11 minute read
Identifying weaknesses
Bureaucracy and red tape
The bureaucratic obstacles that businesses face have a direct impact on economic development and growth. A lot has been said about the need for reform to improve South Africa’s ranking on the World Bank’s yearly Doing Business index, which defines the extent to which the regulatory environment is conducive to the starting and operation of a firm. South Africa is aiming to be among the top 50 global performers by 2022 (Ramaphosa, 2019). That objective seems far off as South Africa fell from 82 to 84 out of 190 countries assessed in the ‘Doing Business 2020’ survey (World Bank, 2019).
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Participants in the webinar have raised concerns about bureaucracy and red tape, stating that it is particularly burdensome for smaller firms, and acts as a disincentive against new business start-ups. To comply with the onerous administrative legalities is time consuming and slays the entrepreneurial spirit so desperately needed in the country. It uses resources that could have been channelled towards growing rather than bureaucratic compliance issues.
Education, skills and work ethic “The bureaucratic obstacles that businesses face have a direct impact on economic development and growth.”
Education quality contributes considerably to a country’s economic growth and getting the basics of schooling right will be important to place South Africa on a sustainable growth path.
However, the South African education system continues to fall behind when achievement is measured against international metrics. The result is an education system that does not adequately prepare young people for the workplace.
In the most recent Trends in International Mathematics and Science Study – a project of the International Association for the Evaluation of Educational Achievement, measuring Grade 5 level mathematics and science accomplishment – South Africa scored among the five lowest performing countries of 64 nations that took part in the assessment. The top five countries were from East Asia and include Singapore, Hong Kong, South Korea, Chinese Taipei and Japan. (Reddy et al, 2020). These countries have also been successful in achieving accelerated economic growth in recent decades. The ISI has studied South Korea and Japan to draw lessons for the South African economy. In both instances, education was a key factor in their success.
South Africa’s education outcomes are inadequate despite substantial investment. Total public expenditure on education for primary, secondary, and post-secondary nontertiary education, as a percentage of total government expenditure, is relatively high when compared with Organisation for Economic Cooperation and Development countries (Education GPS, 2021).
Identifying weaknesses
Educational failures filter through to the job market. The manufacturing industry experiences the impact of education challenges first-hand and believes it is an important weakness that must be addressed. A well-educated workforce is central to reviving the sector and ensuring that it is globally competitive.
The education system must also cultivate skills that better prepare learners for the future workforce. Each year, too many matriculants are graduating into joblessness. Statistics show that although those with higher levels of education are more likely to find a job, the unemployment problem is so pervasive that as many as 37.70% of those who are unemployed have passed Grade 12 (Stats SA, 2021b).
There is also a sense that work ethic and pride are lacking among the work force. A lack of a productivity mindset, culture and accountability damages the country’s potential. An attitude of entitlement must make way for a spirit of hard work and honesty.
The values that a nation adopts influence actions and are thus key predictors of a country’s success (Steel, 2017).
Impact of crime
Businesses are finding it increasingly difficult to absorb the impact of crime. According to the Global Peace Index, the economic impact of violence on the South African economy in 2019 was R145-billion a year (Institute for Economics and Peace, 2020). With the July 2021 wave of looting and unrest in Kwa-Zulu Natal and Gauteng having exponentially increased these costs to society.
An increasing lack of faith in the capabilities of the police has led to an increase in the use of private security, pushing up the cost to companies and the prices of end-products.
Identifying weaknesses
Misalignment in credit provision
Research for the South African Reserve Bank has indicated that access to finance is not a major concern for most manufacturing businesses, but it concedes that smaller firms do have a higher probability of facing financing constraints (Smith, 2019).
A participant in the webinar representing a medium-sized industrial business has identified the misalignment in the provisioning of credit for industrial development as a concern. According to the participant, banks appear to finance the building of shopping centres or buying of new vehicles more easily than they do investment in new equipment to allow factories to modernise or expand. “Imagine if we built factories at the rate that we build shopping centres and if we then exported these products?”
Municipal malaise
The disintegration of municipalities, causing a lack of service delivery, is having a severely negative impact on business. Companies suffer large losses from unmaintained infrastructure, such as potholes and water and electricity disruptions.
These concerns have been highlighted by poultry producer Astral’s High Court order against the Lekwa municipality for failing to deliver basic services to its factory in Standerton, Mpumalanga, and dairy group Clover, which is closing its cheese factory in Lichtenburg, in North-West, has blamed ongoing poor service delivery by the local municipality for its decision (News24, 2021).
The demise of service delivery is linked to financial mismanagement at local government level. The auditor-general’s report on municipalities produces a grim picture, underlining the persistent underperformance as far as financial management and performance reporting is concerned. The report for the 2019/20 financial year shows that the financial position of more than a quarter of the 257 municipalities is so dire that there is significant doubt that they will be able to continue as going concerns, while almost half are exhibiting indicators of financial strain. Only 27 municipalities achieved a clean audit in 2019/20 (Business Day, 2021).
To deal with a lack of basic service delivery in municipalities, many businesses are taking it upon themselves to clean up towns, fix roads and maintain other infrastructure. However, this duplicates the cost of municipal services, impacting on companies’ bottom lines.
Identifying weaknesses
The ever-increasing cost of water and electricity are also negatively impacting on business. Between 2007 and 2020, electricity tariffs increased by more than 500% and average municipal water tariffs have increased four times faster than inflation since 1996 (IOL, 2021).
Onerous labour legislation
South Africa’s labour legislation mediates the relationship between employers, employees, and trade unions. Although aimed at ensuring fair practices, some issues have been raised about the inflexibility of current labour laws and their impact on small, medium-sized and micro enterprises (SMMEs).
Centralised collective bargaining provided for in the Labour Relations Act (LRA) elicits strong opinions on both sides. The National Employers Association of South Africa (Neasa) has been vocal in its opposition to the ‘one-size-fits-all’ wage approach of centralised collective bargaining, which culminates in bargaining councils extending agreements to non-parties. Neasa states that a statutory dispensation, as contained in the LRA, marginalises the
Identifying weaknesses
voting power of SMMEs. An employer whose cost of labour as a percentage of turnover is less than 5%, can enforce a wage on another employer whose cost of labour as a percentage of turnover is more than 50% (Papenfus, 2018).
Trade unions are generally powerful, which is a concern for business owners considering the threat they pose to economic stability when things do not go the unions’ way.
The law on dismissals also makes it cumbersome for business owners to dismiss unproductive employees. Wary of the difficulty of dismissing staff, employers are reluctant to hire people, contributing to the high unemployment rate of the country.
Labour legislation does not make provision for the different economic realities of a small employer in a rural area, compared with a big business situated in an economic hub. Those two types of employers, for instance, are judged by the same economic and operational measures when it comes to collective bargaining and the national minimum wage.
The national minimum wage, if it is set too high, could have adverse impacts on employment. Critics of the national minimum wage, which is currently set at R21.69 an hour, argue that the requirement denies a work seeker the right to negotiate for a wage that he or she finds acceptable, and which would have offered an escape from unemployment. Proponents argue that it begins to address the problem of the millions of working poor, whose wages are kept low by the prevalence of high rates of unemployment.
Overreliance on grants
At 3.30% of GDP, South Africa is among the biggest spenders on social protection, through which it seeks to tackle poverty and inequality (World Bank, 2021). The social assistance programme provides direct income support to the elderly, children, war veterans and people with disabilities. The welfare system has expanded fast in the past 20 years and currently has about 18.2 million beneficiaries, with another 1.1 million expected to become beneficiaries over the next three years (National Treasury, 2021). Although social transfers do protect the most vulnerable members of society, it cannot be a substitute for growth and jobs (World Bank, 2021). There is concern that an overreliance on grants creates a culture of dependency.
Steel protection measures
There is growing frustration within the steel industry about ongoing tariff protection for primary steel producer ArcelorMittal South Africa (AMSA). Several downstream steel customers have expressed unhappiness with safeguard duties, as well as about steel backlogs and pricing developments.
Identifying weaknesses
South African flat-steel prices are set using a government-approved ‘basket price’ methodology, whereby the price is arrived at following analysis of selling prices in a range of markets included in the basket. Flat and long steel product imports are subject to base tariff protection of 10%, but certain flat products are also subject to safeguard duties of a further 8%, resulting in overall protection of 18% on certain grades. The 8% safeguard on hot-rolled coil (HRC) was initially meant to expire in August 2020, but was extended following an AMSA application to the International Trade and Administration Commission of South Africa (Engineering News, 2021a). Safeguards were first introduced on a sliding scale in 2017 to level the playing field against unfair import competition.
South Africa’s biggest steel merchant, Macsteel, took the Department of Trade, Industry and Competition to court over the extended implementation of safeguard duties on HRC imports. The case was settled in the High Court in June, following an agreement that, once the current 8% safeguard expires in August 2021, there would be a moratorium on the implementation of further safeguard duties on HRC for at least two years (Engineering News, 2021b).
Steel industry players participating in the webinar have questioned the economic benefits of sustaining a primary steel producer in the form of AMSA. They say locally manufactured steel products have become uncompetitive, owing to expensive AMSA steel and that access to cost-effective, high-quality, duty-free input material is needed to revive the downstream industry.
In June 2021, the ‘South African Steel and Metal Fabrication Master Plan 1.0’ was adopted by business, labour and government. The document aims to create a platform for the revival of the embattled downstream steel fabricators. The plan has been developed on three pillars, namely:
• boosting demand for steel and steel products, primarily by reviving South Africa’s stalled public infrastructure roll-out; driving localisation, or import substitution; and by leveraging the market access being created through the implementation of the African Continental
Free Trade Agreement;
• addressing supply-side constraints, including electricity disruptions and tariff hikes, logistics bottlenecks, uncompetitive inputs and inadequate skills and research and development; and
• a series of cross-cutting interventions, including the creation of a Steel Industry
Development Fund, to be capitalised through the introduction of a levy of between
R5/t and R10/t on all steel sold domestically, whether it be produced locally or imported (Engineering News, 2021c).
Identifying weaknesses
Transformation policies
The manufacturing industry is subject to the broad political environment in which it functions. To a large extent, that is informed by the policies of the African National Congress, the ideology of which aims to transform the country from an Apartheid State to a non-racial, non-sexist, united democratic society.
The principal policies that seek to reverse inequality, poverty and exclusion are through stimulating inclusive growth and investment, bolstered by black economic empowerment (BEE) and employment equity, along with the safety-net of an expansive welfare system.
Concerns have been raised that transformation policies, such as the Employment Equity Act and the Broad-Based Black Economic Empowerment Act, do not foster an environment in which entrepreneurs can flourish. Although there is an acceptance that transformation is needed, there is doubt over whether narrow BEE policies are the way to go. Instead of promoting true empowerment, critics say BEE has made it more difficult for many SMMEs to do business with government or big enterprises and that it has created a detrimental side-effect in the form or ‘tenderpreneurship’. In general, complying with employment equity and BEE policies has raised the cost of doing business.
