IGNITING ECONOMIC GROWTH THROUGH STRATEGIC LOCALISATION

Johannesburg, 22 January 2025: In the South African context localisation is often viewed primarily as a state driven policy tool. The history of South Africa’s state-owned entities (SOEs) is deeply intertwined with the country’s broader economic development and socio-political context. The Governments stated aim is to use localisation policy to develop local industrial capacity, increase employment and increase competitiveness across the economy. SOEs have played a significant role in shaping the South African economy, from their establishment in the pre-democratic era and to the present dispensation. Their role in the provision of public goods and equally as an important anchor for domestic demand across numerous value chains, and more especially the metals and engineering sector, cannot be understated.

The establishment of these SOEs in South Africa began in the early 20th century, driven by the need to develop infrastructure, industrialise, and support the mining sector, which at the time was the backbone of the economy. On the African continent South Africa enjoys the status of the largest electricity generation capacity, longest and most extensive rail network, one of the largest synthetic fuel plants (now private), and an unparalleled industrial capability and base to support this extensive infrastructure, all of which partially trace their roots to the existence of these SOE’s domestically. 
  
This critical industrialisation role that these SOE’s play is worth highlighting given the recent criticism that these entities have come under in this regard. Demand from these SOE’s still present a massive opportunity to drive a mega-scale industrialisation project, which will not only save the existing industrial capacity which has been under severe pressure and threat. The recent developments at ArcelorMittal South Africa come to mind, but also the development of new industries. In its simplest term, localisation is the ability of a country to manufacture and procure locally in order to boost the economy and help create jobs. History has shown that this is possible and South Africa should make every effort to capitalise on these SOE’s to drive the domestic industrialisation agenda.  

There are at least three arguments that can be made in support of driving a strategic localisation agenda.
_______________________________________________________________
The first is that SOE’s are a national asset. Their priority should be developing their home country, which includes but is not limited to sustaining the order books of the domestic industrial base. SOE’s have a moral responsibility to do so, not least, because in all the instances where the entities have run into financial trouble, it is the tax payer that has bailed them out.

_______________________________________________________________
This is in no way an attempt to downplay the self-inflicted own goals that led to the financial demise of these entities.  In fact, it is a serious indictment that this deterioration was ever allowed to happen, however, in all these instances it was the tax payer that stepped in as the lender of last resort. This fact engenders an obligation on the SOE’s to play a contributory role in ensuring the sustainability of the country including the domestic industrial base.
_______________________________________________________________
Secondly, SOE’s present huge economies of scale in the context of to the extensive scope and diversity of the products they demand. SOE’s are the largest capital spenders in the public sector, spending in areas such as power generation, transportation, water infrastructure and telecommunications.
_______________________________________________________________
In 2023/24, SOE’s spent R87 billion on capital expenditure, which was 38% of the total public sector expenditure. Eskom was the biggest spender, accounting for R39 billion, Passenger Rail Agency of South Africa (PRASA) spent R16 billion and Transnet was the third largest contributor, spending R15 billion. While this is nowhere near to what is needed to repair, rebuild and grow public infrastructure, it does represent a sizable source of domestic demand. 

This implies that the procurement budgets of each SOEs can be a single point through which many industries are influenced. For example, in the electricity sector Eskom’s demand for transformers of all categories, transmissions lines, the supporting towers, equipment and instrumentation for substations, circuit breakers, capacitators and reactors for the electricity transmission network. Similarly in the logistics sector, PRASA and Transnet’s demand for rails, locomotives, rail joints, signalling equipment, overhead wires and various pieces of port equipment including tug boats. In water infrastructure, valves of all types and sizes and steel pipes are all examples of supply sectors that would be positively influenced by the procurement budget of the different SOE’s. Directing spend of these entities to local companies in all these areas would result in country-wide industrial activity in the metals and engineering sector.
_______________________________________________________________
The final point is that the technical and engineering intensive nature of the industries in which these SOE’s operate, requires a highly technical and engineering intensive industrial base to support it. South Africa already enjoys an unparalleled technical industrial base on the African continent, which is a legacy of a history linked to the need to service the SOE’s. This places the country in prime position to be a preferred service provider for other SOE’s and technical industries on the continent, particularly in the context of the eminent African Continental Free Trade Area (ACFTA) Agreement.
_______________________________________________________________

In its 2017 economic policy paper on unlocking South Africa’s economic potential, National Treasury highlighted that engineering intensive industries have the enate characteristic of being agile and able to reinvent themselves into the future, opening endless possibilities of new globally competitive industries that breach new frontiers. All these would be opportunities that are legacies of the strengthened domestic industrial base.

The benefits to the SOE’s of developing the domestic industrial base to service these entities, which include shorter lead times, shorter supply chains, the savings on costs of long-range transportation, avoiding port challenges, protection from exchange rate shocks and quicker aftermarket servicing of equipment, have all been opined on at length and remain relevant as ancillary points to those listed above.

The points raised here are in no-way intended to be localisation denialist nor are they meant to suggest localisation at all cost, however, history has demonstrated the positive role that SOE’s have contributed and can contribute in developing the domestic industrial base.

Nor is it being suggested that localisation is a stand-alone activity. It is an activity of change that relies on various touchpoints and elements to function fully. If the private and government sectors make localisation their number one priority, the possibilities of a transformed and revitalised nation will become endless.

A mega-scale re-industrialisation program can be achieved through the strategic intervention and deployment of SOE procurement spend. To act on this is a policy choice and an instrument at the state’s disposal to help the country address poverty, inequality and unemployment and ignite an economic recovery strategy aimed at creating a sustainable economy for all its people.

Elias Monage is the President of the Steel and Engineering Industries Federation of Southern Africa (SEIFSA)

Related Posts