacts on the economy, different sectors, and establishing a healthy inter-linked economy where different sectors complement, supply and 14

15 No. Criteria Description Relevance amount of output used as inputs to other sectors (see multiplier section for more info) 15 Import Leakage % of intermediate inputs sourced from imports support each other. Ultimately the knock on impacts are determined by these linkages and conversely the types of leakages in the economy. See the multiplier section for more information. See above. 16 Wages as % of total output Wages as % of total output from Quantec national sector data Wages as a % of total vary dramatically across sectors due to how capital intensive a sector is, the type and number of labour employed, and how much of the value add is captured as profit (often related to the level of competition in a sector). It is a good measure of how much of the stimulus makes it s way into the hands of labour and ultimately into households. 17 Multipliers: Output GDP Income EMployment Calculated multipliers from the KZN SAM and the SA SAM. Compared against those in the IPAP2. See multipliers for more. Conduct background research & compile statistics The next stage in the report was to conduct the background research on different sectors, and importantly collect data to be used in the analysis. Sources of data included: Quantec Standardised Industry ( ) Quantec Provincial Standardised Industry ( ) StatsSA Labour Force Survey (LFS) 2011 StatsSA Income and Expenditure Survey (IES) 2005/06 StatsSA GDP by Province & GDP by Industry by Province DBSA KZN SAM 2006 (2009) SARB South Africa SAM 2006 (2009) EIU Industry Forecasts Standard & Poor s Industry Surveys IPAP 2 BER Consumer and Business Confidence Indexes ABSA Housing Price Index IMF World Economic Outlook (WEO) UNCTAD Information on different drivers and sectors came from the following sources (amongst others) Various KZN documentation (Ezomnotho, TIKZN, Strategic Plan 2011/12) EIU Euromonitor 15

16 IPAP2 & NGP World Bank Standard & Poor s Industry Services Departmental Websites (i.e. Department of Tourism, DTI) Various Websites The Multipliers were calculated from the DBSAs Social Accounting Matrix (SAM) for KZN and from the SARBs SAM for South Africa. Multipliers were calculated for output, GDP and income for KZN sectors, and for output, GDP, income and employment for SA (the SAM has employment per skill level disaggregated). A detailed explanation of the calculation of multipliers, the different linkages of the different sectors in the KZN province, and why some of the results look the way they do is included in the section entitled Economy Structure & Indirect Impacts. Compare metrics and assess sectors Once the information and data on the different sectors for each of the chosen metrics had been collected and compiled, it was then appended to a large table set out in the format as outlined above so that the sectors could be compared against each other on a) each individual metric, b) for sets of metrics, and c) overall comparison. The sectors were therefore assessed against individual metrics. In many cases these metrics are those used to measure the key objectives of the industrial & development policies, both national and provincial. These metrics include GDP, employment, growth, exports etc. A rating system which allocated ratings of 1 to 5 for each of the metrics was then created. This was designed such that the metrics could be measured and added up to obtain overall metrics and an overall picture of how a sector compared against other sectors on a variety of measures each of which might be important for different reasons. For quantitative numbers the rating system simply works by setting different bands and assigning numbers accordingly. An example is that of Gross Value Added (GVA) growth in a sector, where growth of less than 1.5% might achieve a rating of 1, between 1.5% and 2.5% a rating of 2, between 2.5% and 3.5% a rating of 3, 3.5% and 4.5% a rating of 4, and greater than 4.5% scoring a rating of 5 for the sector in question. These ratings were then weighted according to their perceived importance to KZN DEDT and to the IPAP and NGP in turn. Although there is some level of subjectivity in assigning weights and/or cut-off points a sensitivity test whereby these were changed did not change the overall ranking greatly. Sectors which then aligned with national policies, were target sectors for KZN DEDT, and achieved relatively highly on the rankings/ratings were then identified for further research. Conduct more detailed sector studies After this section more detailed mini-studies on each of the selected sectors was conducted and presented in a separate section for each sector. The mini-study sought to examine The basics of sector and how it operates How the sector links up with other sectors Global trends and developments in the sectors Some information about the sector in South Africa and KZN 16

17 Basic growth of GDP and employment and other key metrics (which are summarised in the comparison table) Drivers and key ratios These individual sector sections also explain some of the results and findings in the overall tables used for comparative purposes. 17

18 Definition and Alignment of Policy Objectives & Metrics Many Policies many of the same goals In constructing provincial goals and initiatives it is important that alignment is achieved with national goals and initiatives. The Kwazulu-Natal Department of Economic Development and Tourism (KZNDEDT) has outlined that their mission is to develop and implement strategies that encourage participatory sustainable economic development. In order to achieve the departments goals whilst achieving the goals of the nation, initiatives must be thoughtfully and strategically designed. On a national level there are two policies which outline the goals set by the government. The first and older policy is the Accelerated and Shared Growth Initiative South Africa (ASGISA). ASGISA outlines a number of constraints that are holding back development within the country and addresses these through various proposed mechanisms. The New Growth Path (NGP) which was launched in 2010 set out similar developmental goals and laid out various initiatives that would need to be completed in order to achieve the goals set out. Although there are differences in how the policies suggest the goals should be tackled, the overall targets do not differ by very much. Hence between the two policies there is a lot of overlapping goals. The first shared goal is that of the strength and competitiveness of the Rand. ASGISA recommends tighter fiscal policy, more exchange rate intervention and better government management of funds. NGP on the other hand suggests a national growth fund, and then similar to ASGISA, tighter fiscal policy, increased reserves and more intervention in the capital market. Both policies also identify infrastructure spending and skills development as key issues in holding back development within the country and suggest increased spending on both. The purpose of these action plans is to create an environment in which the economy can develop at a faster rate and compete internationally. By achieving these goals the ultimate goals of employment and growth will be reached. With regards to development, both initiatives propose identifying industry clusters that will bring the greatest growth if given more support. ASGISA suggests investing in technology and more regulatory intervention, both aimed strategically identified industries. The NGP on the other hand suggests an industrial policy plan, out of which the Industrial Policy Action Plan (IPAP) was created. Both policies also mention that more regulation and intervention is needed to tackle anticompetitive behaviour. By focusing on specific sectors, both ASGISA and NGP put forward steps to increase domestic product by supporting and identifying industries that have growth and employment potential as well as potential for other goals like rural development or green industries. It is important to note that both ASGISA and NGP encompass equitable development and focused support towards small to medium enterprises, in order to share the benefits of development. By comparing these two policies it is clear that economic growth (through financial and regulatory support) and employment creation (through skills development and affirmative action) are primary overarching goals. Where the two policies differ the most is with regards to southern African interaction. ASGISA being developed first focused upon addressing key problems within South Africa immediately, whereas NGP suggests more regional interaction, specifically with SADC and East African countries to capitalise on opportunities that may exist or emerge in the future. 18

19 KZN ASGISA DTI & IPAP2 DED & NGP NPC DBSA IDC MDG The Industrial Policy Action Plan (IPAP) on the other hand is more concerned with the industrialisation of the economy. IPAP which was launched in 2007 and then amended and extended in 2010 (IPAP2) is a rolling three year policy which will have a ten year outlook for outcomes, thus it is a continuous rather than once off policy. The policy tries to address the goals of the NGP by focusing on specific industries within South Africa. By supporting these industries directly or indirectly goals such as SME development, sustainable and equitable employment, rural development, increased trade and global competitiveness and more skills development, can all be achieved which are in line with the NGP and ASGISA. IPAP.2 plays a central role in relation to NGP, and focuses on manufacturing and other value-added sectors, with a combination of high employment and growth multipliers. This includes the co-ordination of certain value chains where manufacturing is the given the most attention, although other areas such as tourism or outsourcing are also mentioned. In conclusion KZNDEDT has set a mission to develop and implement strategies that encourage participatory sustainable economic development. Given the department s goals and the goals of the nation it is important to focus on areas where increased growth and employment are possible. It is also important to make sure that any job creation that is achieved allows benefits to flow to rural areas, thus allowing more equitable and shared opportunities. Fostering an environment that encourages growth and investment will allow KwaZulu-Natal to be aligned with national goals of increasing South Africa s global competitiveness as well as increased growth and employment. Given the goals of ASGISA, NGP and KZNDEDT, it is clear that there are many similarities and shared views on how to achieve them. Table 1: High level summary of Policy Goals/Objectives general & economic metrics Policy type Employment Creation of sustainable jobs (food security, wealth and job creation) Formalize the informal economy 1 promote the development of SMMEs and Co-operatives Race/Gender Income inequality Increase GDP Improve trade agreements/relations/investment climate Facilitate and promote integrated economic development planning Facilitate & support improvement of global competitiveness Facilitate trade and the inflow of foreign direct investment To be a centre of excellence strengthen compliance with relevant legislation and govnt policies 1 1 facilitate strategic stakeholder partnership for provincial economy 1 implement a strategy of operational excellence 1 promote a culture of good corporate governance 1 Improving service delivery 1 1 Skills development Poverty reduction facilitate access to asset base for the poor promote social enterprises 1 1 Reduce mortality rates 1 Improving health 1 1 African/SADC development 1 1 Sustainable energy/environmental usage

20 KZN ASGISA DTI & IPAP2 DED & NGP NPC DBSA IDC MDG In order to achieve the national goals set out by ASGISA and NGP, key enablers have been identified. These enablers are key building blocks that must be addressed before real economic development can be realised. In order for the industries identified in IPAP.2 to develop foundations both physical and non-physical must be in place. With regards to ASGISA, infrastructure such as roads and communications were identified as key enablers in addressing constraints to development. With recent developments NGP has added to these and included addressing electricity and water issues, which are seen as future areas of concern. For SME development to occur access to finance has also been mentioned as a key constraint in developing rural areas to alleviate poverty. With regards to non-physical constraints, macroeconomic issues must be addressed if trade is expected to grow and become more competitive. On more national level competition and government efficiency have also been identified. Table 2: High level summary of Policy Goals/Objectives strategic enablers Enabler type Infrastructure Roads 1 1 Logistics 1 1 Communications (Electronic) 1 1 Electricity & prices 1 Water 1 Finance/ Access to Macroeconomic Variables (exchange/interest rate) 1 1 Currency 1 Legal Government efficiency 1 Labour law 1 Trade policy 1 1 Competition and regulatory law Both ASGISA and NGP propose that industrial policies must be created to identify industries that are important in achieving growth and sustainable employment. By comparing the suggested sectors and sub-sectors mentioned between these policies as well as industries that are important to KZNDEDT we can identify which industries offer the best opportunities for investment. ASGISA mentions business process outsourcing, tourism and bio-fuels as these industries offer great potential for employment and growth. Other sectors also mentioned are the creative, chemicals, clothing and textiles, durable consumer goods and wood, paper and pulp. These are identified as they are well established industries in South Africa and critical in the employment of people with lower levels of skills. NGP mentions industries such as agro-processing, mining and metals, manufacturing and tourism. With these industries in mind the department of trade and industry (DTI) developed IPAP which outlines the various steps required to support these industries. Given the industrial structure of KwaZulu-Natal, KZNDEDT has outlined key industries that need support within the province. These industries include the forestry, metals fabrication, agroprocessing, clothing and textiles, chemicals, automotive, and maritime sectors. Also mentioned are services industries such as business outsourcing, tourism, transport and cultural. Comparing these industries to those outlined in NGP and IPAP, it is clear that KwaZulu-Natal will be a key player in achieving the country s ultimate goals. By investigating further the employment and growth 20

21 KZN ASGISA DTI & IPAP2 DED & NGP NPC DBSA IDC MDG potential of these sectors as well as the linkages they have with other important sectors, a more informed decision process can be made in terms of investment potential. Table 3: High level summary of Policy Goals/Objectives key sectors Key Sectors Agriculture, forestry and fishing 1 1 Transport & Logistics Tourism Medical, dental and other health and veterinary services 1 Educational services 1 Electricity, gas and water 1 1 Wood, wood products, pulp, paper and furniture Green Economy/reneawable energy Business services Creative industries (crafts, film & TV, content and music) 1 1 Clothing, footwear and textiles 1 Durable consumer goods 1 1 Chemicals and chemical, rubber and plastic products Automotive industry 1 1 Food and drink 1 1 Metal Machinery and related items 1 1 Other manufacturing industries 1 1 Mining and quarrying 1 1 Research and scientific institutes 1 Public administration

22 Sector Comparison Introduction KZN economy The KwaZulu-Natal Economy is the second largest contributor to South Africa s GDP after Gauteng. The province has large untapped environmental resources, which allows it to be a key player in the resources based economies, especially in the base metals and timber industries, whilst the unique environment has also resulted in KZN being the number one holiday destination in South Africa. Having two of the busiest ports in South Africa makes the province an integral part of South Africa s global participation. In addition to sea access KZN has recently finished the development of its new King Shaka International Airport which has been branded as the second-largest infrastructural project in the country. After Gauteng, KZN's diversified manufacturing sector is the second largest in the country with nearly a third of South Africa's manufactured exports are being produced in the province. Large, globally competitive manufacturers operate in the province with corporations involved in vehicle and vehicle parts, forestry products, chemicals, and food and beverages, and metals and mining. KZN has also been one of the fastest growing economies growing at 4% per annum between 2001 and 2005 and at 3.3% from despite the recession. These growth rates meant that over the period KZN was the third fastest growing province, surpassed only by Gauteng and Western Cape. Figure 1: SA Provincial GDP (2010) and growth rates ( ) 1000, , , , , , , , , , Average Real GDP growth Employment in KZN Unemployment is undoubted South Africa s biggest challenge, and with KZN it is no exception. The broad unemployment rate in the province is about 33%. As can be seen from Table 4 below the unemployment rate is much higher for those people who have less education and fewer skills. KZN has a large number of residents that have not completed their secondary level of education. In fact about 67% of the population in KZN over the age of 15 has not completed their secondary level of education. The only group with unemployment rates (well) below 30% is the tertiary sector. A key 22

23 y/y % change Thousands challenge for the province will therefore be creating jobs for those with low levels of education which is associated with low levels of skill or ability. Table 4: Unemployment in KZN by level of schooling LFS 2011 Quarter 1 No Schooling Less than Primary Primary Employment in the province, much like that in the rest of the country, experienced a long slow decline from the early 1990 s until This decline occurred across all levels of skill. The period was characterised by liberalisation, the reduction in imports tariffs, increased competition and a need for local firms to reduce redundant employees and increase efficiency. However between 2004 and 2008 South Africa experienced an economic boom and the unemployment rate for KZN started improved. The boom however was a consumption lead boom, and much of the growth occurred in the services sector. Growth in employment was mostly contained within the highly skilled and the skilled segments of the workforce, these skills being more in demand in the services sectors, like financial services, that benefitted most from the consumption boom. The world financial crisis started affecting the economy in the latter half of 2008, and KZN experienced the worst fall in employment across all the other provinces due in most part to the structure of the economy, and the reliance on export demand. Although the financial crisis affected individuals across different levels of skill, the downturn had a much greater effect on those employed in lower skilled jobs. Given KZN s employment structure and population demographics, tackling the unemployment problem will involve creating jobs which absorb lower skilled people. Figure 2: Employment by skills level in KZN Employment statistics by level of education Secondary not completed Secondary completed Tertiary Population (over 15) Labour Force Participation Rate 25% 40% 39% 44% 67% 84% 51% Employed Unemployed (Broad) Unemployment Rate (Broad) 38.3% 32.5% 40.5% 38.7% 34.1% 11.6% 33.1% Total 9 7 Total Employment Skilled Highly Skilled Semi-Skilled 2,000 1, , , , , ,400 23

24 Structure of the KZN economy The three largest industries in KZN are the manufacturing, finance & business services and wholesale & retail trade (including hotels and accommodation) industries. KwaZulu-Natal s manufacturing sector is the second largest in the country, after the Gauteng province, and makes up about 22% of the provinces total contribution towards GDP. The manufacturing sector is based on exporting goods, with nearly a third of South Africa s manufactured exports being produced in KwaZulu-Natal. The sector also contributes towards 20% of the provinces employment. The largest industries in KZN s manufacturing sector are the automobile, wood, pulp and paper, chemicals and petrochemicals, food and beverages and mining. Metal fabrication has also been identified as a key industry whose growth potential will be used to promote job creation. Aluminum and titanium, mostly located in Richard s Bay, dominate KwaZulu-Natal s contribution in the South African metals industry. KZN also boasts Africa s busiest sea port and Africa s biggest bulk sea port, making KZN southern Africa s trade gateway. KZN transport and logistics has enormous importance for KZN and South Africa linking the rest of the world with SA s largest consumer market, Gauteng, whilst also allowing exporting industries in KZN, Gauteng, and elsewhere to be competitive on a global level. The province s financial and business services industry is well established and accounts for over 15% of local GDP. KZN s retail and tourism sectors offer a range of shopping experiences and holiday destinations, and the growing number shopping malls across the province indicates the boom in retail trade that KZN and South Africa experienced. Small towns and communities are benefiting from projects that allow them to produce and sell arts and crafts, a major contributor to KZN rural development. Retail and tourism combined contributes almost 14% of KZN s total output, and nearly 20% of KZN employment is attributed to these two sectors. KwaZulu-Natal is also South Africa s best watered province and the national leader in several agricultural products. Although KZN covers a small portion of South Africa s land area, a significant percentage of the country s small-scale farmers are based there. The sugar industry in KwaZulu-Natal is probably the most established and supports the livelihoods and incomes of close to one-million people. Figure 3: KZN Province GVA per sector

25 Comparison of Sectors by Policy, Funding & Incentives By listing the various industries in an economy and applying a value that represents the importance given to that industry, we can identify and rank which industries are considered more important by various policies or institutions. The table below lists both policies (IPAP, NGP, ASGISA and MDG) as well as institutions (IDC, DBSA, SARS and DTI) that provide funding or support to various industries. Included as well are the sectors that are targeted by KZNDEDT. The industries that are mentioned most often are tourism, mining, construction, transport and logistics, high level business services, some key overarching components and sub-sectors within manufacturing industry. Table 5: Policy, Funding projects and Incentives Alignment & Rating per sector Sectors Note: Ranking system as follows: 1. Not mentioned or indirectly affected 2. Not mentioned but indirectly affected 3. Mentioned and indirectly affected 4. Mentioned as a secondary target 5. Mentioned as a core target Policy Alignment National Local Funding & Incentives Funders Incentives/ financing IPAP NGP ASGISA MDG KZN IDC DBSA SARS, DTI etc Agriculture Manufacturing Metals fabrication Automotives Clothing and textiles Forestry, paper and pulp Plastics and chemicals Food (Agro-Processing) Beverages Machinery Electrical Machinery Furniture Electricity, Gas & Water Tourism Cultural (Crafts,music and film) Transport & logistics Mining Construction Communication Financial Services Wholesale & Retail Trade High level services (BPO) Overarching Green economy Infrastructure Trade Skills Development Comparison of Sectors by Current Economic Metrics In order to analyse the different industries within KwaZulu-Natal some key economic metrics must be considered. Comparing the gross value added by each sector against the South African economy will indicate not only the size of the industry but also its national contribution. Sectors such as 25

26 manufacturing, transport and logistics and wholesale and retail trade generate high values output and whereas the forestry, paper and pulp and clothing and textiles industries contribute larger proportions to national GDP. Another important metric to consider is the number of employed workers within the industry. This helps identify which sectors have potential in creating more employment or which sectors are not allowed to deteriorate as they sustain a larger proportion of the population. Across SA the services sectors account for some 2/3 rd s of all people employed wholesale & retail and business services, for example account for about 1 and half million people each. Construction at 400 thousand, Mining at 500 thousand and cultural services at 300 thousand are also key sectors. Calculating the ratio of employment to GDP however illustrates that the agriculture, tourism and the retail trade sectors provide the most jobs per rand of output. Agriculture and Tourism creates roughly 17 jobs per ever R1 million of output. Clothing and textiles and furniture also have particularly good employment ratios. This gives an indication that growth in these sectors could imply good growth in employment. Another key aspect to consider is the capital required per employed worker. Industries such as the clothing and textiles, furniture and construction generate larger employment levels for given capital input.. But total employment doesn t tell the full story, as from a policy perspective there is a premium to be placed on industries that employ lower skilled labour. As demonstrated in the table on KZNs unemployment, identifying Industries that absorb higher levels of lower-skilled individuals are important in helping alleviate poverty, inequality and related issues. Industries such agriculture, clothing and textiles and mining are important in this regard. Agriculture has the highest proportion of semi- or un-skilled employees with 91% of the total work-force, followed by Clothing, Textiles and footwear at 81%, Mining at 77% and Construction at 74%. It is little wonder therefore that these sectors are so integral to national and local industrial policies. Table 6: Current Economic Metrics per sector comparison table Sectors Current Economic Metrics Skills Intensity Employment Intensity Exports % of (% semi or GDP (R billion) Employment ('000) (per 2005 Rm) Export Rb Output unskilled) KZN SA KZN* SA Jobs/GDP Jobs/Capital KZN SA Fixed capital to output Agriculture Manufacturing Metals fabrication Automotives Clothing and textiles Forestry, paper and pulp Plastics and chemicals Food (Agro-Processing) Beverages Machinery Electrical Machinery Furniture Electricity, Gas & Water Tourism Cultural (Crafts,music and film) Transport & logistics Mining Construction Communication Financial Services Wholesale & Retail Trade High level services (BPO)

27 Comparison of Sectors by Market Attractiveness To identify industries that offer greater opportunities for employment creation, market dynamics such as growth, changes in employment intensities and various demand drivers must be taken into account. Current trends of growth indicate areas in which employment and output is expected to continue whereas sectors that are currently experiencing declines will need careful attention. Comparing growth trends only within the province does not give a complete analysis and growth trends nationally as well as internationally must also be considered for both growth potential as well as increased competition. Sectors such as agro-processing, construction and communication show good global and local growth potential. Table 7: Market Attractiveness by sector comparison table Sectors Market Growth (Constant prices ) Market Attractiveness % Δ in jobs/gdp intensity % Δ in jobs/capital intensity Trends/Demand Drivers KZN SA Int SA Int Agriculture Manufacturing Metals fabrication Automotives Clothing and textiles Forestry, paper and pulp Plastics and chemicals Food (Agro-Processing) Beverages Machinery Electrical Machinery Furniture Electricity, Gas & Water Tourism Cultural (Crafts,music and film) Transport & logistics Mining Construction Communication Financial Services Wholesale & Retail Trade High level services (BPO) Note: Ranking system for trends and demand drivers as follows: 1. No growth expected 2. Slower rate of Growth 3. Moderate growth expected 4. Strong Growth expected only in the short term 5. Strong Growth expected in the medium to long term The % change in the jobs/gdp and the jobs/capital stock ratios are very interesting. They are intended to show that even though some sectors have much higher employment intensities, and are therefore often bandied about as the panacea to all unemployment woes, when examined in a more sober light, one often discovers that these sectors have had higher than normal employment-tooutput ratios due to the peculiar structure of the isolated sector that happened to exist in South Africa at a particular time and under a particular set of circumstances (for example: protection afforded by high tariff barriers). Changes in skill intensities, especially in the manufacturing sector, 27

28 show possible substitutions away from labour to more capital. Industries which have positive rates of change towards skill intensity are the cultural and crafts, mining and business outsourcing sectors. If sectors are changing then the direction in which they are changing is an important when estimating the likely job creation of investments and future growth in that sector. These values show the potential for cultural & crafts, mining, business outsourcing sectors to absorb lower skilled workers if they continue to grow, whilst placing some doubt on the future labour intensity and whether as much employment will be created in sectors like automobiles, clothing, furniture, construction and agriculture. This is particularly concerning given the fact that four of these sectors are the least skills intensive and have the highest employment to GDP and capital ratios. The last two columns give weightings based on local and international trends and how they will affect the industries in the near future. Industries such as metal fabrication, plastics and chemicals, agro-processing, tourism, culture, transport and logistics and energy are expected to grow well into the medium to long term. Comparison of Sectors by Multipliers Comparing forward and backward linkages will identify sectors that can benefit from growth in other sectors as well as which sectors benefit a larger amount of other sectors. Examples of these include the metals fabrication, construction, automotive and clothing and textiles industries. Growth in these industries will have both up-stream and down-stream benefits for various other industries. They also indicate which sectors can have large constraining effects if they would begin to decline. Table 8: Industry & Value Chain Linkages and Multipliers per sector comparison table Sectors Industry/Value Chain Linkages Multipliers Import Wages as % Output GDP Income Employm ent Backward Forward Leakage of total input KZN SA KZN KZN SA Agriculture Manufacturing Metals fabrication Automotives Clothing and textiles Forestry, paper and pulp Plastics and chemicals Food (Agro-Processing) Beverages Machinery Electrical Machinery Furniture Electricity, Gas & Water Tourism Cultural (Crafts,music and film) Transport & logistics Mining Construction Communication Financial Services Wholesale & Retail Trade High level services (BPO) Looking at the income multipliers the agriculture, forestry, paper and pulp, beverages and furniture industries generate higher levels of compensation if they had to experience growth which is an 28

29 important consideration when considering that some large households rely on single incomes. By far the most attractive sector for employment creation based on the multipliers is the tourism industry. This is because lower levels of capital are required per job as well as the high levels of demand for tourism services within Kwazulu-Natal. Second to tourism is the agriculture, cultural and agroprocessing industries. (For more information on this please refer to the multiplier section). Overall Comparison of Sectors All sectors selected by the KZN DEDT match very well with the national industrial policies, and other funding institutions and incentives offered by DTI and SARS. Overall the top ranked sector is the Tourism, followed by Food, BPO and then Metals Fabrication. Tourism scores particularly highly on the linkages and market potential. BPO has the best prospects on market potential based on recent growth, improving employment to GDP ratios, and large international optimism in the sector. Metals fabrication has scored well alround. Table 9: Overall ratings per metric set and overall ranking of sectors Sectors Policy, Funding, Incetives Current Economic Market Attract Multipliers & Linkages Overall Ranking Selected Total Total Total Total Agriculture Manufacturing Metals fabrication Automotives Clothing and textiles Forestry, paper and pulp Plastics and chemicals Food (Agro-Processing) Beverages Machinery Electrical Machinery Furniture Electricity, Gas & Water Tourism Cultural (Crafts,music and film) Transport & logistics Mining Construction Communication Financial Services Wholesale & Retail Trade High level services (BPO) Overarching Green economy 4.15 Infrastructure 4.40 Trade 3.85 Skills Development 4.15 The only sectors which are specifically focussed on that do not perform particularly well are forestry, wood, paper and pulp, mining, and automotives. The Forestry, Wood and pulp sector s low rating is

30 due mostly to the poor economic performance and low forecast expectations for the future. Automotives score lowly due to their poor linkages with other sectors in KZN, and declining employment ratios, whilst the mining sector has low linkages and multipliers, low employment ratios, and high capital requirements, and hasn t performed particularly strongly over the recent past. Sectors like electrical machinery, beverages, financial services, wholesale & retail trade and machinery are excluded partly because the score poorly overall, but also because they are a poor fit with local and national policies. Selection of the sectors for more detailed analysis From the table above, and guided by the KZN DEDT selected industries we will examine the following sectors in more detail: 1. Agribusiness (Agro Processing) 2. Manufacturing 2.1. Metal Fabrication 2.2. Automotives 2.3. Clothing & Textiles 2.4. Forestry, Wood, Paper & Pulp 2.5. Chemicals & Plastics 3. Tourism 4. Cultural & Creative 5. Transport & Logistics 6. Mining 7. Construction 8. High Level Services (Specifically BPO) 30

31 Review of Specific Sectors & Cross-Cutting Policies Sector 1: Agribusiness Description of Sector Agribusiness companies function in the middle stages of the food production process. Crop processor operations include the harvesting or milling of raw agricultural commodities; crop processors also may plant and raise crops, although they generally buy these commodities from farmers. Crop processors typically sell their products not to consumers, but to processors and food packagers, which use the ingredients to make finished consumer food products. Some companies process and merchandise raw grains, including corn (maize), wheat and soybeans, and in KZN processing of sugarcane in important. Their end products include oils, syrups, starches, and meals used in the food and feed industries, as well as sugar and corn sweeteners used in soft drinks. Meat processors slaughter and process livestock and chickens for retail sale. Dairy processors process raw milk into packaged milk and other related products, such as cheese and butter. Companies engaged in the late stages of producing consumer food products are generally referred to as food manufacturers or packagers. These companies sell their finished goods to retailers, which, in turn, sell the products to consumers. (Companies involved in the later stage processing of foods for consumer consumption are usually included in the Foods & Non-alcoholic Beverages sector.) Figure 4: An Example of a Value Chain: Maize Processing Due to their size and capital resources, the larger firms in these areas typically have stronger competitive positions, greater diversity of businesses, and greater earnings stability than do other industry participants, such as smaller processors or primary producers. Weather disruptions can significantly affect markets and prices for all agribusinesses, but the impact is generally more easily absorbed by the bigger firms. 31

32 Rand (Billions) Rand (Billions) Farms generate the bulk of commodities supplied to meat and crop processors. As prices for crops or unprocessed meat rise, profit margins for processors fall, unless the rising prices can be passed along to consumers. If demand for the good is inelastic, such as it is for milk, processors have more leeway to raise prices. If there are sufficient replacement products, processors will have less pricing power. The list of commodities that the agribusiness industry grows and processes is wide ranging and includes field crops, fruits, vegetables, meats, poultry, fish, and dairy products. Generally, companies operate within one of these major categories and focus on one or two commodities within that segment. Figure 5: Output & growth: Food & beverage industry for KZN, 2005 prices Output Growth (% change) 10% 5% 0% -5% -10% Distribution plays an important role in agribusiness. After crops are harvested or animals are raised, they must be transported to food processors, storage centres, or to retailers before they can reach the end user (the consumer). Trucking systems and railroads are important means of transporting agricultural products. In addition, many agribusiness companies use barges, which travel via river to huge seaside terminals; from there, products are exported on ocean-going vessels. Figure 6: Compensation of KZN Food & Beverage employees, constant 2005 prices R,5.0 6% R,3.0 4% R,1.0 -R,1.0 2% 0% -2% -R,3.0-4% -R,5.0 Total Compensation Growth (% change) -6% 32

33 Global Trends Globalisation: With the world s gross domestic product expected to rise more than 3.5%-4% annually between 2010 and 2015, according to IMF projections, there is ample reason to expect evergrowing demands on the world s agriculture. When incomes begin to rise, people often upgrade their diets, consuming more food grains, meat, sweeteners, and vegetable oils. This trend could benefit the agricultural industry, especially high-value products (including packaged meat and processed foods). A greater reliance on foreign markets is also likely to increase the volatility of local firm sales and profits. However currency fluctuations become critical raising and lower the price of local producers against exporter from other markets. As a result, many companies hedge their risks by entering into foreign currency forward contracts to minimize income shifts produced by currency fluctuations. The industry is becoming more sophisticated Changing oil prices cause an agricultural firm s transport costs to rise or fall, whilst international Companies may minimize the impact of fuel costs by operating processing plants around the globe. Applying Standards to ever increasing (and more complex) supply chains Impact of Trade Agreements (multilateral or unilateral FTAs) Consolidation: The broader agricultural market was once characterized by large numbers of buyers and sellers trading homogeneous commodities on the open market. Within this market, spot prices coordinated the flow of products from sellers to buyers, with low-cost producers usually the most successful. Over the past 30 years, consolidation has dramatically altered the agribusiness industry, driven recently by global expansion and vertical integration. It has reduced costs through economies of scale, encouraging farms, like factories, to become larger and more specialized Acquisitions can increase the proportion of value-added products a company offers, whilst Mergers and acquisitions can strengthen a company s pricing power within a segment Food Safety Issues: Increasing focus on food safety, labelling and other types of standards (Sanitary & Phytosanitary, ISO, Eurep-Gap etc) Exports must meet more stringent regulations in order to gain re-entry to certain foreign markets, including Europe, Japan and South Korea Liabilities, lost revenue, lost reputation are consequences of failure to implement standards Organic Farming Organic food sales are growing at a rapid rate, opening new opportunities for food producers and processors. The Organic Trade Association (OTA) estimates that $15 billion worth of organic products are sold in the United States each year, up from only $1 billion in

34 The rapid growth is largely the result of much-publicized food scares and public concerns about the use of chemicals, growth hormones, antibiotics, and bioengineering in the food system. Organic farming relies on ecological practices that virtually exclude the use of synthetic chemicals in crop production and prohibit the use of antibiotics and hormones in livestock Genetic Engineering The development of genetically engineered crops has increased farm productivity rapidly since the 1980s. Scientists use genetic engineering techniques, which involve changing the genetic makeup of seeds in the laboratory, to produce new plant species with desired characteristics Concerns exist about the unintended crossbreeding of genetically modified crops with naturally occurring plants and the potential for people to experience allergic reactions to foods with unexpected characteristics. Some foreign governments have attempted to restrict the usage of genetically modified organisms (GMOs). Local Trends & Industry Developments South Africa s agricultural sector is characterised by dualism: a modern commercial farming sector using hired farm workers alongside small scale farmers, mostly in the former homeland areas. In addition, land reform is creating thousands of new farming opportunities for emerging black farmers throughout the country and across the scale from large commercial to smallholder production. The agro processing sector comprises a highly diverse group of sub sectors and industries. The major sub sectors include: Food processing Beverages Aquaculture Horticulture Medicinal, aromatics and flavourings The agro processing sector has particularly strong linkages both up and down stream. Up stream, the sector links to agriculture across a wide variety of farming models and products. Down stream, the sector s products are marketed across both wholesale and retail chains, as well as through a diverse array of restaurants, pubs, shebeens and fast-food franchises. Moreover, the food processing sector is now the largest manufacturing sector in employment terms with some 160,000 employees, and this increases to more than a million jobs once the upstream (primary agriculture) is included. KwaZulu Natal s focus on agriculture in the Growth Development Strategy is poverty alleviation, as most areas of poverty in the province are rural. The plan is to link up rural subsistence agricultural activity with commercial agriculture so as to develop subsistence agricultural projects into commercial ones. The other focus is to link land reform projects to key provincial agrarian revolution programmes so as to make land transfer an economic growth opportunity. The agrarian revolution strategy involves enabling access to markets, farmer development through the set up of agri businesses, improve road infrastructure to improve access to markets, and expediting the land reform process. 34

35 Table 10: Agro-processing Key Statistics Agro-Processing SA KZN Gross value Added (2010, Rb) Market Growth ( , % ) Formal Employment ('000) Employment Growth ( ) -1.4 Employment to GDP (jobs per Rm) 6.2 Employment to GDP growth ( ) -5.5 Employment to Capital (jobs per Rm) 6.2 Employment to Capital Change ( ) -2.0 Remuneration as % of value add 58.7 Skills Intensity (% semi or unskilled) 49.3 Import Leakage (%) 7.4 Export (Rb) 1.9 Exports % of output 1.9 Multiplier Output 2.6 Multiplier GDP 1.0 Multiplier Income 0.5 Existing Projects in Sector in KZN Investment opportunities exist to develop the growing capacity of sites in four municipalities in Ilembe for it to become an agri-processing hub. Four hydroponic greenhouses, two plant nurseries and a processing and packaging facility are envisaged, to take advantage of the proximity of the new King Shaka International Airport and the associated Dube TradePort. Funds The Department of Agriculture, Forestry & fishing has numerous projects and initiatives currently ongoaing. Support for new beneficiaries of land to ensure sustained productivity is derived from two main sources of funding the Broadening Access to Agriculture Thrust (BATAT) and the Comprehensive Agricultural Support Programme (CASP). Small and Medium Enterprise Development Programme (SMEDP) - For new or expansion projects whom can receive a tax free grant up to 10% on qualifying assets. Agro-Industries Development Finance - For business needing minimum of R1 million finance. Loans, equity and quasi-equity and suspensive sales. Competitive and risk-related interest rate. The aim of the financing is to promote the expansion of the agriculture and related industries. Orchards Schemes - Low interest loans granted to those establishing orchards and thus creating jobs in the agricultural sector. The Land Reform Credit Facility - Loans with deferred payments. Available to investors/banks financing land or shares for emerging farmers or farm workers. To promote access to commercial land, empowerment and job creation. 35

36 Critical Infrastructure Programme (CIP) - Infrastructure development for municipalities and companies constructing infrastructure. Between 10 30% of costs covered. To promote construction of key infrastructure for industrial development. Key Ratios used to measure business investment attractiveness Currency exchange rates Agricultural exports and imports Gross domestic product of export (destination) markets Supply and utilization Commodity prices Business & Government Rationale for Investing in Sector Agriculture has always been integral to the South African economy, and indeed to KZN. Whereas most of the rest of South Africa is semi-arid with most of the land not arable, KZN has some of the most fertile agricultural land. It also receives excellent annual rainfall, and has a well established road and rail transport system and a distribution network of farming equipment/products. From this simple viewpoint, therefore, there is excellent business rationale for investing in the sector. The sector has also shown strong international growth in the past few years, especially meat products, animal feed, and selected other food products. Much of this growth has to do with the rise of global middle classes as countries like China and India grow exponentially, and if the investment by China in Africa, and the so-called land-grabbing are anything to go on, then this demand will continue growing for some time. This will place pressure on food prices for some time to come, and hence an agro-processing industry serves not only South Africa s own growing domestic market, but could be tailored towards the exports of certain product to other growing markets. From Government s perspective investment in this sector is particularly critical because of the high employment to output ratio s, and high ratio of unskilled workers. This is especially true for those who live in rural and/or geographically spread out regions, many of which are particularly susceptible to poverty. On the negative side, however, is the land reform issue which has been slow and in many instances is fraught with complications. There are many arguments that suggest that not enough support has been given to new recipients of land claims and hence these new farms have been unsuccessful. These issues are also occurring against a backdrop of increasing consolidation and commercialisation in the agricultural industries, as farmers and companies come under increasing competitive pressure from imports (many of which benefit significantly from subsidies from their respective governments). The number of farmers recorded as formally employed has therefore decreased dramatically in the past couple of decades and as a result the Employment to GDP ratio has also fallen. All of this affects the downstream agro-processing industry. Nevertheless on the balance of the evidence we still feel that this sector holds a lot of promise and is worth investing in. Sector 2.1: Manufacturing Metals fabrication Description of sector The metal fabrication industry generally performs two functions, forming metal shapes and performing metal finalising operations. The industry is composed of firms that fabricate ferrous and nonferrous metal products and those that perform other plating and coating operations. 36

37 Billions (Rand) Molten metal which can be ferrous (containing iron) or non-ferrous (not containing iron e.g. aluminium or brass) is made into a form that can be shaped using various processes. In general, the metal may be heat treated or remain cold. Heat treating is defined as the modification of the physical properties whereas cold metal treatment is processes by which shapes are formed through applying direct pressure to the metal. During these processes various lubricants and oils such as ethylene glycol or different acids, are needed for cutting and cleaning. Figure 7: The KZN Metals & Metal products Output & Growth, constant 2005 prices R,16 25% R,12 R,8 R,4 20% 15% 10% 5% R,0 0% -R,4 -R,8 -R,12 Output Growth (% Change) -5% -10% -15% -20% -R,16-25% Once the molten metal is formed into a workable form, then the process of shearing is performed which shapes the metal into the desired shape and size. Once the desired shape and size are achieved, some surface preparation might need to be completed before any final finishes can be applied. Surface preparation is an essential process in guaranteeing that finishes perform correctly. Without proper surface preparation corrosion or peeling can occur. The final step is applying the surface finishing, which may include anodizing, electroplating or simply painting or dipping. Global Trends Apart from world economic growth, the demand for aluminium primary products beyond 2011 will depend mostly on the developments in China s aluminium industry. Outside of China, the global aluminium industry has undergone a large amount of consolidation. In 2009, three companies accounted for 48.2% of world primary output, up from 36.6% at the end of Severe flooding in the coal-producing states of Australia could lead to higher metallurgical coal prices in 2011, which in turn could lead to higher steel production costs. Given that three companies (Vale, BHP Billiton, and Rio Tinto) account for an estimated 75% of the seaborne iron ore trade, steelmakers need to become much larger entities in order to obtain more favourable terms from their suppliers and thus cut overall costs. It is worth noting that these same three iron ore mining companies are large producers of manganese and metallurgical coal, which are also used in steelmaking. 37

38 Rand (Billions) Figure 8: Compensation of KZN Metals & Metal products employees, constant 2005 R,8.0 15% R,6.0 R,4.0 R,2.0 10% 5% R,0.0 0% -R,2.0 -R,4.0 -R,6.0 -R,8.0 Compensation of employees (Rb) Growth (% change) -5% -10% -15% Local Trends & Industry Developments For South Africa, the metals fabrication industry consist of activities in primary steel products and semi-finished products, for example metal slabs, bars railway tracks, wire and plates. Aluminium is the main non-ferrous metal product produced. The basic metals fabrication industry plays an important role in the economic development of various up-stream and down-stream industries. Industries and public programmes which have important relationships with the metal fabrication sector include infrastructure programmes, construction, engineering, mining, car manufacturing and packaging. These numerous linkages make the metals fabrication industry a key element in the global competitiveness of the manufacturing sector as a whole. Growth in manufacturing output for South Africa is currently underpinned by the good performance of the basic iron and steel sector, which expanded by 16.7% on a quarterly basis in April 2011, whilst the petroleum industry reported a 14.4% expansion. These two sectors accounted for almost half of the growth in manufacturing output in the first quarter of the year. The top exporting destinations to which South Africa exports basic iron and steel products are China, Taiwan and Germany. The top exporting destinations to which South Africa exports basic non-ferrous metal products are Japan, Switzerland and USA. Some of the key firms within the KwaZulu-Natal metals industry are mentioned below: Tata Steel is the anchor client of the Richards Bay Industrial Development Zone (RBIDZ), with installed capacity to produce tons of ferrochrome (from locally supplied ores), mainly for markets in Europe, Japan and the United States. Given the high quality of infrastructure and access to raw materials offered, this industrial development zone next to a major port is likely to see further investment in the mineral beneficiation sector. Safal Steel at Cato Manor has built a coated steel-roofing factory which will further add to production capacity within the province. The company will manufacture metal coated steel coils which will be supplied to both the local and global markets. The facility will have 30,000 square metres under roof and the site is 14,4 hectares. 38

39 Arcelor Mittal is a dominant company for steel in Africa and has four plants in South Africa, with one in the Newcastle area. Newcastle Works, located in the northern part of South Africa s KwaZulu-Natal Province, is the country s foremost supplier of profile products. This highly efficient and low cost operation, rated among the lowest billet cash-cost producers in the world by a leading commodities research institute, bears testimony to the success of the intensive re-engineering programmes undertaken at Arcelor Mittal South Africa. The plant employs 1850 staff. Yearly, Newcastle Works produces 1.6 million tonnes of final product of which a fluctuating amount is exported to international markets. Macdonald Holdings is a KwaZulu-Natal based group in the steel and aluminium sector. Macdonald Steel companies in Durban and Pietermaritzburg supply steel and metal products. They offer a diversified stock of steel and metal products that are utilised in everything from cars, ships and trains to high-tech engine components, cooking utensils, and nuts and bolts. The world s largest diversified resources company, BHP Billiton, has two large aluminium smelters at Richards Bay, although most of the aluminium mineral ore is sourced internationally. Hulamin is a leader in the sophisticated aluminium finished product sector. The company makes rolled products at Edendale, Pietermaritzburg and at Camps Drift while its Pietermaritzburg facility, for making extrusions, is one of the three in the country. The manganese furnaces operated by Assmang at Cato Ridge have high capacities, but diminished demand in 2009 led to part of the plant being shut down. For the province in general, it continued to export natural resources in 2010, with the share of these exports reaching nearly 44% of total outward trade. A large portion of these products came from aluminium (22.9%), and iron and steel (16.6%). Mineral products were the second largest export product contributing 14.7% toward KZN exports. Table 11: Key Statistics of the Metals & Metal Fabrication Sector Metals Fabrication SA KZN Gross value Added (2010, Rb) Market Growth ( , % ) Formal Employment ('000) Employment Growth ( ) 0.4 Employment to GDP (jobs per Rm) 4.3 Employment to GDP growth ( ) -2.5 Employment to Capital (jobs per Rm) 3.2 Employment to Capital Change ( ) 0.6 Remuneration as % of value add 53.3 Skills Intensity (% semi or unskilled) 51.0 Import Leakage (%) 18.5 Export (Rb) 25.2 Exports % of output 25.2 Multiplier Output 2.7 Multiplier GDP 0.7 Multiplier Income

40 Existing Projects in Sector in KZN National Tooling Initiative Nature of the intervention: (DTI) The National Foundry Technology Network (NFTN) Approval of R45 million to allow a women-owned business upgrading Metrorail coaches to expand to KwaZulu-Natal, DTI Funds & Incentives available for Sector Steel Rebates - Rebates based on the value of exports, currently at R135 (2011) per ton of net steel content (VAT exclusive) provided by steel suppliers. Customs Rebate and Drawback Provisions - Rebate or drawback of customs duties on imported goods, raw materials and components used in manufacturing or processing of goods for export. Industrial Development Zones (IDZs) - Rebate of customs duties, exemption of VAT on imported goods, raw materials and components used in manufacturing and processing goods for export and exemption of VAT on services provided in Customs Controlled Areas. Financing for mining and beneficiation for assistance small- and medium-sized mining and beneficiation activities and jewellery manufacturing. Financing for metal, transport and machinery products to develop and support viable downstream metal producers with a focus on the automotive, other transport, structural and fabricated metal, as well as, the machinery sectors. The Sector Specific Assistance Scheme is a reimbursable cost-sharing grant scheme whereby financial support is granted to non-profit business organisations in sectors and sub-sectors of industries prioritised by the DTI. Manufacturing Investment Programme (MIP) The objective of the MIP is to stimulate investment within the manufacturing industry. Qualifying investment costs would comprise machinery, equipment, land and buildings, and commercial vehicles. As part of the government s national strategy of consolidating small enterprise support interventions across different government departments and government agencies, the DTI has commenced its own process of streamlining its small enterprises support interventions. As part of this process, the DTI and the Department of Science and Technology (DST) agreed to merge the Godisa trust with the National Transfer Centre (NTTC) and the Technology Advisory Centre (TAC). The three DTI incubators, namely Mpumalanga Stainless Steel Initiative (MSI), Downstream Aluminium Centre for Technology (DACT) and Furntech, were also incorporated into SEDA Technology Programme. Key Ratios used to measure business investment attractiveness The demand for aluminium and steel is cyclical and sensitive to the health of the economy in which it is being consumed. Revenues and earnings for both commodities rely heavily on demand for consumer products such as appliances, cars, and containers. Aluminium depends more heavily on consumer demand whereas steel depends more on the state of the capital goods markets. Against a backdrop of economic cycles, the most important long-term trends shaping the industrial metals industries are related to new manufacturing technology, consolidation of firms, foreign competition or imports, and raw material costs. 40

41 Business & Government Rationale for Investing in Sector Basic metals form a cornerstone of any industrialisation process. The forward linkages are always significant in that so many industries rely on their output as inputs into their processes. If there is no metals industry, or if the industry is insufficiently large enough to meet demand, then these sectors have no alternative but to import, or not to produce. Fortunately South Africa has a healthy metals sector. Unfortunately this sector creates fewer jobs than other sectors, and can be quite capital intensive. In the case of South Africa the metals sector also has strong backwards linkages as much of the metal ores (ie iron ore from sishen) and other minerals needed for the processes come from South Africa. And until recently electricity has been cheap thanks to large coal reserves and massive coal fired power stations. Hence the sector enjoys a strong comparative advantage, and has consequently grown strongly, domestically, whilst expanding its exports. It is also in line with national strategies such as the New Growth Path (NGP) and IPAP2 But there is a need to ensure that existing industries within KwaZulu-Natal continue to operate to ensure sustainable employment and continued competitiveness. The metals fabrication industry also contributes to the effectiveness and hence the competitiveness of other industries within KZN or the rest of South Africa. Export opportunities exist in relation to infrastructure and mining turnkey projects, especially in the rest of Africa and South America. Lack of maturity in South African beneficiation chains presents opportunities to extend value chains through further downstream manufacturing. The new APDP offers additional opportunities for metal-component manufacturing. Sector 2.2: Manufacturing Automotives Description of Sector The motor vehicle and motor vehicle equipment industry can be divided into four categories: passenger cars and light trucks; medium and heavy duty trucks; truck trailers; car parts and accessories. The car parts industry can then be divided further into two sectors, original equipment suppliers and aftermarket suppliers. The original equipment suppliers provide parts directly to automakers while aftermarket suppliers provide parts exclusively to the replacement parts market. The automobile industry comprises of various activities other than the manufacturing of various types of vehicles. These activities include design, production, marketing, sale, and servicing. Because of these numerous activities the motor industry is connected to a large number of other economic sectors and activities, indicating the importance of such an industry. Vehicles are built in factories around the world, with the majority manufactured in North and South America, Europe, and Asia. The manufacturing process involves sourcing raw materials such as steel, glass, plastic, and rubber from various suppliers. These raw materials are made into intermediate parts and are then transported to assembly plants, where workers and machinery assemble the vehicles. The degree to which car manufacturers manage or manufacture intermediate parts varies depending on the number and reliability of intermediate part suppliers. In recent years, car manufacturers have come to depend on external parts suppliers (called tier 1 suppliers) where strict time guidelines are used to keep production levels at optimal levels. Before any manufacturing 41

42 Rand (Billion) begins, new designs will need to be created which appeal to consumers. With better technology the time from the design phase to final product going on sale is falling, allowing car manufactures to release new models almost every two years. Figure 9: Output & growth: Transport equipment for KZN, constant 2005 prices R,6.0 R,4.5 R,3.0 20% 15% 10% R,1.5 5% R,0.0 0% -R,1.5-5% -R,3.0 Output Growth (% Change) -10% -R,4.5-15% Once the assembly process is finished, vehicles are sold to dealerships which are independent businesses. By working closely with dealerships, car manufacturers can adjust their output levels or offer different pricing options, especially when there are large swings in market demand for new cars. These dealerships also offer finance to consumers, sometimes at lower rates than banks. Because of the diverse materials and technologies involved in producing different vehicles there are a large number of up-stream and down-stream linkages. The supply chain is a network which involves transforming raw materials and other intermediate parts into a finished vehicle. The supply chain also includes financing, advertising, management, and distribution to the final customer. Global Trends Negative economic conditions and an intensely competitive environment are reducing the number of US dealerships, primarily among US brands. Meanwhile, prices of used cars sold by dealers are rising within most economies, a sign of decreased consumer confidence or disposable income. US & Europe s loss, however, is the emerging markets gain, as these countries have seen strong growth in automotive sales as huge swathes of their population enter the middle class. The most common vehicles in these countries are still inexpensive entry level vehicles or motorbikes Sales of smaller-sized vehicles are rising in many markets. Buyers are often enticed by these vehicles diminutive price and favourable environmental footprint as well as extra offerings which were previously only available on more expensive cars. The dramatic growth in emerging market vehicle sales is benefiting from the rise of first-time car buyers. Stricter emissions and mileage standards are being created across all geographical areas and will likely have a noticeable impact on the auto industry. While the actions will force greater 42

43 Rand (Billions) fuel efficiency and reduce rates of fuel consumption, they will also increase costs for consumers. Automakers are developing technologies utilising alternative fuels (such as ethanol, methanol, propane, or natural gas) or electricity derived from batteries or solar power. Some are actually marketing modified vehicles that can run on either gasoline or alternative fuels. Sales of such alternative fuel vehicles are still relatively small, but demand is rising, and some automakers have waiting lists of buyers. Hybrid vehicles are those with two or more sources of energy. In this category, foreign companies have taken the lead. Toyota and Honda, for example, offer hybrid vehicles that alternate between gasoline and battery-powered electricity. The US automakers have resisted hybrid vehicles, and have instead been focusing on alternative fuel technologies, such as fuel cells. Figure 10: Employee Compensation in KZN Transport Equipment, constant 2005 prices R,3.5 R,2.5 R,1.5 R,0.5 -R,0.5 -R,1.5 15% 10% 5% 0% -5% -R,2.5 -R,3.5 Total Compensation Growth (% change) -10% -15% Local Trends & Industry Developments The automotive industry is one of South Africa's most important sectors, with many multinationals such as BMW, Ford, Volkswagen, Daimler-Chrysler and Toyota using South Africa to source components and assemble vehicles for both their local and international markets. Although distanced from some of the major markets in Africa, the South African automotive and components industry is growing swiftly and is perfectly placed for investment opportunities. Companies with plants in South Africa are benefiting from the low production costs, coupled with access to new markets in sub-saharan Africa. Interest rates are at relatively low levels, reducing the cost of investments. Because most multinational vehicle manufacturers are currently operating in South Africa, (producing cars for foreign and domestic consumption) international trends will also impact on the country. The outlook for the vehicle industry is positive in terms of both exports and the domestic market. A key challenge will be to raise local output and competitiveness. 43

44 Table 12: Key Statistics for the Automotives sector Automotive SA KZN Gross value Added (2010, Rb) Market Growth ( , % ) Formal Employment ('000) Employment Growth ( ) -3.6 Employment to GDP (jobs per Rm) 3.8 Employment to GDP growth ( ) -6.6 Employment to Capital (jobs per Rm) 4.1 Employment to Capital Change ( ) -6.0 Remuneration as % of value add 67.6 Skills Intensity (% semi or unskilled) 48.1 Import Leakage (%) 26.3 Export (Rb) 6.7 Exports % of output 6.7 Multiplier Output 2.3 Multiplier GDP 0.5 Multiplier Income 0.2 Existing Projects in Sector in KZN The Durban Automotive Cluster (DAC), a well-established, proactive and ambitious publicprivate partnership between the ethekwini Municipality and the automotive industry in KwaZulu-Natal. Funds & Incentives available for Sector Manufacturing Investment Programme (MIP) - To encourage local and foreign capital investment in productive qualifying assets such as plant and machinery, land and buildings and commercial vehicles. Foreign Investment Grant (FIG) - To encourage foreign businesses to invest in manufacturing companies by assisting in the cost of transporting productive qualifying assets to South Africa. Automotive Investment Scheme (AIS) - Objective To grow and develop the automotive sector by increasing plant production volumes and strengthening the automotive value chain. Applicable to light motor vehicle and automotive component manufacturers. Taxable grant of between 20% and 30% of the value of the qualifying investment in productive assets. Industrial Development Zones (IDZs) - To promote manufacturing and increase the competitiveness of South African exports. Value Added Tax Export Incentives - To encourage exports from and investment in South Africa. Applicable to exporters registered as VAT vendors in South Africa. Motor Industry Development Programme (MIDP) which has now become the APDP - To increase local economic productivity by encouraging fewer model productions. To increase international competitiveness of the South African motor industry by assisting in reducing the cost of goods in the form of import duty savings. Encouraging foreign currency earnings 44

45 through increased exports and promoting foreign investment with the aim of creating and retaining jobs. MIDP Productive Asset Allowance. Available to motor vehicle assemblers and component manufacturers and is a duty credit calculated to 20% of value of expenditure on productive assets. The credit is against import duties and is spread equally over 5 years to encourage fixed capital investment and rationalisation of model ranges, specifically light vehicles. Key Ratios used to measure business investment attractiveness The current health of an economy will naturally affect the demand for vehicles. Cars are a major purchase for most consumers, and consumers need to feel confident in their choice before they spend their money. During periods of sustained economic growth and plentiful employment, sales typically rise as customers feel confident enough to buy new vehicles. Conversely, when the economy weakens and employment levels fall, consumers are more likely to delay the purchase of new vehicles. The most important trends in the automotive industry generally involve two related developments: competition and globalization. As the global market for vehicles expands and as more producers enter new markets around the globe, competition escalates worldwide and companies seek to achieve economies of scale. Scrap rates. An increase in scrapped vehicles is generally believed to precede a rise in demand for motor vehicles. Consumer confidence. A high level of consumer confidence generally signals that people feel good about the economy, their job security, and their future earnings ability. Rising confidence levels indicate that consumers expect further economic growth ahead, which generally implies positive future trends in automotive sales. Conversely, when people feel concerned about their jobs, the economy, or their cost of living, their confidence level declines and put off buying large purchases such as vehicles or buy used vehicles instead. Business & Government Rationale for Investing in Sector The Automotive Industry is a truly gigantic global industry and it has long been the ambition of many emerging markets to enter it. It not only creates economic activity and can increase exports greatly, but it is able to increase the amount of technology transfer into an economy, and upskill that economy s employees significantly. It has tends to have a strong cluster effect with automotive assembly units requiring product and inputs from other, smaller, automotive parts companies. Hence being able to establish a local value chain, or even a niche in global chain, is a very attractive prospect. As per the MIDP s original intentions (and even import tariff structures before that), a successful industry can also help with the trade balance, as automotives tend to be a large part of durable goods spend in an economy, and more important consumer good imports. Despite the fact that much of the recent development in the industry in SA has occurred in the Eastern Cape, there are still strong rationale for increasing the sector in KZN. KZN has two large and well functioning ports at Durban and Richards Bay, is a key transport hub, especially to the largest regional domestic market for vehicles in all of Africa, Gauteng, and has a well established engineering and manufacturing industry that can support the sector with various products. There are also various policy, investment and tax incentives that can be accessed and leveraged off to assist investment in the sector. Finally there are also opportunities in expanding production of medium to 45

46 Rand (Billions) heavy vehicles where demand is coming from public transport initiatives and other industries such as infrastructure, construction, mining and the agricultural sector. Sector 2.3: Manufacturing - Clothing and Textiles Description of sector The textile industry is one of the oldest in the world with the current industry characterized by high levels of specialization. Broadly defined, the textile industry consists of establishments engaged in spinning natural and manmade fibres. These are then converted (by weaving and knitting) into fabrics. The clothing and accessories industries supply people with basic attire that is affordable and unlikely to change drastically in style from year to year. For more fashion-conscious consumers, the industries strive to update their assortments to reflect changing trends or to offer innovative styles or features that command higher prices. The clothing industries offer diverse products, with hundreds of product lines designed for men, women, and children in a wide range of styles and price points. Companies can operate as manufacturers (wholesalers), as retailers, or as both. Today, most companies distribute their products through a number of different channels such as catalogues, internet sales, as well as through retailers. Within the wholesale channel, manufacturers often try to sell to various types of retailers, including department stores, specialty stores, discount stores, and national chains. The industry is thus linked to a number of other industries, mainly within the retail and transport industry. Figure 11: Output & Growth: Clothing & Textiles in KwaZulu-Natal, constant 2005 prices R,10 10% R,8 8% R,6 6% R,4 4% R,2 2% R,0 0% -R,2-2% -R,4-4% -R,6-6% -R,8 -R,10 Output Growth (% change) -8% -10% 46

47 Rand (Billions) Figure 12: Employee Compensation: Textile & Clothing in KZN, constant 2005 prices R,4 R,3 R,2 Total compensation Growth (% change) 10% 8% 6% 4% R,1 2% R,0 -R,1 -R,2 0% -2% -4% -6% -R,3-8% Global Trends Despite years of consolidation, the apparel and accessories industries remain extremely competitive and highly fragmented. This is most likely due to the low barriers to entry. These industries are characterized by simple technologies, low fixed assets per employee, and ease of expansion through the use of contractors. One needs only good clothing designs that attract department store and/or specialty store buyers. Although getting into the business may be relatively easy, staying in is much more difficult. In general, small start-up companies are undercapitalized and lack broad-based global sourcing. The power of big retailers is a major challenge for many apparel vendors and manufacturers. As retailers shrink their inventories and order closer to the time that merchandise is needed, manufacturers are forced to assume more inventory risk. In addition, their sheer size puts big retailers in a strong position to negotiate favourable terms with manufacturers in terms of price, shipping, co-advertising and product labelling. Table 13: Key Statistics Textiles, Clothing, Footwear & Leather Products sector Textiles, Clothing and Footwear SA KZN Gross value Added (2010, Rb) Market Growth ( , % ) Formal Employment ('000) Employment Growth ( ) -5.9 Employment to GDP (jobs per Rm) 13.1 Employment to GDP growth ( ) -6.8 Employment to Capital (jobs per Rm) 30.2 Employment to Capital Change ( ) 3.3 Remuneration as % of value add 89.7 Skills Intensity (% semi or unskilled) 81.2 Import Leakage (%)

48 Rand (Millions) Export (Rb) 1.0 Exports % of output 1.0 Multiplier Output 2.2 Multiplier GDP 0.6 Multiplier Income 0.3 Local Trends & Industry Developments Given South Africa s abundant natural, human and technological resources the textile and clothing industry has great productive potential. At the same time though high levels of foreign competition will continue to put downward pressure on South Africa s global competitiveness. The apparel industry has also benefited from the country's sophisticated transport and communications infrastructure which allows for reductions in supply times as well as transport costs. South African market demand is increasingly changing towards trends of first world markets and the local clothing and textile industry has changed accordingly to meet these ever changing demands. The clothing, textiles and footwear industry in South Africa has been through a torrid time over the past 2 decades. After democracy and accession to the World Trade Organisation, and the subsequent lowering of tariff barriers, the industry went into a steady decline. Pinetown, Pietermaritzburg and other centres felt this change greatly, and many people lost their jobs as companies downsized and attempted to compete with the imports of cheap foreign goods suddenly lining the shelves of such companies as Mr Price (itself a proudly KZN retailing firm). The decade following was a lost one for growth in the sector, but not for learning, and soon companies had altered their value propositions and where finding new and innovative ways to compete. Reduced production lines and small jobbing teams able to absorb surplus demand orders where unit sizes were two small for the mass-produced likes of China/India helped the sector rebound, as did specialised product lines, and other innovative approaches. As a result the sector remains at about R4 billion in value add, although growth rates have swung wildly from year to year. Exports of clothing, shoes and other leather products have unfortunately declined significantly over the period. Figure 13: Textile, Clothing and Leather Exports from KwaZulu-Natal, constant 2005 prices R 1,000 R,900 R,800 R,700 R,600 R,500 R,400 R,300 R,200 R,100 R,0 Textiles Wearing apparel Leather & leather products 48

49 Although the textiles and clothing sector is not as powerful as it once was within KwaZulu- Natal, the importance of the sector still remains high due to the employment it currently offers and the proportion of unskilled labour in this sector. Existing Projects in Sector in KZN The provincial government announced that R30 million had been set aside in the 2010/11 budget to implement a provincial Clothing and Textile Revitalisation Strategy through which 19 hubs would be created to support 141 co-operatives. The KwaZulu-Natal Clothing and Textile Cluster (KZNCTC) was established in 2005 to boost the global competitiveness of the clothing and textiles industry. The KZNCTC established a Sector Business Support Centre in Newcastle, aimed at regenerating the area s clothing and textile industry. The KZNCTC lists the benefits of clustering as generating a critical mass of resources, shared learning, supporting the rapid diffusion of ideas, collective action and risk sharing, reduced costs and enhanced ability to compete on a global platform. The Durban Investment Promotion Agency (DIPA) is a part of the ethekwini Municipality mandated to attract, retain and grow direct investment into Durban. It is a free professional advisory service to assist investors, and medium to larger businesses. Funds & Incentives available for Sector Value Added Tax (VAT) - Industrial Development Zone (IDZ). Purpose-built industrial sites in South Africa which have been specifically designated to be developed and operated by the private sector. Clothing and Textile Competitiveness Improvement Programme (CTCIP). To build capacity in manufactures and in other areas of the apparel value chain in South Africa to effectively supply to the major retailers, as well as to grow South African-based clothing and textile manufacturers to be globally competitive. Financing - Textile and Clothing: To support and promote entrepreneurship, industrial development and strategic partnerships by building competitive industries and enterprises in South Africa and the rest of Africa. Competitive, risk-related interest rates are based on the prime bank overdraft rate. Finance for the Textiles, Clothing, Leather and Footwear Industries. Clothing and Textiles Financial contribution of 35-50% of with minimum financing requirement of R In the form of loans, suspensive sales and equity. Development and expansion of textile/clothing sector by providing necessary finance Key Ratios used to measure business investment attractiveness Gross domestic product (GDP). As an economy expands and contracts with the business cycle, economic growth is measured by changes in real GDP. Two consecutive quarters of decline in real GDP generally signal that the economy is in a recession. With most economies coming out of recessions and experiencing positive growth rates in real GDP, the demand for textile and clothing is expected to increase. Disposable personal income. Disposable income influences the level of expected consumer spending. When incomes are rising, consumers are willing to spend more than previously, which bodes well for apparel and footwear sales. Conversely, when incomes are declining, consumers are more likely to defer spending and save their money. 49

50 Consumer confidence. High consumer confidence usually is accompanied by increased spending and borrowing. Conversely, when consumer confidence is low (usually due to uncertainty about the future), personal expenditures are likely to be cut back or postponed. Consumer price index (CPI). Inflation rates reflect and influence pricing decisions of apparel and footwear companies and their suppliers. Because of the large number of choices and types of goods in the clothing and textiles industry, consumers are able to change their spending patterns relatively quickly in response to rising price levels. Business & Government Rationale for Investing in Sector Despite the painful past of the sector it remains important in the KZN Economy, particularly of semi and unskilled labour. It also retains strong linkages with other industries, and therefore shows strong multiplier effects. The industry has also evolved over the past 15 years into a much more mature competitive, innovative sector such that the firms in the sector are well established and likely to grow in the future. Lessons have been learnt and it seems the sector is ready to rebound. Crucially it has been identified as a key industry in the New Growth Path, not only because of the Minister Patel s past, but more because it continues to offer some of the best prospects for employment. One of its most redeeming features as a sector, is that it is requires relatively little capital to start up, and hence is particularly well suited to SMEs, formerly disadvantaged individuals and those with little or no access to capital. It was after all clothing and footwear that built much of New York in the early 1900 s by poor European and Jewish immigrants, then some sixty years later, the same sector was responsible for many success stories in the emergent Chinese economy. There are also great opportunities in applying green technologies within this industry, which promises great employment opportunities. According to research from the National Retail Federation (NRF), an industry trade group, consumers increased green goods consumption at retail in 2008, despite the faltering economy, with 61% of consumers saying they had bought a green product. Research has shown that shoppers remain unwilling to pay a premium for sustainability, and that age is an important factor in green attitudes and behaviour, with more than two-thirds of under 34-year-olds being green buyers versus over half of those over 45. Sector 2.4: Manufacturing Forestry, timber pulp and paper Description of sector The paper and forest products industry is involved in the manufacture of paper, paperboard, and wood products such as household and office furniture. What these products have in common is their use of timber, or some other form of raw wood as an input. In the paper industry, timber or recycled material is converted into products such as printing and writing papers, newsprint, tissue, containerboard, etc. In the wood products sub-industry, logs are converted into goods such as lumber and structural panels. To manufacture paper and forest products, a company must first find sources for its raw material inputs. The source of raw material may come from owning timberlands, signing cutting contracts to harvest timber on land (government-owned or privately held), and purchasing already-harvested logs. Paper makers that are not vertically integrated may rely on purchases of recovered paper or market pulp. 50

51 Rand (Billions) Rand (Billion) Once a firm has its necessary supply of raw material, it brings the fibre into mills that produce the various paper, paperboard, and wood products that it has chosen to manufacture. Paper mills tend to be highly capital intensive and expensive to operate given their large size and capital requirements. Costs of sophisticated safety and environmental protection capital can also increase capital expenditures. Although these costs create high barriers to entry in the paper industry, there are a large number of interconnected industries which have great employment and output potential. Figure 14: Output & Growth: Forestry, Wood, Paper & Pulp in KZN in constant 2005 prices R,13.00 R,9.50 R,6.00 R,2.50 -R, % 10% 5% 0% -R,4.50-5% -R,8.00 -R,11.50 Output (2005 prices) Growth (% change) -10% -R, % Figure 15: Employee Compensation: Forestry, Wood, Paper & Pulp, constant 2005 prices R,8.0 R,6.0 R,4.0 R,2.0 10% 8% 6% 4% 2% R,0.0 0% -R,2.0 -R,4.0 Total compensation Growth (% change) -2% -4% -6% -R,6.0-8% Global Trends Although the paper and forest products industry remains very large and mature, there are several factors that will contribute to future demand uncertainty. These factors include the continuing 51

52 negative impact of electronic communication on paper demand, further industry consolidation and specialization, managements approach to manufacturing capacity, the growing use of recycled materials, and a focus on environmental concerns and regulations. With regards to wood products, environmental regulations that have reduced access to timber resources have caused a major shift from plywood and traditional lumber to engineered products. Within the past five years, a few forest products companies have followed the trend among paper companies to consolidate and divest noncore assets. Years ago, when computers began to be widely used, the term paperless office was coined by those who envisioned the end of printed documents as a form of office communication. The completely paperless office has yet to become a reality, and is unlikely to do so anytime soon. Nevertheless, new forms of communication and commerce are clearly having a significant impact on demand for many grades of paper. With information so readily and quickly available via the Internet, many people have stopped reading newspapers altogether, especially younger people, and now rely on the Internet as their primary (and sometimes only) source for news, information, and entertainment. Reduced newspaper readership is also leading to lower levels of newspaper advertising, which in turn leads to lower page counts. Newspaper companies have addressed this issue by creating their own websites and filling them with information normally found in their printed editions. In addition, many companies have added new features such as more detailed information, links to other news sources, and more local news and sports coverage. Other printing paper categories are likely to experience declining demand trends as well due to the development of electronic books (e-books). E-books such as Amazon.com Inc. s Kindle and Barnes & Noble s Nook are being developed with more features such as the ability to read horizontally, to change the print size, and to hear the book read aloud. The next generation of e-books is expected to have features such as color displays that could make reading newspapers and magazines on electronic screens more enjoyable and accelerate the shift away from print. The costs of the devices are also falling as the number of market entrants expands. As prices decline, the market for e-readers is likely to expand beyond avid readers. A newer machine similar to e-readers is the so-called media tablet, and these devices may have even broader appeal than e-readers. Tablets are essentially low-power, portable computing devices with more capability than e-readers. Gartner, a leading information technology researcher, expects rapid growth of media tablets, driven by Apple s ipad. We do not see any reason to expect a major reversal in the demand trends for uncoated free sheet. Because the segment has many more applications than newsprint, we believe the decline in demand will not be as steep as for newsprint. Cellulosic ethanol could replace corn ethanol Cellulosic ethanol can be produced from a wide variety of plant materials including switchgrass, agricultural plant wastes, municipal solid wastes and most important for this industry, forest waste products. Although cellulosic ethanol is chemically the same as ethanol produced from corn or soybeans, its net energy content is three times greater than corn ethanol, and its production emits a low net level of greenhouse gases. The possibilities for biomass appear to be significant. According to RISI, corn-based ethanol production has the potential to increase to more than 15 billion gallons per year. However, that would still be only a modest amount compared with the 140 billion gallons of gasoline produced per year. In contrast, cellulosic ethanol has the potential to displace more than 30% of US domestic gasoline consumption. Although technical hurdles exist in converting biomass to fuel due to the 52

53 difficulty in breaking down its complex structure, progress is being made, and the planned increase in funding should accelerate the progress. Wood pellets: a safe, efficient, and sustainable alternative One form of biofuel that is has been used for years and may have the broadest long-term appeal is wood pellets. Wood pellets are made by using wood manufacturing by-products, such as tree trimmings and chips, and refining them into pencil-sized pellets that are uniform in size, shape, moisture content, density, and energy content. Burning wood pellets is much more efficient than burning wood wastes directly for several reasons. Pellets have substantially lower moisture content than raw biomass, which gives them a higher BTU (British thermal unit) value and also allows for easier handling in freezing situations. The higher density of wood pellets allows for reduced transportation and storage costs for an equivalent amount of energy. Pellets are also a safer alternative than fossil fuels because they do not have the explosion or environmental pollution risks of fossil fuels. However, in residential applications, pellet burners are less convenient than oil or gas burners because they need to be refilled periodically since they are not connected to a gas or oil distribution network or a large tank. The benefits from biofuel production would likely be greatest for forest products companies that own their land rather than those that buy fibre from outside sources. Just as increased production of ethanol has led to sharply higher prices for corn, rising demand for wood fibre from the biofuels sector will likely push fibre prices much higher. This could worsen the supply situation over the long term as timberland owners divert some of their harvest to the biofuels sector rather than to the paper or wood products industries. Local Trends & Industry Developments The forest, timber, pulp and paper (FTPP) and associated industries accounted for jobs in 2008 (across the total cluster). Forestry product exports in 2009 came to R12,5 billion while imports totalled R9,6 billion. Downstream the furniture sector employed over people in In 2009, the sector contributed about 1% to manufacturing GDP and 0.2% to the economy as a whole. Table 14: Key Statistics of the Wood Products, Paper & Pulp Sector Wood products, pulp and paper SA KZN Gross value Added (2010, Rb) Market Growth ( , % ) Formal Employment ('000) Employment Growth ( ) -2.4 Employment to GDP (jobs per Rm) 4.5 Employment to GDP growth ( ) -3.1 Employment to Capital (jobs per Rm) 3.2 Employment to Capital Change ( ) -5.6 Remuneration as % of value add 60.3 Skills Intensity (% semi or unskilled) 55.3 Import Leakage (%) 10.3 Export (Rb) 5.0 Exports % of output 5.0 Multiplier Output

54 Rand (Millions) Multiplier GDP 1.0 Multiplier Income 0.6 The global economic downturn had a big effect on the FTPP industry. Wood sales in South Africa of 14.2 million tons in 2009 were down by 2.3 million tons (or 14%) from Wood prices in 2010 had increased by 30% in the course of the year. The forestry and paper sector within KwaZulu-Natal is an important part of the local economy. Pietermaritzburg in particular has become an area well developed towards furniture manufacture, due to the abundance of raw material from nearby forests in the Midlands and further north. Although local demand is dwindling, the export market for pulp and paper from South Africa remains strong. The sector contributed about R2-billion to the nation s balance of payments in Key wood and paper corporations operating within KwaZulu-Natal are Mondi, Nampak, Merensky, The R&B Timber Group, NCT Forestry Co-op Limited and Sappi. Existing Projects in Sector in KZN NCT Forestry is a timber marketing co-operative catering to the needs of private and independent timber growers. It is recognised as an international supplier of quality round wood timber, hardwood pulp chips and the largest forestry marketing organisation in southern Africa. NCT's core area of management and operation covers the province of KwaZulu-Natal. IPAP2 outlines key action plans that are required to promote the sustainability and growth of the FTPP industry. The first is an integrated approach to fast-tracking the issuance of water licences, the second is a skills transfer and technology upgrading programme for small scale saw millers. Figure 16: Wood and paper exports from KwaZulu-Natal, nominal Rands, R,450 R,400 R,350 Wood & wood products Paper & paper products R,300 R,250 R,200 R,150 R,100 R,50 R,0 54

55 Forest Industries Education & Training Authority has embarked on a number of specific programmes of support for employers and the unemployed so that productivity and performance can be enhanced. The following are current initiatives within the KZN region; Amahlathi Emerging Entrepreneurs Forum, Kranskop Community Land Claims Project, Artisan Development Programme and the Assessor & Moderator Training Project to name a few. Funds & Incentives available for Sector Incentives There is financing available for the Wood and Paper Industries: to help the industry become a key player in the generation of a balanced, integrated and internationally competitive forest products sector within the Southern African region. Focus areas are projects and investments in the following industries: Forestry, Pulp & paper, Furniture, Sawmilling, board production, and Renewable energy. Competitive risk-related interest rates are based on the prime bank overdraft rate. Funds The DTI s Forestry and Wood products strategic Business Unit finances projects and investments in the forestry, sawmilling, pulp, paper, furniture and wood industries, as well as those involved in biomass, renewable energy and energy efficiency. It is committed to ongoing economic growth, job creation and the reduction of poverty. In 2010, the unit approved 17 projects with a total value of R403-million. Key Ratios used to measure business investment attractiveness The performance of the paper and forest products industry is driven mainly by the interaction of supply and demand. Because the sector is so dependent on factors such as global economic health and the capacity of the industry, supply and demand are frequently out of balance. Although the industry cannot control the global economic situation, it can try to keep supply from greatly exceeding demand. One way to do this is to limit capacity expansion. In addition, producers on occasion take downtime, halting production to allow supply and demand to balance out, or to conduct scheduled or unscheduled maintenance. Other key indicators for estimating the future for forestry products are: Housing starts. The housing market is the largest end market for lumber and other wood products. As a result, housing starts (the number of residences on which construction has begun during a given period) are a key indicator of the direction and health of the forest products industry. Interest rates. The level and direction of interest rates have a major impact on paper and forest products companies due to their relationship to investments and loans which finance new homes and buildings. Gross domestic product (GDP). The growth of GDP is an important indicator of the economy s general health, which tends to have a significant impact on conditions within the paper and forest products group. Strong economic growth is not always a positive factor, however, as it can be a precursor to inflation. International trade. International trade can play an important part in the performance of the forest products industry. A solid level of exports can help the industry to thrive during periods of strength in domestic markets and can keep the industry afloat during difficult times. 55

56 Business & Government Rationale for Investing in Sector The forestry, timber, paper and pulp (FTPP) and furniture sector has the potential to contribute greatly to rural and economic development by contributing to GDP output, job creation income to rural areas. High employment multipliers and a large number of upstream linkages also make this industry an attractive and important sector within KwaZulu-Natal. Opportunities also exist in expanding the small-scale saw milling industry, since most of the saw millers are located close to forests in rural areas. Consequently, this is an important sector from the perspective of rural development. Opportunities for employment growth within this sector can also come from green initiatives and industries. In recent times, the sector has struggled with falling global demand, most noticeably in the recent global recession, but also generally, as global demand for paper and wood products shifts. Exports of wood chips to Japan, for example, has slowed, just as Japan s economy has fallen, whilst opportunities that might exist in other developing economies have not yet materialised or been taken advantage of. However, the sector in KZN has still been able to grow by about R3 billion, from R9.5 billion up to R12.5 billion before the recession thanks to strong domestic demand. Sector 2.5: Plastics and chemicals Description of sector Chemicals used in other industries are generally made from more basic chemicals, and because they are designed for various applications and customers, they may be produced in small volumes. The basic chemicals group includes inorganic chemicals, chlor-alkalis, and industrial gasses. Basic chemicals are made from mineral ores or brines, atmospheric gases, or gases created as a by-product of various manufacturing processes. Basic chemicals are used both as building-block materials and as processing aids in the production of other chemicals and nonchemical goods. The largest consumers of basic chemicals are companies within the industrial and agricultural sectors. Specialties chemicals are sold largely based on their performance attributes and are often critical components of the end products in which they are used. Specialties products include paints and coatings, pesticides, adhesives and sealants, catalysts, and plastics additives. Plastics are polymers that are combined with additives and other ingredients such as stabilizers, colorants, flame retardants, and reinforcing agents. The chemical mixtures are then shaped or moulded into a solid product under heat and pressure. Plastics are directly or indirectly produced from organic chemicals such as ethylene, propylene, butadiene, and benzene. The manufacturing, automobile, agriculture, and housing sectors are the chemical and plastics industry s largest customers. A large portion of plastics demand comes from the packaging and consumer markets. Goods, such as kitchenware, toys, sporting goods, medical products, pipes, conduits, fittings, transportation, furniture and furnishings, electronic appliances, electronic components, adhesives, inks, coatings, etc all require chemicals and plastics during their production stages. 56

57 Rands (Billions) Rands (Billions) Figure 17: Output & Growth: Petroleum, chemical, rubber & plastic (constant 2005) R,16 16% R,14 14% R,12 12% R,10 10% R,8 8% R,6 6% R,4 4% R,2 2% R,0 0% -R,2-2% -R,4 Output (2005 prices) Growth (% change) -4% -R,6-6% -R,8-8% Figure 18: Employee Compensation: Petroleum, chemicals, rubber and plastics R,7.0 R,6.0 R,5.0 R,4.0 Total compensation Growth (% change) 25.0% 20.0% 15.0% R, % R, % R,1.0 R,0.0 -R, % -5.0% -R, % Global Trends The businesses of chemicals, coatings and plastics are closely linked, and those sectors, in turn, are closely linked to the oil and gas industry. This is a research-based industry that requires massive capital expenditures on the production end. According to the American Chemistry Council, U.S. chemicals companies invested just under $50 billion in research and development in 2010 alone. 57

58 BASF, the world s largest chemical firm, estimates it will invest over 12 billion Euros in capital expenditures from 2011 to It is also a cyclical business, highly subject to costs for basic commodities, especially oil and gas, and open to rapid changes in fortune due to the ups and downs of the global economy. The global recession was disastrous for the chemicals industry as a whole, as demand plummeted for everything from plastic packaging to paint used on construction projects to industrial chemicals. Employment has been declining dramatically in recent years, along with employment in most basic manufacturing sectors in America. This is due to increasing productivity and technology-based efficiency in manufacturing plants. However, in 2008 and 2009, the decline in employment was very much driven by the recession. Large numbers of plants were closed or idled in Global trade was off considerably. For 2011, the chemicals industry looks brighter, particularly if U.S. and European economies can shake off their doldrums and begin significant growth. Meanwhile, Asian economies, along with Brazil, were enjoying robust economic growth as of mid 2011, which boosted the chemicals sector. On the consumption end, outside of Asia and Brazil, the currently slow construction industry in the U.S. and Europe will have a dampening effect, as building materials of a wide variety are based on chemicals. While the chemicals industry is most definitely cyclical, gaining and losing ground with changes in the global economy, many long-term trends point to increasing demand for many types of chemical products. To begin with, a swiftly aging population with growing access to, and budgets for, drugs of all types is making demand for life sciences chemicals soar. Eventually, worldwide demand for the construction of new commercial buildings and new housing will once again fuel growth for chemicals used in building products of all types. The extremely rapid industrialization and commercialization of markets in China and India, two nations where an immense proportion of the world s population live, is creating demand for industrial and consumer chemicals of all types. Finally, a rapidly-expanding transportation market worldwide, including the growing number of automobiles and trucks on the road, will create greatly increased demand for chemicals, coatings and plastics used in the manufacture of automobiles. (Lightweight plastics are extremely important for the manufacture of fuel-efficient vehicles.) Growing demand for consumer products and convenience products, such as processed foods and beverages, is enhancing demand for plastic packaging on a worldwide basis. Meanwhile, makers of many components in major commercial and consumer products are switching to plastics due to the durability, light weight and long life of plastic. Meanwhile, consumer concerns and environmental activism about packaging have come to the fore. Plastic grocery and shopping bags have become evil in the eyes of some. In the U.S. alone, plastic 58

59 bags are about a $4 billion industry. In America and elsewhere, bags to a growing extent are seen as a big burden to landfills and an even bigger eyesore in the form of litter. Various answers are being developed. Biodegradable bags would be welcomed by many consumers, even if they drove up costs a bit, and reusable string, nylon or canvas bags are very much in fashion. Paper bags are now more in evidence and are clearly biodegradable. Table 15: Key Statistics for the Chemicals & Plastics Sector Chemicals and Plastics SA KZN Gross value Added (2010, Rb) Market Growth ( , % ) Formal Employment ('000) Employment Growth ( ) 0.5 Employment to GDP (jobs per Rm) 2.1 Employment to GDP growth ( ) -1.5 Employment to Capital (jobs per Rm) 0.8 Employment to Capital Change ( ) -0.5 Remuneration as % of value add 45.3 Skills Intensity (% semi or unskilled) 52.1 Import Leakage (%) 17.1 Export (Rb) 4.2 Exports % of output 4.2 Multiplier Output 2.3 Multiplier GDP 0.7 Multiplier Income 0.3 Local Trends & Industry Developments Growth of the South African chemicals industry has been sustained by a large demand from various industries which are growing within the economy. Development of the nation's manufacturing, mining, automotive, agricultural and construction industries are contributing to a steady rise in the demand for chemical commodities. South Africa's chemical industry is of substantial economic significance to the economy as it provides key inputs into many other intermediate and final sectors. The industry is the largest of its kind in Africa and was developed due to demand from mines for chemicals and explosives. It KwaZulu-Natal provides nearly a third of South Africa s plastics demands. The industry uses tons of polymer a year and consists mainly of SME enterprises. The most challenging concern presently experienced by the plastics industry in South Africa is the cost of raw materials linked to the crude-oil price, which has risen dramatically in the last decade. However, plastics still remain cost-effective products and a vital component in the packaging industry. The Chemical industry is well developed with numerous SME enterprises along the value chain. The sectors that enjoy substantial investments into the chemical industry are paint, agricultural chemicals, plastics and synthetic resins. 59

60 Future legislation proposed by the EU Commission is termed REACH. Its overriding goal is to respect environmental concerns and sustainable development issues by ensuring both a high level of protection of human health and the environment and the competitiveness of the chemicals industry, within the framework of the Single Market. The specific objectives of REACH are: Protection of human health and the environment Maintenance and enhancement of the competitiveness of the EU chemical industry Prevent fragmentation of the internal market Increased transparency Integration with international efforts Promotion of non-animal testing Conformity with EU international obligations under the WTO The impacts of REACH on African countries are cause for serious concern. REACH poses a major challenge to the mining industry in the short-medium term, especially where mining is the foundation industry for the economy. The links between Africa and the EU are especially strong in the trade of minerals and mineral commodities. Existing Projects in Sector in KZN The Sector Specific Assistance Scheme (SSAS) is a reimbursable cost-sharing grant scheme whereby financial support is granted to non-profit business organisations in sectors and sub-sectors of industries prioritised by the DTI. The Chemicals Allied Industries is one such industry. Funds & Incentives available for Sector Incentives Chemicals, Textiles and Allied Industries - Objective: To stimulate development and sustainable global competitiveness. Funded by the IDC where focus areas are: Upstream and basic chemicals. Ceramic, concrete and stone products. Cosmetics and detergents. Fine and speciality chemicals. Glass products. Recycling. Rubber products. Plastic products. The Manufacturing Investment Programme (MIP) is an incentive offered by the DTI designed to stimulate investment growth, in line with the South African government s National Industrial Policy Framework. The objective of the incentive is to stimulate investment within the manufacturing industry, to enhance the sustainability of manufacturing investment projects by small enterprises and to support large-to-medium-sized investment projects in manufacturing that would otherwise not be established without the grant. 60

61 Section 12i Tax Allowance Incentive (12i TAI) - The 12i Tax Incentive is designed to support Greenfield investments (i.e. new industrial projects that utilise only new and unused manufacturing assets), as well as Brownfield investments (i.e. expansions or upgrades of existing industrial projects). The new incentive offers support for both capital investment and training. Funds None found Key Ratios used to measure business investment attractiveness The main factors driving the chemical industry s revenues are volume growth and pricing flexibility. Profits are mainly driven by a combination of product mix, raw material costs, capacity utilization, and operating efficiency. Industrial production indexes - The production index for chemicals (which includes pharmaceuticals) increased every year from 1991 through 2007 except for 2001, when the manufacturing sector had a downturn. Capacity utilization/operating rates. Capacity utilization (or operating) rates, which measure actual output as a percentage of total potential capacity, are a key barometer of an industry s health as well as market conditions for a particular product. Because chemical manufacturing plants have sizable fixed costs, higher volume spreads these costs over a greater number of units, thus improving profit margins. Producer price indexes (PPIs). The PPIs indicate trends in selling prices for the overall chemical industry and for various product lines. They also indicate changes in raw material costs for companies, such as specialty chemical firms, which consume chemicals in the manufacturing of their own products. Greenhouse gas controls. A major potential regulatory and legislative change that could affect the chemical industry is the current climate change proposals, including global talks and proposed global and local regulations designed to reduce greenhouse gases (GHG) such as carbon dioxide and methane. Business & Government Rationale for Investing in Sector The industry has very strong downstream (forward) linkages with the output being used as inputs into many other sectors. Increased product in this sector therefore tends to replace imports and increase the availability and reliability of supply. The industry also has great potential for employment creation since down-stream industries are made up of many SME rather than a few large corporations. Stimulating this industry therefore has great developmental prospects for the province. The industry also has great potential to expand the green economy where biotechnology is used to create bio-plastics. From a business perspective, there is no shortage of demand for the products, and the underlying drivers for demand appear to improving along with the prospects of the many sectors that use the output. 61

62 Rand (Millions) Rand (Billions) Sector 3: Tourism Description of sector The tourism sector is divided into two interlinked parts; the travel industry and the tourism services industry. Tourism is vital for many countries due to the large inflow of international currency for businesses which provide services that cater for the industry. These service industries include transportation, hospitality services (such as tour operators, travel agents and tourist information services), and entertainment venues. Travel or tourism does not necessarily involve travelling internationally. A lot of tourism and travel can take place within people s home country, and may include pure leisure or even work related travelling. Figure 19: Output & Growth: Catering & Accommodation in KZN, constant 2005 prices % 10% 8% 6% 4% 2% 0% -2% Output Growth (% change) -4% -6% Figure 20: Employee Compensation: Catering & Accommodation KZN, constant 2005 prices R 1,200.0 R,800.0 R,400.0 R,0.0 16% 12% 8% 4% 0% -R, R,800.0 Total compensation Growth (% change) -4% -8% -12% -R 1, % 62

63 Global Trends The Asia and Pacific regions experienced the fastest growth rates in 2010 and results were better than expected for Europe due to temporary redistribution of travel to destinations in Southern and Mediterranean Europe because of unrest in North Africa and the Middle East. Worldwide, international tourist arrivals surpassed 124 million in the first two months of 2011, up from 119 million in the same period of 2010, with emerging economies growing faster than the more advanced ones. These results confirm that in spite of economic difficulties the recovery of international tourism is consolidating. Table 16: Key Statistics for the Tourism Industry (Catering & Accommodation) Tourism SA KZN Gross value Added (2010, Rb) Market Growth ( , % ) Formal Employment ('000) Employment Growth ( ) 3.4 Employment to GDP (jobs per Rm) 17.5 Employment to GDP growth ( ) 0.1 Employment to Capital (jobs per Rm) 13.7 Employment to Capital Change ( ) -0.7 Remuneration as % of value add 32.2 Skills Intensity (% semi or unskilled) 23.4 Import Leakage (%) 4.0 Export (Rb) 0.0 Exports % of output 0.0 Multiplier Output 2.5 Multiplier GDP 0.8 Multiplier Income 0.4 Local Trends & Industry Developments KwaZulu-Natal is the most popular tourist destination in South Africa, with 21.3% of total overnight trips. South Africa's beauty and sunny climate, cultural diversity and reputation for delivering value for money have made it one of the world's fastest growing leisure and business destinations. International travel to South Africa has increased dramatically since Directly and indirectly, tourism constitutes approximately 7% of employment in South Africa and promises to be a great driver of new jobs creation. South Africa s attractive eco-tourism comes from its diverse climate, from tropical in the south-east to desert in the central region. Tourism has always played an important role in the economy of KwaZulu-Natal and will remain so especially as tourism has been identified as one of the key sectors in the New Growth Path, mainly for its employment to investment ratio. Tourism is well developed in the province and very popular with family holidays and beach tourism which is a major component of the tourism sector. Recently, and excluding the soccer world cup, sporting events have become increasingly popular in the region. 63

64 Existing Projects in Sector in KZN The KwaZulu-Natal province has a number of investment projects. These include; The St Lucia region, brought about by the Lubombo Spatial Development Initiative Five casino developments The emakhosini Valley cultural conservancy The Port Shepstone marina Lilani and Shushu hot springs The Mkhambathini Game Reserve A tourism centre in Mnweni valley in the ukhahlamba-drakensberg world heritage site Funds & Incentives available for Sector Funds Tourism Finance - To contribute to Governments strategy for the tourism industry, participate in the establishment of good quality hotels in South Africa and the rest of Africa and diversify the portfolio into other subsectors such as cultural and heritage products, arts and crafts and business tourism. Applicability Focus on asset-based finance, with the bulk of the portfolio invested in the accommodation sector. Preference is given to: Projects that show profitability and sustainable commercial viability. Financing of fixed assets and capital expenditure. A product or facility for which there is an identifiable demand from a quantifiable market. Projects which have a significant developmental impact i.e. job creation, empowerment and rural development. Tourism Development Finance - Minimum finance requirement of R1 million. Provision of medium-term finance (loan, equity) by the DTI for upgrading or renovation of tourist facilities in aid of developing and expanding the tourism industry. To make investment in this sector attractive, funding Sources of funding come from various donors/facilitators: The International Tourism Marketing Aid Scheme Development Bank of Southern Africa The Small and Medium Enterprise Development Programme The Tourism Enterprise Programme The tourism scheme of the Industrial Development Corporation Khula Enterprise Finance Ithala Development Finance Corporation Small and Medium Enterprise Development Programme (SMEDP). Caters for SMMEs (Manufacturing and Tourism). A two year cash incentive on qualifying assets and 3rd year if labour requirement is met. To encourage investment of up to R100 million in small and medium SA companies. 64

65 Incentives The Tourism Support Programme. To stimulate growth within the tourism industry. The establishment of new or the expansion of existing tourism facilities. A tax exempt cash grant of between 10% - 30% of the qualifying investment cost up to a maximum grant of R30 million. The Tourism Enterprise Support Programme (TEP). To encourage and facilitate the growth and expansion of tourism enterprises. Applicable to Large operators, investors, SMMEs and historically disadvantaged entrepreneurs and enterprises (HDEs). Key Ratios used to measure business investment attractiveness Consumer confidence. Measures of consumer confidence indicate how Americans feel about the current economic environment and its prospects. If their mood is positive, they are more likely to open their wallets. If they are worried about their financial situation, they are more likely to postpone or forgo discretionary purchases. Casino visits and vacation travel, which may include hotel stays, are commonly regarded as discretionary expenditures. Room supply or construction levels. This information indicates how much new industry capacity is coming on stream. If industry supply grows faster than demand, this may signal trouble for industry revenue and profit growth. Revenue per available room (RevPAR). RevPAR is calculated as the number of rooms available, times the occupancy rate (percentage of rooms occupied), times the average room price in dollars. It measures dollars generated in room-sale revenue, on average, for each room available, both sold and unsold, on an industry-wide basis, as well as for individual companies, chains, and properties. Visitor levels. The number of visitors during a given period will indicate trends in the attractiveness of different travel destinations as well as popular seasons. Business & Government Rationale for Investing in Sector In terms of opportunity for growth and employment creation, Tourism probably ranks the highest. Globally tourism is growing, and notwithstanding the recent global economic crisis, international travel continues to expand year on year, as does the number of visitors to our shores. And the industry is not only driven by traditional tourists, like Europe, the US and Japan; more and more tourists are including those upwardly mobile individuals in developing countries. South Africa is a large tourist destination, and it is growing. KZN is one of the top tourist destinations within South Africa, with its warm coastline, spectacular mountain range, the Drakensburg (a global heritage site), its endless valleys and multi-terrain environment, its game parks and its well established hotels, catering, accommodation and venues. The year round temperate climate makes the province ideal to host recreational & sporting events or conventions that coincide with European winters. And tourism has many linkages with other sectors, and often result in positive spin-off s or developments. Positive benefits might include better infrastructure, such as roads, sports and leisure facilities or even better security that benefit other sectors not associated directly with the tourism industry. The tourism sector also provides a better business for local craftsman, providing income to more rural households. Other industries not directly associated with tourism benefit with larger tourist visits, such as restaurants and shopping malls. Besides its impact on economic growth and sustainable development, tourism is one of the sectors better positioned to deliver on jobs, perhaps the single most common issue of concern at this time. 65

66 Tourism creates opportunities for entrepreneurship and provides millions of direct jobs worldwide, as well as countless more through its multiplier effects on related sectors such as trade, manufacturing, construction or agriculture. It is already one of the largest employment sectors in many countries and a fast entry vehicle into the workforce for young people and women in both urban and rural communities. Overall Tourism ranks as the highest sector. Sector 4: Cultural and creative industry Description of sector The cultural and creative industry refers to a range of economic activities and services which are concerned with the knowledge and information of a country. The industry comprises of advertising, architecture, art, crafts, design, fashion, film, music, performing arts, publishing, R&D, software, toys, TV and radio. The creative industries have been seen to become increasingly important to measuring economic living standards, and the development of human creativity. Table 17: Key Statistics of the cultural and creative industry (SIC 94-96) Culture & Media SA KZN Gross value Added (2010, Rb) Market Growth ( , % ) Formal Employment ('000) Employment Growth ( ) 9.9 Employment to GDP (jobs per Rm) 5.9 Employment to GDP growth ( ) 6.8 Employment to Capital (jobs per Rm) 7.7 Employment to Capital Change ( ) 0.6 Remuneration as % of value add 35.1 Skills Intensity (% semi or unskilled) 19.2 Import Leakage (%) 7.7 Export (Rb) 0.0 Exports % of output 0.0 Multiplier Output 2.0 Multiplier GDP 1.1 Multiplier Income 0.5 Global Trends Globalization and connectivity are new realities that have brought profound changes in lifestyles worldwide. This is reshaping the overall pattern of cultural production, consumption and trade in a world increasingly filled with images, sounds, texts and symbols. There is a clear need to better grasp the complex interactions among the economic, cultural, technological and social aspects guiding the dynamics of the world economy and the way people live in the twenty-first century. In this era of transformation, creativity and knowledge are fast becoming powerful means of fostering development gains. In this context, the interface among creativity, culture, economics and 66

67 technology, as expressed in the ability to create and circulate intellectual capital, has the potential to generate income, jobs and export earnings while at the same time promoting social inclusion, cultural diversity and human development. This is what the emerging creative economy has already begun to do as a leading component of economic growth, employment, trade, innovation and social cohesion in most advanced economies. The creative economy also seems to be a feasible option for developing countries. If effective public policies are in place, the creative economy generates crosscutting linkages with the overall economy at macro and micro levels. It thus fosters a development dimension, offering new opportunities for developing countries to leapfrog into emerging highgrowth areas of the world economy. Creative industries are among the most dynamic emerging sectors in world trade. Over the period , trade in creative goods and services increased at an unprecedented average annual rate of 8.7%. Creative services in particular enjoyed rapid export growth at 8.8% annually between 1996 and It is clear that developed countries still dominate the global market for creative products. Nonetheless, many developing-country products are already benefiting from the creative industry boom, particularly in Asia. Unfortunately, however, the large majority of developing countries are not yet able to harness their creative capacities for development. In Africa, for instance, despite the abundance of creative talents, the creative potential remains highly underutilized. The continent s share in global trade of creative products remains marginal at less than 1 per cent of world exports despite sharp increases. As is the case for other developing regions, this is a reflection of both domestic policy weaknesses and global systemic biases. Local Trends & Industry Developments South African broadcasters have begun exploring opportunities to distribute local productions in the rest of Africa through direct sales and a form of bartering, where content is exchanged for advertising airtime. This is expected to increase the demand for locally produced television content South Africa has a vibrant, growing film industry that is increasingly competitive internationally. Local and foreign filmmakers are taking advantage of the country's diverse, unique locations as well as low production costs and favourable exchange rate, which make it up to 40% cheaper to make a movie here than in Europe or the US and up to 20% cheaper than in Australia. An example of the way in which development strategies can contribute to the achievement of MDGs is provided by the Creative Industry Development Framework in the Gauteng province of South Africa. This framework makes explicit the contribution of the creative industries to social development goals such as community participation in cultural activities; regional integration across Africa; poverty alleviation, particularly in previously disadvantaged communities and among the youth; and public-private partnerships in community-based cultural programmes such as indigenous dance and music, carnivals and festivals. Existing Projects in Sector in KZN In the promotion of the creative industries, artists and 46 arts and culture institutions will become direct beneficiaries within a budget of R18,540 million. The visual and performing arts, craft, theatre and film development sectors will be used to broaden the needs of the creative industry. 67

68 The department will invest R through the KwaZulu-Natal African Film festival and the Centre for Creative Arts festival to open up platforms for local content in film to be showcased. A total of R3.3 million has been allocated to various cultural associations and festivals such as South African Traditional Music Awards (SATMA), KZN Gospel Crown, MTN Jazz Festival, Hilton Arts Festival, the Ushaka Marine and Wildfees in order to extend the reach of the arts and culture to the community,. Cultural establishments like Indonsa Arts Centre, Stable Theatre, Bat Centre, Ekhaya, Gobhela, Infusion, Rorkes Drift, and a further six establishments Jambo, Khula,Osiweni, Uthungulu, Ladysmith, Mbazwana will be receiving funding with an overall budget of R4.8 million. The statistics of the Playhouse Company illustrate a positive trend against a backdrop of the global economic crunch with 84 productions, 346 performances, arts practitioners and persons participating. Its new mobile truck will cover rural areas taking the arts closer to the people and in the process opening new artistic spaces. Our KZNPO, through its performance of high-profile concerts, featuring of the cream of international and South African music talent, assists to brand our province and country positively. Its cadetship programme opens new doors for local students to enter the classical music genre through the community engagement and rural residency programme. The Playhouse Company and KZN Philharmonic Orchestra receive a combined budget of R15,197 million for 2011/12. Funds & Incentives available for Sector Incentives The state, via the National and Film and Video Foundation, the Industrial Development Corporation and the Department of Trade and Industry, is the chief investor in the local film production industry. The Department of Trade and Industry (DTI) offers industry-specific incentives to encourage local-content generation as well as attract international productions. The DTI announced revised film and television production incentives in March 2008, dropping the qualifying threshold to open the door for lower-budget productions from emerging filmmakers. The Location Film and Television Production Incentive aims to attract big-budget overseas film and television productions. It offers a 15% rebate to foreign-owned productions with a South African spend of at least R12-million. Other DTI initiatives aimed at developing the industry include: Capacity development for emerging production companies. Development of writers and editors through the DTI's Enterprise Development Programme. The establishment of five pilot programmes in different locations to address distribution infrastructure, local content and audience expansion. 68

69 Funds The National Film and Video Foundation (NFVF) offers funding for the production of films and documentaries through repayable loans or grants. It supports South African-owned production companies, and prioritises projects or organisations of national importance and proposals that contain local content and have empowerment or training components. It also funds education and training through various bursaries; awards development funding; and supports applications for marketing and distribution funds, allowing independent producers and distributors access to test screenings and film launches. The Industrial Development Corporation (IDC) seeks to create a sustainable film industry in which skills have been transferred to people from groups disadvantaged under apartheid and "home-grown" films are made and watched by South Africans. The IDC's Media and Motion Pictures Strategic Business Unit funds film, broadcasting and post-production projects. Assistance is usually in the form of loan finance. Its minimum participation is R1- million and no more than 49% of a project. Business Rationale for Investing in Sector The government has identified the film industry as a sector with excellent potential for growth. Although South Africa's contribution to global output stands at a mere 0.4%, the local film industry is getting stronger all the time. The benefits of a burgeoning film industry are clear, especially when considering incoming foreign exchange. Co-productions with international companies result in the direct investment of millions of Rands into the economy. South Africa has signed co-production treaties with four countries: Canada, Italy, Germany and the UK. This means that any official co-production is regarded as a national production of each coproducing country, making it eligible for any benefits or programmes of assistance available in either country. South Africa also has a memorandum of understanding relating to film with India. Sector 5: Transport & logistics Description of sector The transportation industry includes other modes of transport, such as trucking, railroad, pipeline, and water, which make up an important portion of overall transportation activity in an economy. The commercial transportation business is a service industry that moves raw materials, product parts, and finished goods across entire supply chains. It is an essential link among the extraction of natural resources, the fabrication of industrial, commercial, and consumer products, and the final distribution of goods to wholesalers, retailers, and end users. A variety of carriers engage in commercial freight transportation. Transportation services are segmented by type of product, length of haul, and speed of delivery. Each transportation mode rail, truck, air, or water tends to specialize in certain segments of the market. Global Trends The primary long-term trend in commercial transportation is the ongoing improvement of speed, service, flexibility, and area served, with costs declining as a proportion of the value of delivered 69

70 goods. Shipments that used to take several months and cost a fortune can now be delivered overnight for a reasonable sum. Each segment of the transportation industry plays an important role in delivering these improvements. Progress can be observed even on a year-to-year basis. Companies that advance these transportation improvements more than their competitors tend to win higher revenue market share. They do so by designing new methods of organization, employing technology more effectively, using resources efficiently, providing new and better client service, and expanding their geographic reach. These kinds of companies also adapt to external trends such as rising Internet-sourced and tracked deliveries, increasing global trade and offshore manufacturing, and the US economy s shift from heavy industry and low value-added products to products more oriented to the consumer and with higher added value. In the overall transportation industry, we believe that long-term growth and market share will be determined primarily by a segment s exposure to higher-value freight versus lower-value bulk freight. Over the long term, we expect that air freight, with its relatively high value and timeintensive freight profile, will gradually grow in market share. We forecast that trucking, with its blend of bulk and general freight will see steady market share, while railroads, with bulk freight representing the majority of business, will grow more slowly and thus gradually lose market share. Table 18: Key Statistics for Transport Sector Transport and Logistics SA KZN Gross value Added (2010, Rb) Market Growth ( , % ) Formal Employment ('000) Employment Growth ( ) 0.0 Employment to GDP (jobs per Rm) 4.8 Employment to GDP growth ( ) -1.5 Employment to Capital (jobs per Rm) 0.9 Employment to Capital Change ( ) -0.6 Remuneration as % of value add 33.8 Skills Intensity (% semi or unskilled) 27.5 Import Leakage (%) 7.8 Export (Rb) 0.0 Exports % of output 0.0 Multiplier Output 2.3 Multiplier GDP 0.9 Multiplier Income 0.4 The impact of globalization is most obvious on the air freight industry, which operates numerous international routes; faster-growing international traffic has recently surpassed purely domestic tonmiles. However, the railroad and trucking industries are also adjusting to the increasingly global nature of their customers supply and distribution chains. For example, increasing quantities of goods are being manufactured in Asia, transported in containers across the Pacific Ocean, transferred from ship to train and then hauled by truck to big box retailers. Thus, international 70

71 intermodal container shipments have been among the fastest-growing freight categories, boosting both railroad and trucking volumes at the companies that best serve this trend. Local Trends & Industry Developments Airports: The new King Shaka International Airport (KSIA) opened in Designed to cater for 7.5 million passengers at a cost of about R7 billion, the airport will create about direct and indirect jobs. Eighteen companies were involved in the construction of the airport. A major thrust in justifying the building of a new airport was the desire to stimulate cargo volumes, particularly in the agricultural sector. Dube TradePort. This forms part of the King Shaka International Airport project. It is estimated that the impact of the Dube TradePort (DTP) and related schemes will boost KwaZulu-Natal s economy by some R20.5-billion. Components of the DTP are King Shaka International Airport (KSIA), a trade port with a cargo terminal, a trade zone, a support zone, an agri-zone and an IT zone. Harbours: Durban Port: The harbour entrance-widening project, which began in 2007, was formally completed in February The new channel has been deepened and widened, allowing the likes of the Queen Mary II to enter Durban, which she did a month after the project was completed. Richards Bay: The phased expansion of the Richards Bay Coal Terminal (RBCT) continues apace. Transnet Freight Rail is committed to delivering more coal to the terminal as part of its upgrade. In 2009, RBCT exported 61.1 million tons of coal but the facility is on course to push capacity up to just over 91 million tons. Rail. Work on expanding capacity on the railway line between the coalfields of the Highveld and Richards Bay is advancing. The long-term goal is for Transnet Freight Rail to carry 92 million tons per year by 2011, an increase of 20 million tons over the current capacity. New trains equipped to run without switching electrical systems are being acquired by the rail entity. Roads. The South African National Roads Agency (Sanral) is introducing Freeway Management Systems and Intelligent Transport Systems at various locations throughout South Africa. In KwaZulu- Natal sections of the N2 and N3 highways are being equipped with more than 100 CCTV cameras and 18 viable message signs. Both systems are designed to reduce congestion and speed up response times when there are accidents or stoppages. Existing Projects in Sector in KZN The Trade Point Programme was initiated to assist small and medium size enterprises to participate in international trade, that is, to help them have their products access international markets. The Trade Point Durban started operating as a new venture in December 2006 Funds & Incentives available for Sector Incentives Richards Bay Industrial Development Zone (RBIDZ): The Richards Bay Industrial Development Zone has received the go-ahead to trade as an IDZ and consequently is on the look-out for investors. The provincial government has budgeted R57-million to support the mandate of the RBIDZ which is to make it a preferred investment destination. With unique logistical 71

72 advantages and favourable investment conditions, it is likely that companies will be looking seriously at what the RBIDZ has to offer. Tax incentive: Rolling Stock Depreciation: Encouragement of infrastructural development of rail transportation. Applicability Rolling stock, this is understood to mean trains, carriages and the like. Benefit Deduction of 20% per annum of the cost incurred in respect of rolling stock brought into use on or after 1 January Funds Industrial financing Transportation: Focuses on proactively identifying and developing market opportunities that result in the promotion of entrepreneurship, facilitation of transport links and access to financial services. Applicability Focus areas are: Transport services (road, freight, logistics, maritime, aviation and bus sector). Financial services (retail banking, acquisitions and commercial micro-finance). Other (security services, listed retail acquisitions and catering services). Preference will also be given to emerging or established entrepreneurs wishing to raise finance for a minimum loan of R1 million. Critical Infrastructure Programme (CIP) Infrastructure development For municipalities and companies constructing infrastructure. Between 10 30% of costs covered. Promote construction of key infrastructure for industrial development Key Ratios used to measure business investment attractiveness Tonne per kilometre (t/km). Unit of measure of goods transport that represents the transport of one tonne by road over one kilometre. The distance taken into account is the distance actually run. It excludes the distance covered when the goods road vehicle is being transported by another means of transport. Passenger traffic. The number of passengers travelling on either road, sea, rail or air. Business & Government Rationale for Investing in Sector The important role of good infrastructure in stimulating economic development and creating the climate for sectoral investment in the province cannot be overstated. The province has the busiest highway in the country, an extensive rail network and two of Africa s most important ports. Richards Bay is the biggest bulk seaport on the continent, while Durban is its busiest container port. The province has one international airport and several regional airports. KwaZulu-Natal s geographic location gives it the edge with regard to logistics. The province s position on the eastern seaboard gives it maritime access to countless destinations. Maintaining and expanding KwaZulu-Natal s transport and logistics sector is critical in maintaining and growing the global competitiveness of all the other industries within South Africa. Sector 6: Mining Description of sector The metal mining industry includes facilities engaged primarily in exploring for metallic minerals, developing mines, and ore mining. These ores are valued chiefly for the metals they contain, which are recovered for use as constituents of alloys, chemicals, pigments, or other products. In addition, the extraction and beneficiation of these minerals generate large amounts of wastes. The main 72

73 players in the precious metals industry are mining companies, refiners, fabricators, central banks, bullion dealers, and private investors. Operations in this industry aren't vertically integrated; companies that mine precious metals don't also refine or transform the initial product into its final form. A clear division of labour exists between the companies that extract metal from the Earth and those that refine, smelt, or otherwise alter the commodity for final sale at a later stage. Global Trends Precious metals are truly global commodities, and the industry has a worldwide reach. For example, North American gold mining companies own producing mines and explore for gold internationally, not just in the United States and Canada. Similarly, South African companies explore for gold outside of their own country. According to Gold Fields Mineral Services Ltd, the five largest gold-producing nations are South Africa, the United States, Australia, Canada, and China. Of the top 15 gold companies, five are based in South Africa, three in the United States, three in Canada, and two in Australia. Production in the gold industry is dominated by a relatively small number of companies. Yet the participants range from those yielding over four million ounces per year to those producing nothing at all. The three categories of gold production companies are exploration companies, development companies and production companies. Silver producers do not fall into distinct classifications because the metal is mostly the by-product of gold, lead, zinc, and copper production. In 2000, companies' silver yield ranged from the 11.7 million ounces excavated by Coeur d'alene Mines, North America's largest primary silver producer (i.e., whose primary product is silver), to the 12.3 million ounces uncovered Echo Bay Mines, a midsize gold company. Financing is the principal barrier to entry in precious metals mining, which is a highly capitalintensive enterprise. Large sums of money are required to construct mines and associated production facilities and to sustain the exploration and development needed to replenish reserves. The risks in precious metals mining are numerous, and long-term survival requires deep pockets. If we were to include exploration companies as an important part of the industry, broadly speaking, we could argue that the financial barrier to entry for precious metals is small. However, embarking on a business and surviving in it are two very different things. Thus, it would be more accurate to state that the financial barrier to entry for precious metals is small, while the obstacles to remaining in business are enormous. Political events may constitute significant barriers to entry in precious metals mining. Following the downfall of the Soviet Union and a worldwide movement away from state industry ownership, a large portion of the globe has been opened up for mineral exploration by private companies. In many instances, however, such areas are located in politically unstable nations. For now, many nations, anxious to attract capital for development, offer favourable deals to private producers. However tempting the terms of such pacts might be, the prospects of civil strife and possible nationalization of mining properties remain as threats. Only major producers have the financial wherewithal to risk making such pacts. In this respect, the political and financial barriers to entry overlap. 73

74 Rand (Billions) Rand 9Billions) Local Trends & Industry Developments South Africa is a world leader and key player in the global mining industry, especially with regards to platinum, gold, diamonds, coal and other base metals. The country is famous for its abundance of mineral resources, accounting for a significant proportion of world production and reserves. South Africa holds the world's largest natural reserves of gold, platinum-group metals, chrome ore and manganese ore, and the second-largest reserves of zirconium, vanadium and titanium. Figure 21: Output & Growth: KZN Mining Industry, constant 2005 prices Output Growth (% change) The sector spans the full spectrum of the five major mineral categories - namely precious metals and minerals, energy minerals, non-ferrous metals and minerals, ferrous minerals, and industrial minerals. Apart from its prolific mineral reserves, South Africa's strengths include an extremely high level of technical and production expertise, and comprehensive research and development activities. Figure 22: Employee Compensation KZN Mining industry, constant 2005 prices R,5.0 R,4.0 R,3.0 R,2.0 R,1.0 R,0.0 -R,1.0 -R,2.0 50% 40% 30% 20% 10% 0% -10% -20% -R,3.0 -R,4.0 Total Compensation Growth (% change) -30% -40% 74

75 The country has world-scale primary processing facilities covering carbon steel, stainless steel and aluminium, in addition to gold and platinum. It is also a world leader of new technologies, such as a ground-breaking process that converts low-grade superfine iron ore into high-quality iron units. With the growth of South Africa's secondary and tertiary industries, the relative contribution of mining to South Africa's gross domestic product (GDP) has declined over the past years. Nonetheless, the industry is continually adapting to changing local and international world conditions, and remains a cornerstone of the economy, making a significant contribution to economic activity, job creation and foreign exchange earnings. In 2009, South Africa's mining industry was the largest contributor by value to black economic empowerment (BEE) in the economy, in terms of the value of BEE transactions completed. The junior mining sector in South Africa was born of new legislation in the form of the Mining and Petroleum Resources Development Act of The law enforced a "use it or lose it" principle, stipulating that mining rights not used by mining companies to exploit minerals in the ground would revert back to the state. The legislation gave rise to the development of the junior mining sector in South Africa. Unused mining rights held by mining groups, but not used for years, were awarded to newly established junior companies that often showed themselves to be true mining entrepreneurs. Table 19: Key Statistics for the Mining Sector Mining SA KZN Gross value Added (2010, Rb) Market Growth ( , % ) Formal Employment ('000) Employment Growth ( ) 2.9 Employment to GDP (jobs per Rm) 5.5 Employment to GDP growth ( ) 2.8 Employment to Capital (jobs per Rm) 1.9 Employment to Capital Change ( ) -0.2 Remuneration as % of value add 36.3 Skills Intensity (% semi or unskilled) 77.1 Import Leakage (%) 7.2 Export (Rb) 7.9 Exports % of output 7.9 Multiplier Output 1.5 Multiplier GDP 0.4 Multiplier Income 0.2 The advent of the legislation saw the launch in the same year of the Nedbank South Africa Junior Mining and Exploration Index, an instrument tracking the performance of junior miners operating in South Africa. The index aimed to raise the profile of the sector that had been dominated by major mining houses for more than a century. The dominant companies include; BHP Billiton; Anglo 75

76 American; Impala Platinum; Anglogold Ashanti; Anglo Platinum; Goldfields; Sasol; Harmony and Kumba. The rich dark sands of northern KwaZulu-Natal contain the most important mineral resources of the province: the amount of titanium found in the ilmenite, rutile and leucoxene in the vicinity of Richards Bay and St Lucia represents the fourth-largest reserve of this mineral in the world. With the price of zircon going well above $1 200 per ton in March 2011 (compared to $800 in 2010), the province s two biggest producers Richards Bay Minerals and Exxaro/KZN Sands are expanding production. KZN Sands (an Exxaro subsidiary) is the other major mineral company operating in the uthungulu district. It focuses on smelting ilemnite to produce titanium slag and is a foremost black economic empowerment venture. It operates a mine at Hillendale (south of Richards Bay) which supplies a heavy minerals concentrate to a processing facility at Empangeni. Other products include pig iron, zircon (of which 100% is exported) and rutile. The northern region has deposits of aluminium and calcitic marbles. Some low-grade bauxite has been found in parts of the province, although sometimes in environmentally sensitive areas. Vein gold mining is undertaken near the northern border with Mozambique. The Umzinto goldfield has several sites where gold occurs, but mining has only ever been on a small scale. The Marble Delta Formation inland from Port Shepstone produces carbonates from three large quarries. High-grade material is used as filler in paint, paper, toothpaste, bread and plastic, lowergrade material is used in rubber, glass and fibreglass, and the third quarry provides limestone for the major NPC-Cimpor cement plant nearby. Approval was given in 2011 for the construction of a second plant at this site. Richards Bay Coal Terminal (RBCT) is situated in northern KwaZulu-Natal and currently has a design capacity to export 76Mt of coal annually. The majority of South Africa s export coal is shipped through it with the balance being shipped out of Matola in Mozambique and Durban Harbour. Shareholders in the RBCT company are the major exporters through the terminal with an additional 4Mt allocations going to 16 BEE companies that obtain 3 year contracts. These contracts are subject to performance reviews and are evaluated yearly. Existing Projects in Sector in KZN A major new initiative, the Community Responsible Mining Initiative (CRMI), seeks to redress this anomaly by bringing together key-role players and stakeholders - both from within the mining industry itself as well as from host communities - traditional leaders, civil society and local government, among others. Funds & Incentives available for Sector Funds Industrial financing for Mining and Beneficiation: Assistance for small- and medium-sized mining and beneficiation activities and jewellery manufacturing. Focus areas are: o Financial and technical assistance for the development of mining, beneficiation and metals projects in South Africa and the rest of the continent. o Financial assistance for junior and emerging mining houses and mining related activities such as contract mining. 76

77 o o Facilitating the acquisition of mining assets by historically disadvantaged persons (HDPs). Developing the South African jewellery manufacturing industry and optimising valueaddition beneficiation opportunities. Anglo-Khula Mining Fund is a joint venture initiative between Khula and Anglo American, which provides seed capital to junior mining projects at pre-feasibility and precommissioning phases. Incentives National Framework for Sustainable Development - The team responsible for developing this Sustainable Development strategy document has provided comprehensive comment and opinion on the National Framework for Sustainable Development (NFSD). Thus, Sustainable Development in the mining sector and its critical linkage with NFSD has been recognised and the necessary integration will be implemented. Key Ratios used to measure business investment attractiveness Worldwide mine production. Mines are the principal source of supply for precious metals. Therefore, to understand the precious metals industry, one of the most important statistics to track is worldwide mine production. Worldwide production data on gold and silver are published on an annual basis. Producer sales. A common practice among gold producers since the 1990s has been to sell some of their output on the futures market to hedge against weak prices. Such sales are an important barometer of producer sentiment. For example, if producers are fearful that gold prices will fall, they'll likely respond by selling more output forward in the futures market. Fabrication demand. The principal demand for precious metals comes from fabricators of jewellery and from industrial consumers. Demand from these sources for both gold and silver has regularly outstripped mine supply in recent years. Business Rationale for Investing in Sector The mining industry has large backward linkages to various high employment and low skilled intensity industries. Because of South Arica s mineral resources and competitive advantage the mining industry acts as a large support base for South Africa s development. The government has targeted the downstream or beneficiated minerals industry as a growth sector, and where the commercial opportunities exist, downstream beneficiation is already taking place. Richard Bay Mineral's social investment initiatives have benefited the surrounding areas, transforming them into a thriving community. The company employs some permanent staff and contractors in various positions, providing jobs and training for the local population, while also building skills and developing a sense of community and achievement within. It is for this reason that upstream and downstream industries connected to the mining industry within KZN or the rest of South Africa must continue to provide support for the industry. Downstream industries include the local market but also more importantly, international markets. 77

78 Rand (Billion) Sector 7: Construction Industry Description of sector Houses, apartments, factories, offices, schools, roads, and bridges are only some of the products of the construction industry. This industry's activities include the building of new structures as well as additions and modifications to existing ones. The industry also includes maintenance, repair, and improvements on these structures. The construction industry is divided into three major segments. The construction of buildings, Heavy and civil engineering construction and Specialty trade contractors. Construction usually is done or coordinated by general contractors, who specialize in one type of construction such as residential or commercial building. They take full responsibility for the complete job, except for specified portions of the work that may be omitted from the general contract. Although general contractors may do a portion of the work with their own crews, they often subcontract most of the work to heavy construction or specialty trade contractors. Global Trends The construction industry has been strongly affected by the credit crisis and recession that began towards the end of Housing prices fell and foreclosures of homes rose sharply, particularly in overbuilt areas of certain economies. New housing construction, while still ongoing, dropped significantly. The recession is expected to impact other types of construction as well. Retailers are refraining from building new stores and State and local governments are reducing spending. However, as energy costs have risen, some companies are finding it necessary to build or renovate buildings that are not energy efficient. "Green construction" is an area that is increasingly popular and involves making buildings as environmentally friendly and energy efficient as possible by using more recyclable and earth-friendly products. Figure 23: Output & Growth: KZN Construction industry, constant 2005 prices R,10.0 R,7.5 R,5.0 R,2.5 R,0.0 -R,2.5 40% 30% 20% 10% 0% -10% -R,5.0-20% -R,7.5 Output Growth (% change) -30% Local Trends & Industry Developments The South African building industry is an active and vibrant part of our economy. In combination with economic growth and the national/provincial government's infrastructure thrust, major 78

79 Rand (Billions) refurbishment projects have occurred in city centres around KwaZulu-Natal. The construction sector is entering into period of sustained growth, that has not been experienced by most people currently employed in the sector and will test the ability of the sector to react to demand side pressures and the ability of downstream industries to put the appropriate supply side measures in place. The construction of homes and resorts has led the growth in the provincial construction sector and looks set to continue for a decade. Total construction increased 12.9% in real terms for the year to March 2005 and a further 16.4% in This high level of growth was supported by sustained growth in the residential (24.9%) and non-residential (10.1%) construction sector on the back of the sustained low interest rates. The Soccer World Cup soccer boom is over, but the newly built King Shaka International Airport is sparking another boom in commercial and residential property developments in the area north of Durban. Whereas the first boom that came to Umhlanga and beyond was concentrated on holiday homes, the current building spurt is much more multi-dimensional. In KwaZulu-Natal, the volumes of property development projects, both residential and resort have had a positive effect on new business in terms of management and securing new management contracts. All this has had implications for staffing, capacity, marketing and sales, as well as service delivery. Moreland has large number of projects underway. KwaZulu Natal has plenty of well developed suburbs with good quality housing to suit most income groups. The Department of Housing is being proactive in addressing the housing shortage in informal settlements. Figure 24: Employee Compensation: KZN Construction industry, constant 2005 prices R,4.0 R,3.0 R,2.0 R,1.0 R,0.0 -R,1.0 -R,2.0 40% 30% 20% 10% 0% -10% -20% -R,3.0 Total Compensation Growth (% change) -30% Existing Projects in Sector in KZN The government's Expanded Public Works Programme has also created many opportunities for contractors. The EPWP is a nation-wide programme covering all spheres of government and stateowned enterprises that aims to draw significant numbers of unemployed into productive work accompanied by training so that they increase their capacity to earn an income. One of the key focus areas of the EPWP is the replication of best practice programmes, and the Zibambele Road maintenance programme of the KwaZulu-Natal Department of Transport has been identified as one such programme. This programme currently provides work for more than people who maintain sections of rural road network across the Province. 79

80 Table 20: Key Statistics for the Construction Sector Construction SA KZN Gross value Added (2010, Rb) Market Growth ( , % ) 7.0 Formal Employment ('000) Employment Growth ( ) -1.7 Employment to GDP (jobs per Rm) 11.6 Employment to GDP growth ( ) -8.1 Employment to Capital (jobs per Rm) 21.4 Employment to Capital Change ( ) -9.0 Remuneration as % of value add 52.7 Skills Intensity (% semi or unskilled) 74.3 Import Leakage (%) 9.8 Export (Rb) 0.0 Exports % of output 0.0 Multiplier Output 3.1 Multiplier GDP 0.9 Multiplier Income 0.4 Funds & Incentives available for Sector Funds SETA initiatives for construction workers Funds from other initiatives indirectly apply to construction Incentives The Youth in Construction initiative focuses on the importance of the construction industry as a national asset and its critical link to skills development, infrastructure creation and service delivery. A number of Industry stakeholders participated by manning stands and interacting with youths enlightening them as to the various career paths available within the sector. In KwaZulu-Natal, the interest has grown from 2200 learners in 2009, to just over 3500 in The Youth in Construction initiative is an industry initiative of the Construction Industry Development Board (CIDB), the SA Federation of Civil Engineering Contractors (SAFCEC), the SA Institution of Civil Engineering (SAICE), the Master Builders Association (MBA) and FET Colleges in support of the National Construction Week of the Department of Public Works. 80

81 The NCDP is a government programme comprising of a partnership between the CIDB, national and provincial public works and other willing stakeholders. The participating stakeholders commit their efforts and resources to develop previously disadvantaged contractors, by: establishing an enabling environment for contractor development; enhancing and strengthening contractor development mechanisms, including emerging contractor development programmes (ECDP s), joint ventures (JVs) and other appropriate mechanisms; facilitating performance improvement of contractors; and supporting the creation of a pool of skilled artisans, supervisors, technicians and technologists for the construction industry. Construction Education and Training Authority (CETA) was established in April 2000 after the promulgation of the Skills Development Act, No.97 of 1998 which aims to develop and improve the skills of the South African workforce. CETA s primary objective is to influence the course of training and skills development in the construction sector. Various skills development projects and learnerships are initiated with a view of developing a pool of skilled and motivated construction workforce whose skills are recognised and valued in terms of the National Qualifications Framework (NQF). Key Ratios used to measure business investment attractiveness Interest rates. In assessing the overall industry outlook for homebuilders, the level and direction of interest rates are typically the most important factors in determining future housing market trends. For example, the most recent highly favourable building cycle, which peaked in the second quarter of 2005, included a multiyear period of historically low job growth, as well as consumer confidence that had witnessed a precipitous decline. Additional factors including a recession at the beginning of the decade and global unrest following the terrorist attacks of September 11, 2001 failed to materially dampen demand for new homes. GDP and the economic cycle. The growth of GDP is an important macroeconomic indicator of the economy s general health, which, in turn, strongly affects the building industry. Excessive economic growth can be a precursor to inflation; therefore, the Federal Reserve pays strict attention to GDP. Business & Government Rationale for Investing in Sector Construction is a key industry in any country. Investment in productive capacity in a country, or what economists term capital stock, requires construction. This includes the construction of infrastructure projects like roads, rail networks, ports & harbours, airports, electricity and water provision, and other municipal service requirements, but it also includes all private demand for construction like plant, factories, buildings, warehouses, and retail and office parks. Finally it also requires the construction of residential buildings. The private component is therefore cyclical and completely dependent on overall economic demand and confidence. As such it is currently undergoing a slow period, but over time this will change. On the other hand the last few years have been characterised by strong government investment and large capital intensive sector projects which have to some degree compensated for the lack in private demand. In the future construction in public corporations such as Eskom and Transnet seem set to stay relatively strong, if tapering off slightly. However the Government s commitments to increased service deliver have been stepped up, as witnessed by the 81

82 latest budget allocation. Any efforts to drive SA forward will require investment in infrastructure and improved service delivery, and this will require a strong construction sector. On a broader level construction is important because it has a great deal of opportunity for SMEs and the employment of semi-skilled and unskilled individuals. Geographically demand is also widespread, meaning there are opportunities in rural areas or those far from the main municipalities. It also has low barriers to entry and limited start-up capital requirements in certain sub-sectors. Given the large number of low to medium skilled people the industry employs as well as the linkages to other industries downstream such as retail, commercial or public infrastructure, and upstream industries such as basic metals and chemicals the industry is an important economic driver for SA. Sector 8: Call Centres & Business Process Outsourcing (BPO) Description of sector Business process outsourcing (BPO) is a subset of the outsourcing industry that involves the contracting of the operations and responsibilities of specific business functions a third-party service provider. In the contemporary context, it is primarily used to refer to the outsourcing of business processing services to an outside firm, replacing in-house services with labour from an outside firm. BPO is typically categorized into back office outsourcing - which includes internal business functions such as human resources or finance and accounting, and front office outsourcing - which includes customer-related services such as contact centre services. The BPO industry's focus sectors include financial services, insurance and telecommunications, with outsourced processes including aftersales services, data capture and conversion, accounting, benefits administration, human resource functions, and website design and development. BPO that is contracted outside a company's country is called offshore outsourcing. BPO that is contracted to a company's neighbouring (or nearby) country is called near-shore outsourcing. Given the proximity of BPO to the information technology industry, it is also categorized as an information technology enabled service or ITES. Knowledge process outsourcing (KPO) and legal process outsourcing (LPO) are some of the sub-segments of business process outsourcing industry. Global Trends Significant global integration and consolidation is taking place in the BPO space and Indian BPO companies must factor in this trend to get their strategies right. Having established a brand that connotes quality and lower cost, the Indian BPO sector has emerged as a dominant global player and is poised to be the main beneficiary of this aggregation opportunity. Some of the changes happening outside and within the Indian BPO industry are rapid but subtle, and likely to be overlooked. These changes need to be factored in by BPO companies to get their strategies and decision making aligned to various opportunities which exist in the global market. According to NASSCOM, the BPO sector is looking at improving productivity and providing greater value to customers. Companies also need to combat competition from other emerging destinations such as the Philippines and China, which are also trying to replicate our model. The Yuan has appreciated less than the Rupee and the Chinese government has been offering various incentives to its BPO companies. By and large, people here have realized that the rupee-dollar rate is impacted not by any specific action that a country takes but by being a part of the global environment. 82

83 The evolution of platform BPO is actually a gradual shift from the earlier models of BPO. However, platform is in a way BPO on a cloud model and since this is the way of the future, it is also most likely to succeed. Another reason why platform BPO will succeed is the inherent benefit to the clients in terms of low capital expenditure as well as transparency in pricing. Therefore, whether platform BPO is a win-win solution for all is yet to be seen but surely a model that will see exponential growth in the next few years. Local Trends & Industry Developments For international firms, South Africa slots in between near-shore locations such as Canada, Mexico or Eastern Europe, which offer close proximity as well as cultural affinity to domestic markets, and more traditional offshore locations, such as India and the Philippines, that offer cheap labour. South Africa has many factors working in its favour, including: World-class service levels of call centre staff. A broad base of management and service provider expertise, coupled with extensive financial services expertise, particularly in insurance, mortgage and loan processing and collection. Time-zone compatibility with Europe. High rates of fluency in English, coupled with neutral English accents that are easily understood in Western markets. A favourable exchange rate. Strong government support. State-backed incentives, such as start-up and expansion grants and discounted telecommunications prices. An advanced and growing telecommunications industry. South Africa's commitment to the BPO industry was underscored in 2007 by the decision to build a R125-million, seat call centre at the Coega Industrial Development Zone outside Port Elizabeth in the Eastern Cape. The BPO Park covers five hectares in Coega's business service precinct and includes training facilities and recreational space. The managing company said the space was designed to cater for various scenarios and could accommodate numerous different investors. The business process outsourcing sector (BPO) contributed R1.7-billion to South Africa s economy in This is according to the national agency promoting business processing outsourcing (BPO) in South Africa. The industry is growing because the national Department of Trade and Industry has a generous incentive scheme that is attracting international investors. Under this scheme, every 50 jobs created between 2011 and 2014 will attract R in state subsidy. There is a sliding bonus for operations that create more than 800 jobs. This makes South African operations some 60-70% cheaper than similar operations in the UK. The Everest Research Institute estimates that South Africa could create jobs by Whereas the country had only international call centre operators in 2008, by 2010 there were About 54% of South Africa s overseas business is with UK call centres. KwaZulu-Natal is positioning itself as a destination for call centres and business-process outsourcing. A seat KZN BPO Park is planned for Dube TradePort, the blueprint of which was unveiled in 83

84 April The majority of the KwaZulu-Natal s 61 call centres are located in Durban but opportunities in Mount Edgecombe and Umhlanga are growing. Blake & Associates headquarters is in Mount Edgecombe. Two 700-seater operations cater exclusively to major clients Nedcor and MTN. Financial services are the focus of major operator Direct Channel Holdings while BizWorks, which operates in the CBD, has a 230-seat operation concentrating on telesales, Internet and telecommunications. Daly Contact Centre Solutions intends enlarging its Mount Edgecombe facility from 150 seats to 500 seats. Table 21: Key Statistics for the Business Services Sector (includes BPO) Business Services (BPO) SA KZN Gross value Added (2010, Rb) Market Growth ( , % ) 4.7 Formal Employment ('000) Employment Growth ( ) 10.0 Employment to GDP (jobs per Rm) 8.6 Employment to GDP growth ( ) 5.3 Employment to Capital (jobs per Rm) 3.5 Employment to Capital Change ( ) 7.9 Remuneration as % of value add 29.7 Skills Intensity (% semi or unskilled) 16.5 Import Leakage (%) 3.5 Export (Rb) 0.0 Exports % of output 0.0 Multiplier Output 1.7 Multiplier GDP 0.9 Multiplier Income 0.4 More than R1-million has been generated in a single year by the 15 disabled call centre operators working for the ethekwini Municipality Traffic Fines Call Centre. The national Department of Trade and Industry has identified 22 municipalities nationwide, including in KwaZulu-Natal, that are particularly well suited to hosting call centres. The department believes that factors working in South Africa s favour are its good regulatory framework and infrastructure and the country s sophistication in the fields of financial services, insurance and telecommunications. Existing Projects in Sector in KZN Funds & Incentives available for Sector Funds TIKZN points out that the coastal province has very low attrition rates among its call centre staff complement and lists a number of organisations that are actively supporting new business development: KZN Growth Fund, 84

85 Ithala Development Finance Corporation, Durban Investment Promotion Agency The ethekwini Municipality. Incentives A government-backed BPO support programme, launched in 2007, aims to enhance South Africa's competitiveness and includes a budgeted R1.1-billion in investment incentives. The plan focuses on: o A broad-based marketing strategy. o A government support programme which includes an investment grant and training subsidies. o A developmental pricing framework for telecommunications. o Competitive advantages Business Process Services (BPS) Incentive - To attract investment in the BPS sector that creates employment opportunities through offshoring activities. Aimed at local and foreign investors (new and expanding projects) that create jobs in South Africa to serve offshore clients. A total grant of up to R per offshore job created, claimable against operational expenditure. The grant will be payable over a period of three years. Additional bonus structures will be applicable for projects creating more than 400 or 800 offshore jobs respectively. Business Rationale for Investing in Sector The government is taking steps to ensure cheaper and more widely available bandwidth capacity, which will allow cheaper international phone calls. Major projects are also under way to lay submarine fibre-optic cables along both the east and west coasts of Africa to boost the continent's connection with the rest of the world. Identified as a key sector in the government's strategy to boost the country s economy and create employment. South Africa is becoming a favoured international location for business process outsourcing and offshoring due to companies worldwide responding to increasing costs and efficiency pressures. Cross Cutting Policies In addition to the sectors there are a number of cross cutting policies that have a lot of attention dedicated to them in the IPAP2, NGP and various other industrial policies strategies and initiatives. Broadly these policies tend to fall into 4 main categories, namely: The green economy Infrastructure Development International Trade Skills Development These four policies involve interventions and incentives which can apply across sectors. In some cases the policies are closely related to a sector, for example the green economy is closely related to developments in the electricity, gas and water sector as well as the petroleum sector. It is also, however, also related to the transport sector (pipelines), the mining sector and manufacturing sector 85

86 (for example energy efficiency), tourism sector (green tourism), construction sector (building standards), electrical machinery (solar water geysers, smart meters etc), and the automotive sector (emissions standards, catalytic converters etc). Similarly infrastructure development is closely related to construction, transport, electricity, gas and water and agriculture. Skills development tends to be across all sectors, and whilst international trade might be thought of as only applying to export orientated sectors, it also applies to import competing sectors. Hence international trade and trade policy is closely aligned with industrial policy, as well as macroeconomic policies such as those set by the National Treasury and the SARB around such macro variables as current account, currency and foreign exchange reserves. 86

87 Economy Structure & Indirect Impacts One of the most commonly used metrics to evaluate overall economic impact is that of indirect or induced impacts. These impacts are usually measured through economic multipliers, input output analysis, or a related modelling process, and make use of either input output (supply-use) tables or a social accounting matrix (SAM). It is important to measure not only direct benefits from an investment, but also indirect benefits. Economic effects are measured not only for the initial change in business activity but also for related subsequent economic transactions through the use of economic multipliers. Direct economic impacts are those recorded directly at the company/project/industry in question (the capital value of a project, the amount of turnover of the company, the number of people that company employs, the amount of tax it pays etc). Indirect impacts are those which are as a result of the activities of that company, but not measured directly (financially or another metric) i.e. when an employee spends his/her money elsewhere thereby increasing demand for another company/sector s output. Indirect multipliers measure business-tobusiness transaction while induced multipliers measure the effects of employee spending. What is a SAM One way of depicting the economy is the circular flow diagram (Figure 25), which captures all transfers and real transactions between sectors and institutions. Productive activities purchase land, labour, and capital inputs from the factor markets, and intermediate inputs from commodity markets, and use these to produce goods and services. These are supplemented by imports (M) and then sold through commodity markets to households (C), the government (G), investors (I), and foreigners (E). In the circular flow diagram, each institution s expenditure becomes another institution s income. For example, household and government purchases of commodities provide the incomes producers need to continue the production process. Additional inter-institutional transfers, such as taxes and savings, ensure that the circular flow of incomes is closed. In other words, all income and expenditure flows are accounted for, and there are no leakages from the system. Figure 25: Circular Flow of Funds in an economy Factor Earnings (Value Add) Factor Markets Domestic Private Savings Indirect Taxes Direct Taxes Fiscal Surplus Productive Activities Households Government Investment Intermediate demand Consumer Spending Social Transfers G Spending Sales Income Commodity Markets Remittances Investment Demand Capital Transfers Exports Imports Rest of the World 87

88 Income Rows Labour 1 Labour 2 Capital A SAM is also a representation of the economy. More specifically, it is an accounting framework that assigns numbers to the incomes and expenditures in the circular flow diagram. A SAM is laid out as a square matrix in which each row and column is called an account. The table below shows the SAM that corresponds to the circular flow diagram. Each of the boxes in the diagram is an account in the SAM. Each cell in the matrix represents, by convention, a flow of funds from a column account to a row account. For example, the circular flow diagram shows private consumption spending as a flow of funds from households to commodity markets. In the SAM, it is entered in the household column and commodity row. The underlying principle of double-entry accounting requires that, for each account in the SAM, total revenue equals total expenditure. This means that an account s row and column totals must be equal. Table 22: The SAM explained Expenditure Columns Activities Commodities Factors Households Government Savings & Investment Rest of the World Total 1 2 n 1 2 n 1 2 n Activities Commodities Factors Households 1 2 n 1 2 n Labour Labour Capital 1 2 n Intermediate Demand Value-added Domestic Supply Factor Payments to Households Consumption Spending (C) Recurring Government Spending (G) Social Transfers Investment Demand (I) Export Earnings (E) Net Foreign Remittances Activity Income Total Demand Total Factor Income Total Household Income Government Sales taxes & Import tariffs Direct Taxes Net Foreign Government Grants & Loans Income Savings & Investment Rest of the World Total Gross Output Import Payments (M) Total Supply Total Factor Spending Private Savings Total Household Spending Fiscal Surplus (or deficit) Government Expenditure Total Investment Spending Current Account Balance Foreign Exchange inflow Total Savings Foreign Exchange Outflow The SAM in Table 22 shows only single activity and commodity rows and columns. However, a SAM generally contains a number of different activities and commodities. For example, activities may be divided into agriculture, industry, and services. What are multipliers? An exogenous demand-side shock to an economy, refers to a change in demand for a particular good/service from something external to the normal course of business. In the context of a SAM we are referring to changes in export demand, government spending, or investment demand. The impacts of these shocks have both direct and indirect effects. Direct effects are those pertaining to the sector that is directly affected by the shock. For example, an exogenous increase in demand for sugarcane from KZN (whether from the rest of SA or international) will impact exports and will have a direct impact on the agricultural sector. However, it may also have indirect effects stemming from agriculture s linkages to other sectors and parts of the economy. These indirect linkages can, in turn, 88

89 be separated into production and consumption linkages, or first round, second round and so on. When we add up all direct and indirect linkages, we arrive at a measure of the shock s multiplier effect, or how much the initial direct effect is amplified or multiplied by indirect linkage effects. To understand the linkages that one sector in an economy has with another, one needs to understand how much intermediate inputs a sector uses to produce its output. The intermediate inputs are outputs from other sectors, or imports. The combination of these intermediate inputs and imports, along with the use of factors of production (capital, labour, land etc), and the ratio s at which they are combined are determined by the sectors production technologies. These ratio s (or technical coefficients) are contained in the input output (inter-industry) portion of the SAM, and can be differentiated into forward and backward linkages. Backward linkages refer to the additional inputs required by producers to supply additional output to meet the increased demand, and taking the earlier example of sugarcane could include fertilizers, additional machinery/tractors and even fuel for transport. This demand would then stimulate production in other sectors or increase imports depending on where the inputs are sourced. The more local inputs a sector uses the stronger its backward linkages. Forward linkages, on the other hand, refer to the supply of additional inputs to other, upstream, sectors. More sugarcane or sugar could be supplied to food processing industries for example, potentially stimulating manufacturing production and kicking off another round of indirect impacts. How are SAM multipliers different to IO Multipliers and why use them? A SAM is different from an input output matrix because it not only traces the income and expenditure flows of activities and commodities, but it also contains complete information on different institutional accounts, such as households and the government. Households are usually the ultimate owners of the factors of production, and so they receive the incomes earned by factors during the production process. Households are also usually the largest single contributor to consumption spending (bigger than Government and Investment spending) and hence are critical to stimulating an economy. Traditional input-output multipliers only measure the effects of production linkages and do not factor in the linkages through higher wages and income earned by the factors of production, and ultimately by households. Depending on the share of tradable and non-tradable goods in the typical household s consumption baskets, local producers benefit from the greater demand for their products. Sugarcane farmers buy groceries and clothes, spend money on education, health, and eat out at restaurants. SAM multipliers therefore give one a more complete picture of the linkages and flow of funds around an economy, and the output multipliers tend to be higher than the multipliers calculated through input-output tables. The consumption multipliers are often referred to as induced effects. SAM multipliers will calculate direct, indirect and induced effects for the first round, second round and all subsequent rounds. Some important points about Multipliers 1. As it is not possible to say when the economy will return to equilibrium, following an exogenous shock, and by what time all impact rounds will be completed a multiplier cannot give a definitive timeframe for the impacts to be felt. 2. The size of a multiplier depends on the structural characteristics of an economy. Farmers who have received more income thanks to the stimulus might buy more groceries and clothes, but they also buy cars, televisions and overseas holidays which may have a higher percentage of imports or money accruing to foreign companies/households. This is an important consideration in any multiplier analysis, particularly that of a provincial economy where a large portion of goods are imported from neighbouring provinces. Funds spent on 89

90 imports effectively leave the local economy and the multiplier effect stops this is referred to as import leakage. The larger the proportion of imports, the larger the import leakage and the smaller the multiplier. 3. Taxes can be thought of in much the same way as imports, as a leakage. Although it is true that much of the funds might be reinvested in the economy there are many funds which will accrue to National Government, or will not be used directly to purchase goods/services or pay wages. Hence money paid through tax is normally considered outside of multiplier analysis. 4. There are 3 main types of multipliers a. Output multiplier: combines all production and consumption direct & indirect impacts and calculates the net impact on production (output) across all sectors. b. GDP multiplier: measures the total change to value add in activities, as measured by change to payments to factors of production. Because we are looking at value add only, a GDP multiplier removes some of the double counting of an output multiplier, and hence is usually much lower. c. Income Multiplier: measures the total change in households income 5. A large criticism of multipliers is that they do not consider constraints that might be present in an economy. A standard SAM has no price aspect to it, and makes a number of assumptions such as constant returns to scale or fixed ratios of input coefficients. There is an implicit assumption that when there is an increase in demand, supply will be able to respond and the sectors supplying the required inputs will be able to up production sufficiently. This assumption also assumes that a) the existing production technology (the proportion and ratio at which different inputs are combined to produce a unit of output) will remain the same, and b) the pattern of consumption (or domestic demand for products) will not alter as incomes change. In reality there may be a number of constraints that might prevent the growth of sector, or alter production/consumption patterns. What does the KZN SAM look like? As discussed earlier, a SAM is a representation of the flow of funds in an economy. As a result it provides an excellent picture of the structural make-up of an economy, which sectors are more or less inter-linked with other sectors in the province, how much each sector relies on imports or domestic employees, how much each sector contributes to the province, where people earn their incomes and how they spend it. As SAMs are particularly data intensive and take a long time to compile they are usually only compiled irregularly, and updated infrequently. However the structural aspects of an economy tend to change only very gradually and thus it is considered acceptable to use a SAM that may be a few years old. In this analysis we have made use of the national SAM (from SARB) which was for the 2005/06 period but released in 2009, and the DBSAs KZN SAM for the 2006 period. The figure below shows the activities (or production) accounts of the input output portion of the KZN SAM, dividing the gross output of each sector into value add and intermediate inputs. Value add is then divided into the payments for labour and capital. In effect this shows the structure of each sector, how much of the value of output is linked with other sectors (payments for intermediate inputs) how much is paid to labour, and how for interest, dividends and profits (capital payments). The larger the portion paid to intermediate inputs the larger the backward linkages with other sectors in the economy, whilst the larger the portion paid to labour the larger the forward linkages with household consumption. As can be seen from the figure, some sectors tend to use a lot of intermediate inputs in their production processes, thus relying on upstream industries more heavily. Transport Equipment in 90

91 KZN, for example, has about 88% of the value of its output encapsulated in the payments made to other sectors for their intermediate outputs, 5.5% goes to wages and salaries and the remainder, 6.5% goes to private business enterprises, in the form of interest, profits or dividends. This is similar to the technical coefficients of the transport equipment sector in the national SAM showing 85% to intermediate inputs, 9% to wages and salaries and 7% to capital. If one examines the sector in a little more detail, one discovers that much of the intermediate inputs (about 75%) actually come from other output from the transport equipment sector, or in other words, parts, components and equipment for the motor vehicle or other transport equipment producing companies. This shows a cluster effect, with tightly integrated supply chains. One can think of the Toyota Plant in Durban and what the inputs are to the assembly lines. The transport sector also relies on output from the leather sector, the basic metals sector, chemicals sector, machinery sector and the electrical machinery & appliances sector. Figure 26: Ratio of Inputs to total inputs per sector in KZN Business Activities Insurance Coal Mining Personal Services Sugar Cane Farming Beverages & Tobacco Publishing & Printing Trade Forestry Electricity Other Manufacturing Other Agriculture Other Food Products Other Mining Communications Transport Services Livestock Farming Furniture Non-Metallic Minerals Dairy Farminig Wood and Products Water Real Estate Structural Metal Products Other Metal Products Accomodations Rubber Products Paper andproducts Electrical Machinery Chemicals and Products Dairy Products Basic Metal Products Machinery and Equipment Communication, Medical, Electrical Equip Textiles, Clothing, Footwear Construction Grain Mill, Bakery & Animal Feed Petroleum Transport Equipment Meat, Fish, Fruit, Vegetables Intermediate Inputs Wages & Salaries Capital 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 91

92 Other sectors that tend to rely a lot on intermediate inputs include: Food & food processing (including dairy, Bakeries & Animal Feed); Construction; Textile, clothing and footwear; Chemical products; Basic metals, and other types of manufacturing. These sectors would therefore tend to have higher inter-industry linkages and by extension, higher output multipliers. However the multiplier impact also depends critically on the so-called leakages import and/or tax leakages. Critical is what portion of output is locally produced and what is imported from elsewhere either from other provinces in South Africa or from other countries. The figure below shows the split in final supply of a sector between local production, imports from other provinces in South Africa, imports from abroad, different types of taxes paid and trade or transport costs. The transport equipment sector relies on a significant proportion of imports from both other provinces in South Africa and from abroad and hence the knock-on impact from backward linkages is thus often lost through the demand for intermediate inputs being fulfilled by producers outside of KZN. Figure 27: Ratio of outputs to total outputs per sector in KZN Electrical Machinery Communication, Medical, Electrical Equip Coal Mining Other Mining Trade Other Manufacturing Sugar Cane Farming Paper andproducts Meat, Fish, Fruit, Vegetables Transport Equipment Petroleum Rubber Products Machinery and Equipment Structural Metal Products Non-Metallic Minerals Business Activities Other Food Products Electricity Other Metal Products Chemicals and Products Wood and Products Accomodations Transport Services Basic Metal Products Other Agriculture Beverages & Tobacco Real Estate Furniture Personal Services Livestock Farming Insurance Publishing & Printing Dairy Products Grain Mill, Bakery & Animal Feed Textiles, Clothing, Footwear Communications Water Forestry Dairy Farminig Construction Local Production Imports from RoSA Imports international Taxes Trade/transport costs 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 92

93 Basic Metal Products Chemicals and Products Transport Equipment Textiles, Clothing, Footwear Paper andproducts Transport Other Agriculture Business activities Machinery & Equipment Communications Real estate Other Mining Trade Petroleum Meat, Fish, Fruit & Vegetables Buildings & Construction Wood and Wood Products Personal Services Other Metal Products Electrical Machinery & Apparatus Insurance Electricity Non-Metallic Minerals Water Mill, Bakery & Animal Feed Other Food Products Dairy Products Comm, Medical, Electrical Equip Coal Mining Forestry Other Manufacturing Dairy Farming Structural Metal Products Publishing & Printing Rubber Products Beverages & Tobacco Livestock Farming Accommodation Furniture Sugar Cane Farming Construction on the other hand tends to rely mainly on outputs from local producers, and hence the output multiplier effect is greater than that of the transport sector. Other sectors which rely more on local output include (amongst others): Dairy farming & Dairy Products; Forestry; Textiles, clothing & footwear; Bakeries & Animal Feed; Furniture and other Agriculture. When one combines these two charts, one gets a better understanding of where the output multipliers come from for example: The transport sector has 85% of economic payments (expenditure) incurred during production flowing to intermediate outputs but only 50% of that is directed towards local industry. Hence for every R1 of increased demand for transport equipment (final demand) in the province, only 45c will go directly to local producers. (Indirect impacts are shown later in the multiplier analysis) The construction sector has 77% spent on intermediate inputs and 85% on local producers. For every R1 of extra demand for final output, 67c will accrue to local producers directly. So far we have examined the backward linkages, but there are also forward inter-industry linkages. That is to say that the increased output of a sector can potentially benefit downstream sectors or those industries that rely their output as an intermediate input. Increasing the output of a sector with many forward linkages could therefore benefit downstream industries depending on price impacts, existing supply constraints and the demand for the downstream industries product. The chart below shows how much of a sector s total input mix (intermediate inputs, labour and capital) is made up of outputs from different sectors when averaged across all producing sectors in KZN. On average, therefore, 7.5% of all inputs are the outputs from basic metal products (iron & steel, aluminium etc). Chemicals make up about 6.5% of the average input mix, transport equipment just under 4%, textiles 3.3%, paper products 3% and so on. This chart therefore shows the relative importance of upstream industries to downstream producers when averaged across the entire province, and hence, it shows the strength of different sectors forward linkages. The sectors with the least forward linkages include sugar cane, furniture, accommodation, beverages etc. Figure 28: Use of Sectors Output in Downstream Industries as Intermediate Inputs (KZN) 8% 7% 6% 5% 4% 3% 2% 1% 0% Average Downstream Inputs from Sector Outputs 93

94 It is of course expected that sectors providing final goods will have smaller forward linkages to other sectors. Thus accommodation, furniture and beverages are expected to have smaller forward linkages. Similarly sectors that export a large proportion of their output are also expected to have smaller linkages (see table below). These sectors in the national SAM include: Gold; Coal; Other Mining; Iron & Steel, and to a lesser extent Transport Equipment, Agriculture and Petroleum. Finally sectors that have linkages with only a few, specific downstream industries might also show up as low on this chart, as it shows the average across all sectors. Figure 29: Proportional Destination of Outputs per sector in KZN Business activities Non-metallic minerals Electrical machinery Communications Financial intermediation Electricity Trade Petroleum Other manufacturing Transport services Coal Other mining Water Basic iron/steel Radio Agriculture Transport equipment Real estate Textiles Other activities/services Construction Food Footwear Health and social work Hotels and restaurants Gold Intermediate Output Final Consumption Exports Capital Formation 0% 20% 40% 60% 80% 100% Finally there is the consumption part of the SAM. It turns out that quite a large proportion of wages get remitted either to the rest of South Africa or abroad roughly 14% to the rest of South Africa and 1% abroad. This means that only 85% of wages from productive activities in KZN end up in the provinces households (this is a type of leakage). In terms of income earned from capital (gross operating surplus) only 41% stays within KZN and assists with consumption linkages. A full 22% goes to the rest of South Africa (investors elsewhere) and 7% abroad. All of these leakages serve to reduce the consumption linkages and overall multipliers. It is true, however, that wages earned outside of KZN from the rest of South Africa actually outweigh those paid by KZN firms to non-kzn employees. Similarly KZN firms & households also receive profits and dividends from abroad. These wages and dividends however do not get incorporated into multiplier calculations and effects. 94

95 Construction Dairy Products Paper and Paper Products Mill, Bakery & Animal Feed Dairy Farminig Water Furniture Basic Metal Products Livestock Farming Real Estate Communications Meat, Fish, Fruit, Vegetables Chemicals & Products Wood and Wood Products Sugar Cane Farming Accomodations Forestry Personal Services Other Agriculture Machinery and Equipment Other Food Products Beverages & Tobacco Transport Non-Metallic Minerals Transport Equipment Electricity Rubber Products Textiles, Clothing & Footwear Insurance Petroleum Publishing and Printing Other Metal Products Structural Metal Products Other Manufacturing Trade Business Activities Other Mining Comm, Medical & Electrical Coal Mining Electrical Machinery & So what do the multipliers look like? The KZN multipliers tend to be quite small (in comparison to international multipliers estimates). Much of this can be explained through the fact that in many sectors the leakages are quite high, and KZN relies on imports, either from the rest of South Africa or from abroad when it comes to sources intermediate inputs. Where inputs are sourced locally the knock-on effects are higher. Secondly some of the larger sectors in KZN also export a large proportion of their product, thus reducing the forward linkages. Finally much of the income earned either through wages or profits is also lost to the province and hence the consumption linkages, and additional demand for local product, tends to be smaller than it might have been. Output Multipliers The following tables show the output multipliers that arise from an exogenous shock to demand. For example: if the demand for output in the construction sector were to rise by R1 from some exogenous source (not currently part of the usual everyday economy), then the impact on output across the KZN productive sectors would be about R3.11. At the top end of the spectrum are sectors like Dairy Products, Paper & Paper Products, Mills, Bakeries and Animal Feed, Furniture, Basic Metals and Livestock. At the bottom end of the spectrum are the sectors like electrical machinery, coal mining, communication & medical equipment and other mining. Of course these multipliers are based on the structure of the KZN economy as it is currently, but this does not preclude structural changes which might arise as the economy evolves, particularly through clustering effects. Similarly certain sectors might lose their reliance on other parts of SA or international imports, and hence the multiplier effects would be more keenly felt. Figure 30: Output Multipliers in KZN Multipliers calculated for the broader South African economy tend to show different patterns, and indeed depending on the source of data multiplier calculations might vary from source to source. SA multipliers in general are quite different from KZN as the structure of the economy differs greatly, and because of a smaller reliance on outside inputs and remittances of wages. The following table is taken from the IPAP2 document and shows output multipliers across sectors in SA. Some sectors like 95

96 mining and many of the service sectors show similarly low multipliers whilst others like furniture and food show similarly high multipliers. However some sectors appear far more attractive on a National level like transport equipment (motor vehicles), textiles, footwear and leather and some of the machinery sectors. This may be due to the lower levels of import and other leakages, but it could also be due to different data sources. Figure 31: National Output Multipliers Source: IPAP 2, January 2011 GDP Multipliers Another important aspect about multipliers that must not be forgotten is that output multipliers tend to be far larger than GDP multipliers. This is because GDP multipliers measure only the value add portion, and thereby eliminate the double counting effect that a typical output multiplier includes by adding up all additional output from all sectors (which is the input to other sectors). The GDP multipliers are therefore a lot smaller. When eliminating some of the double counting some new sectors are suddenly ranked higher the sugarcane industry for example, followed by insurance and personal services; three sectors which performed badly in the output multiplier section. Electrical machinery and other types of equipment manufacture, mining, petroleum, chemicals and rubber tend to perform badly however as much of the value add is leaked away from KZN either in the form of profit repatriation to other provinces or wages being paid to individuals not living in the province. This exacerbates the existing paucity of backward and forward linkages in these sectors especially for those sectors that tend to import (backward) or export (forward) a large proportion of their output. 96

97 Sugar Cane Farming Insurance Personal Services Forestry Trade Dairy Farminig Communications Beverages & Tobacco Livestock Farming Water Dairy Products Furniture Other Agriculture Business Activities Real Estate Mill, Bakery & Animal Feed Paper and Paper Products Construction Electricity Other Food Products Transport Services - Rail Wood and Wood Products Accomodations Basic Metal Products Publishing and Printing Chemicals & Products Non-Metallic Minerals Meat, Fish, Fruit, Rubber Products Machinery and Equipment Other Manufacturing Textiles, Clothing & Structural Metal Products Other Metal Products Petroleum Transport Equipment Coal Mining Other Mining Comm, Medical & Electrical Machinery & Figure 32: GDP Multipliers in KZN Income Multipliers Income multipliers focus more on the factor payments that are destined to KZN households. Again these tend to be quite small for many of the reasons given above, but particularly for those regarding the proportion of value add destined for KZN households directly. Some sectors have large income multipliers such as the Sugar Cane Farming which has a multiplier of about 0.8. That means that KZN households were earn, on average, about 80c for every Rand of additional demand for sugar cane thanks in large part to the way in which the capital (farms, machinery, mills etc) is owned and the way in which wages accrue predominantly to local workers. Also it has to do with the fact that the proportion of intermediate inputs (from other industries) is relatively low, and therefore overall value add is a relatively high proportion of total output. Manufacture of automotive equipment on the other hand, or coal mining, tends to have a much lower income multiplier, 0.20 and 0.26 respectively, thanks to the structure of those two sectors and where income accrues to. For Coal mining, which is very capital intensive, much of the value add is made up of interest, profits or dividend payments with the owners of this capital not necessarily resident in KZN. In addition nearly 40% of output is exported meaning little forward linkages to other sectors which might pay wages, and even that which goes into intermediate outputs tends to be destined for sectors with relatively low employment to output ratios such as electricity. For transport manufacturing a different picture emerges. Here the multipliers are low because so much of the inputs into the industry are intermediate (mostly from other automotive related industries) but a large proportion of these other suppliers are not situated in KZN, meaning that this demand is leaked to other provinces or abroad. Of the remaining value add, only a small proportion goes to local wages, with a larger proportion accruing to the owners of capital (many of whom are not local). Finally the fact that many assembled cars are for final demand and/or parts destined for export means that the forward linkages to other industries which might pay a larger proportion to salaries and wages are limited. Hence overall the income multiplier is low and local households earn only 20c in ever Rand. 97

98 Sugar Cane Farming Forestry Beverages & Tobacco Dairy Farminig Furniture Livestock Farming Mill, Bakery & Animal Feed Personal Services Other Food Products Wood and Wood Products Insurance Trade Construction Communications Paper and Paper Products Real Estate Business Activities Electricity & water Transport Accomodations Textiles, Clothing & Footwear Transport Services - Road Basic Metal Products Publishing and Printing Chemicals & Products Rubber Products Machinery and Equipment Other Manufacturing Coal & Other Mining Other Metal Products Petroleum Transport Equipment Electrical Machinery & Figure 33: Income multipliers in KZN Employment multipliers It is difficult to calculate employment multipliers in KZN due to the lack of good data on employment per sector. However one can use employment multipliers calculated at a national level as a form of comparison. Notwithstanding the caveats about import/earning s leakages specific to a provincial economy outlined above, in the absence of any better source of information, it is an acceptable to assume that the KZN sectors bear some resemblance to the overall South African sectors from an employment perspective. One of the most important factors in determining the employment multiplier for a sector will of course be the ratio of employment to GDP (or value add). The figure below (Figure 34) shows this ratio for selected sectors across South Africa. The metric is the number of jobs per R 1 million rand of value add in the sector. The related measure, the number of jobs per R1 million of capital stock in the sector, is also shown in the figure below. Both ratios are calculated for 2005 constant Rands. Effectively these two measures show how labour or capital intensive a sector is, and how many jobs one might expect to be created directly from either an increase in demand for the output of that sector, or in an investment which increases the capital stock. As can be seen from the figure the sectors which employ the most number of people per unit of capital are textiles, clothing, leather & footwear and furniture, followed by construction. All three of these sectors are therefore good bets for increasing employment following an investment, assuming of course that there is sufficient demand to absorb the extra output, and/or that they are competitive enough to compete in the relevant markets. Although capital to labour ratios vary within the sector, for example between firms in the clothing and footwear sectors and those in the textiles sector (which are far more capital intensive), overall this sector tends to have lower start-up costs, and less capital required to start producing output. It can also employ many more individuals with varying skills levels. The Furniture sector is similar. Both sectors are therefore very attractive to 98

99 policy makers, intent on addressing unemployment. Sectors with very low employment ratios include the metals sectors, most of the chemicals sectors, electricity, gas and water and transport sectors. These are unfortunately all sectors with high backward and forward linkages. Also relatively capital intensive is the mining sector, the communication sector, the forestry/pulp mills and automotives sector. Other sectors which create lots of jobs when growing strongly include Agriculture, Construction, Retail and Tourism. Figure 34: Employment to GDP and Capital in SA (jobs per constant 2005 R million) 35 Employment To GDP 30 Employment to Capital According to the multipliers as published by IPAP the sector with the largest employment multiplier was Tourism (catering and accommodation) with a staggering multiplier of 38. What this number means however is not exactly explained. Is the total number of jobs per R10 000, R or R1m? Figure 35: Employment multipliers Source: IPAP 2011/ /14 99

100 It may seem obvious from the figures above that the best sectors to promote and invest in when attempting to address unemployment are therefore Clothing & footwear, Furniture, Tourism and Agriculture, but these sectors would still need to sell their output. They still face the usual market pressures, cost competitiveness, import competition, increasing returns to scale, the need to access potentially long established supply chains, and skills constraints both tangible or technical and those less so (eg. learning by doing for firm management). They also face a price sensitive domestic market that is only so big, brand loyalty, and the usual plethora of other microeconomic factors that might determine success or failure. Investments in this sector are therefore far from guaranteed to create employment. Indeed in other clothing and furniture sectors elsewhere in the world the employment to GDP/Capital ratios might be completely different depending on the level of technology (automation), efficiency or workers and, importantly, the need to match and meet the local pressures and market conditions. These ratios merely reflect the status quo in SA. It is therefore useful to consider how these ratios may have changed over a period of time. Figure 36 shows this change over the period from 2000 to 2010, measured as a compound annual growth rate. In other words over the period the ratio of employment to GDP in the Furniture sector declined by a compound annual growth rate of 8.9% per year with the ratio declining from 25 workers for every R1million to just under 10. Without examining the sector in any great detail, one might surmise that the ratio of 25 jobs/r1m was too high for the sector to sustain and hence any employment multipliers calculated over that period might have been too generous. This period coincided with increased labour productivity, some consolidation across many sectors and, importantly, structural shifts. Figure 36: Percentage growth in Employment to GDP and Capital Ratios from 2000 to Change in Employment/GDP ratio 5 Change in Employment/Capital ratio

101 What is the difference between the Investment & operating phase? Finally it is worth noting that the multipliers that have been shown here have been calculated from Social Accounting Matrices with the usual assumption of an exogenous shock to the demand for output of a particular sector. The actual applicable multiplier for a project tends to be a different for the following reasons: a) The Project will have varying degrees of procurement, employment levels/ratios, and import/export ratios from the sector in which it is classified under. This means that the multipliers shown here will never exactly match those of any project b) The structure of an economy will change over time, albeit slowly, and with it multipliers and ratios will change. Some projects are also large enough and/or catalytic enough to change the entire structure of a particular sector. Even the best and most involved multiplier analysis, or related modeling (such as CGE) will be based on historical data/ratios/structural assumptions. c) The key assumptions of input output or multiplier analysis (fixed production ratios, no treatment of price & its effects, no consideration of factor/sector constraints) applies as noted earlier d) There is an important distinction which is often made between the investment or construction phase of a project and the operating phase and some institutions/reports calculate separate multipliers for each phase. The reason is that the construction of a project tends to involve procurement from different sectors and have different employment dynamics to that of the actual operating phase of a project and therefore the nature of the stimulus provided to the economy is very different. The table below shows an example of differences in multipliers for different phases as used by the DBSA. Table 23: GDP and Labour Multipliers for different phases of an investment project Operate Phase Total GDP Multiplier Total labour Multipliers Total GDP Multiplier Construction Total labour Multipliers Sector Agriculture Manufacturing Mining Tourism Source: DBSA How good are different sectors at targeting poverty and the unskilled? With very a detailed SAM, one can also answer questions which are more specific than just the broad employment and income multipliers. One can actually start estimating the ability of targeted investments to impacts on poverty or create jobs for the unskilled populace (who are the most vulnerable in terms of unemployment). In order to do this the SAM needs to disaggregate the labour portion into different skills levels, accurately estimating the number of employed persons per skill category and per sector. One also has to estimate how much these different skills categories are remunerated per sector. And if that didn t already require a vast amount of data collection and manipulation, one also needs to understand how much of each of these labour categories exist 101

102 within different household segments, and therefore how much of their wages will accrue to different strata of the economy. Fortunately in South Africa such data is starting to be compiled. The national SAM from the reserve bank for example has all this information, and even goes a step further by breaking down the labour and households by race. It is therefore now possible to calculate all manner of multipliers and ratios. Some sectors tend to be better at creating jobs for unskilled labour, the most successful of which is the Agricultural sector. Even the mining sector, once a large absorber of unskilled labour is now far less good at creating employment in this category; times have changed and businesses in the sector have been forced to redesign production process and increase productivity to remain competitive. It now has a multiplier of only 0.95 with most of the job creation occurring in the semi-skilled sector. In terms of household income, stimulating the sectors doesn t always translate into higher income for those in the lowest income deciles. Unfortunately due to the nature of the unemployment problem, and with the poorest households having a large majority of the unemployed, the income almost always tends to be earned by the upper income households, regardless of the sector being stimulated. There are very few sectors in which the multipliers presented in the table differ greatly. Table 24: Disaggregated Labour & Household Multipliers Labour Multipliers Semi- Skilled Unskilled Household Multipliers Medium Income Low Income High Income Sector Skilled Agriculture Manufacturing Mining Tourism Source: DBSA 102

103 Appendix Fund List DTI Automotive Investment Scheme (AIS) Bavumile Business Process Services Incentive (BPS Incentive) Critical Infrastructure Programme (CIP) Foreign Film & Television Production Incentive Isivande Women s Fund Manufacturing Investment Programme (MIP) (under the Enterprise Investment Programme (EIP) ) Production Incentive (PI) Section 12i Tax Allowance Incentive (12i TAI) Sector Specific Assistance Scheme (SSAS) Support Programme for Industrial Innovation (SPII) Tourism support programme (TSP) (under the Enterprise Investment Programme) Employment Creation Fund DBSA Energy and Environment Partnership Grant Renewable Energy Market Transformation. (REMT) IDC ( Finance sectors covered) Africa Strategic Business Unit Agro-Industries Agro-Industries flood Relief Scheme Chemicals and Allied Industries Community Fund (under the transformation and entrepreneurship scheme) Development fund for Workers (under the transformation and entrepreneurship scheme) Equity Contribution Fund (under the Transformation and Entrepreneurship scheme Forestry and Wood products Green Industries Gro-E- Scheme Healthcare Information and Communication technology Media and Motion pictures Metal transport and machinery products Mining and Minerals Beneficiation People with Disabilities Fund ( under the transformation and entrepreneurial scheme) Risk Capital Facility Programme 103