From Business Day

Your Third Umpire ( BD, 29/6/12) rightly flags President Zuma’s somewhat amusing use of the term “inaccurate facts” used to criticise the ANC. I can trump that statement, with a senior ANC member accusing me during a debate in the Gauteng Provincial Legislature of using “sarcastic facts” to criticise the party. Perhaps we should just abandon the facts entirely ?

Dr Gavin Lewis

DA MPL Gauteng Legislature

Published in Sunday Times, Business Times, 22/7/12

Industrial Policy: Who Needs It?

Dr Gavin Lewis

For anyone interested in the future trajectory of the South African economy, and of the prospects for growth and employment, and indeed on favoured sectors for investment in the future, a knowledge of this country’s industrial policy is essential. This policy can be found in the Industrial Action Plans  (IPAP), of which there have been several renditions, perhaps the best known being IPAP 2. The problem is that IPAP 2 is a very long and very complicated document. Too long, and too complicated. But understanding it is critical, because it affects both our current and future economic policies in detail.

Some countries do not regard a specific industrial policy as essential. The current UK government prides itself on not having a formal industrial policy, preferring to let the private sector take the lead – to the consternation of the Business Secretary, Vince Cable, who wants a ‘joined-up’ growth and development strategy. In the UK that means picking sector winners and assisting them with tax breaks, framing procurement policies, ramping up infrastructure investment and focusing on exports – a post-crisis industrial plan, in short.

So what does our IPAP say? It concludes that central to the poor performance of the SA economy is a fall in production, as opposed to consumption, and that this translates into a poor manufacturing performance. Since manufacturing contributes 54% to production, reviving manufacturing, and with it “decent” jobs, is the key but not the only focus of our industrial policy. This approach includes a new thrust into green industries, rural development, the Expanded Public Works Programme (EPWP) and infrastructure investment.

A central element of IPAPs is access to discretionary finance, to fund developmental projects (e.g. infrastructure) that are not currently attractive enough for voluntary private sector investment by offering such prospects loans at reduced interest rates, or backed by state guarantees. Here they run headlong into the fiefdoms of the Department of Finance and National Treasury. So IPAP 2 is  not explicit as to additional sources of long term concessionary finance for disbursement by the Industrial Development Corporation (IDC) , other than to hint that this could come from state assets such as workmen’s compensation funds (or retirement funds?) or – as more recently mooted by minister of economic development and currently interventionist-in-chief Ebrahim Patel – through development bonds.

 Central place in the IPAP 2 goes to the IDC, the state-owned development finance institution which received R102 billion for this purpose in 2011, with the Development Bank of South Africa (DBSA) in a supportive capacity: “…the public role of industrial financing is to channel capital into productive [as opposed to consumption] investments which directly and indirectly generate decent jobs and value addition,” says IPAP 2. Raising funding through the full or partial privatisation of State Owned Companies (SOCs) is however no longer considered an option, reflecting the dominance of leftist influences in the current government. This matters because it rules out raising finance for infrastructure from the partial or full sale of SOCs, as Brazil is doing with considerable success

A further source of such assistance open to the state is leveraging off public and, where possible, private purchases. The model here is the National Industrial Participation Programme (NIPP)  whereby in return for major state orders from abroad for weapons such as civilian aircraft, ICT systems, nuclear power plants, etc, above a certain minim incurs reinvestment obligations as part of offset programmes by those from whom the purchases are made (the ‘obligors’).

The existing seven industrial sectors prioritised by IPAP 2 include automotive, plastics and pharmaceuticals, clothing, textiles and shoes, bio fuels, forestry products, tourism/cultural industries, and business process outsourcing (BPOs). More recently attention has been gained by the oils and gas rig repair sectors and the boat building industry.

Conspicuous by its absence both historically and given China’s insatiable demands for commodities, is one area which forms the backbone of the SA economy, namely mining. Its absence speaks volumes about picking winners and creating jobs. IPAP 2 added new sectors here – metals fabrication, capital and transport equipment, green industries, in particular solar panels, and agro-processing; but not IT services, engineering, legal and medical services. It retains three additional high potential sectors – nuclear, advanced materials and aerospace.

In the end what this aggressive industrial policy – at least in theory- portends is that bureaucrats, not the market, decide where and how resources will be channelled. And unless your bureaucrats are world class in their fields, you are in trouble. This is especially the case when, as in South Africa, the industrial policy emphasis is on big industrial investments, whereas the job creating benefits of small business, universally acknowledged, get hardly a mention and the binding constraints of poor rail, port and energy infrastructure still loom so large as reasons for our poor economic performance.

There are no guarantees of success in devising industrial policies. There are many examples of failures of industrial policy. One is the failure to rescue Britain’s motor industry, which no longer exists. Who remembers British Leyland now? All too often, government bureaucrats fund so called ‘zombie industries’ long after they have ceased to become viable.  Propping up failing businesses that can never be sustainable is a waste of resources. But politics intervenes, and in the case of the ANC industrial policy is distorted to meet essential political imperatives rather than economic ones. BEE crony capitalism and the policy veto exercised by organised labour are also formidable constraints. Instead, the IPAPs exclude some options for ideological rather than for business reasons.

 Similarly, political imperatives often preclude long term planning and the patience needed for long term investments to bear fruit. Election cycles are shorter than economic ones. A case in point is the abandonment of the Pebble Bed Modular Reactors (and the scarce skills it retained) despite the hundreds of millions invested in it on the eve of IPAP 2 which posited the nuclear industry as a high potential future sector for the SA economy.

An associated danger of sector specific and company specific industrial policy worldwide is that of capture of the benefits by a small group of political insiders – crony capitalists. This is an obvious threat in South Africa.

On the other hand there is a growing consensus that the “essence of economic development is structural transformation, the rise of new industries to replace traditional ones,” (The Economist, 17/7/10 ) and that the acceptable face of contemporary industrial policy is where it seeks to temporarily support brand new or infant domestic industries.

Success or failure then depends on a tailored, rather than a shotgun approach; sector specific strategies rather than one-size-fits-all; successful implementation by a competent state; a strict focus on costs, including opportunity costs; and performance measurement, usually by monitoring export performance which is difficult to fake. It also means having an exit strategy for state-owned enterprises such as SAA and Denel, instead of maintaining them at a permanent cost to the taxpayer.

But all of this has to happen after certain pre-conditions are met, prominent amongst them a prior emphasis on strengthening entrepreneurialism instead of suffocating it. A first priority should be to build and maintain public goods that underpin business – getting the basics right, like efficiently run ports, transport infrastructure and communications network. In addition, slashing unnecessary red tape for business pays proven dividends. In none of these is the ANC government distinguishing itself.

It is worth remembering the words of David Lewis (formerly of the Competition Tribunal) that when it comes to industrial policy you “have to be very selective and very focused in your interventions, and you want to leave as much as you can to competitive forces” (Business Times 17/06/12). He should know.

The key issue instead is to focus on those businesses that are already emerging and growing, and to assist them to grow faster without second-guessing by bureaucrats who have no personal practical knowledge of business and the market. In sum, industrial policy must always be market driven for success. In our case the jury is still out.

Letter published in Business Day 17/7/12

I enjoyed Mzukisi Qobo’s insightful article on the need to close down Nedlac (13/7/2012). Not only is Nedlac as undemocratic as he describes, and the “civil society” component as risible as he suggests, but there us another problem with this pathetic institution. It is a place where big business and big labour negotiate and the losers are the rest of us. Not least among the losers is small business interests, which are regularly sacrificed  in the form of new and binding regulations that SMEs just cannot afford. Nedlac costs us jobs, creativity and economic dynamism. Its demise is long overdue.It has become part of the problem, not part of the solution.

Dr Gavin Lewis

DA spokesperson on Economic Development in Gauteng Province.

Letter published in Financial Mail
by Gavin Lewis

SA FILM INDUSTRY CAN LEARN FROM NIGERIA

Your lead article (6-11 July 2012 – “SA’s Film Industry”  refers. Amidst all the bleating for room at the teat of state support, none of those interviewed seemed aware of the phenomenon that is Nollywood, Nigeria’s booming US $200 million (R1.6 billion) a year film industry . It is the third largest in the world, and operates entirely without state support. Operating on shoe string budgets, filming in rented locations and not state of the art film facilities, often with hand held cameras, and focussing on topics of relevance to ordinary  Nigerians, thing they want to see and are willing to pay to see ( now there’s a revolutionary thought) , and is growing exponentially amongst the diaspora (and sometimes MNet ! ). Nollywood employs thousands of people, and  churns out in excess of 1000 films a year, mostly straight to DVD and VCD. A few films are reaching  the art film scene, entirely in their own merit, and without the layers of expensive deployed incompetent cadres the government ( and especially the provinces) in South Africa  seems to regard  as essential for this purpose. There are over 300 film producers in Nigeria, and the VCD discs they are distributed on are sold at an affordable US2 each ,selling an average of 50 000 copies each  per release. One could say more, but the contrast between South Africa’s ingrained  culture of dependency on the state and Nigerian entrepreneurship is startling. No wonder that economy is growing faster , and will soon overtake, South Africa’s muddle of mediocrity and dependence on others to make things happen.

ORGANISED LABOUR IN SA NEEDS A RESCUE FROM ITSELF

Gavin Lewis (published in Business Day 5/7/12)


There are  about 12.8 million workers in South Africa.Organised labout represents about 2.5 miillion of these, of which less than 2 million belong to the Congress otf South African Trade Unions (COSATU). Yet COSATU continues to determine government policy on  economic issues.This is a fact that is costing us the implementation of vital job-creating intiatives, such as the youth wage subsidy.

In the post - Polokwane political arena, and particularly in the run-up to Mangaung, COSATU general secretray Zwelinzima Vavi appears to have a de facto veto power on the governnment's regulation of labour.In fact organised labour represents a minority of workers.  This cannot be either fair or healthy for growth and employment in South Africa, as the National Development Plan itself points out. In fact, in the education system organised labour, in the form of SADTU  is the single biggest cause of poor school performance, casting a blight over generations of our young people for years to come, and crippling our skills base on which our economy depends for faster growth and employment. The ANC Alliance is thus caught in the contradictions of its own internal dialectics.

Nor does the COSATU leadership necessarily reflect the views of its membership. In a thought –provoking article by Philip Hirschsohn, of the University of the Western Cape," The Hollowing out of trade union democracy in COSATU", it is pointed out that as unions have grown, so a bureaucratic elite of full time official has become distant from the workers, taking on oligarchic characteristics. This leads in turn to lower levels of worker participation, and the effective demobilisation of mass worker activism in South Africa, with  a monopoly of political leadership lying in the hands of the leadership. Direct democracy is dying in COSATU, as SACP aligned leaders drift further away from workerist principles, suffering under top down political directives rather than bottom up mandating channels.

 The result in the Western Cape since 2004 has been that only 20% of COSATU workers said that they would still vote for the ANC Alliance, rather than for the DA and Cope. As you reap, so shall you sow, the biblical saying goes. In the fullness of time pro SACP COSATU leaders might become so estranged from their base that a split will occur, and the rest will be history.

 In the meantime, just last year the IMF pointed out that reform was needed in the wage negotiating structure in South Africa if SA was serious about creating jobs. Yet COSATU stubbornly stops any attempt to lower the hurdles for first time entrants to the economy. Instead an entrenched labour aristocracy, increasingly dominated by public sector workers, has pulled up the draw bridge for the rest of South Africa. In this way COSATU blocks initiatives such as Pravin Gordhan's (and the DA's) youth wage subsidy.

 The public service wage bill now leaves only 60 % of our national budget for infrastructure investment, and its share is growing all the time. In fact, the two fastest growing sections of our national budget now are public sector wages and repayment of our climbing debt.

Economist Mike Schussler points out that, after Sweden and France, South Africa has the highest paid civil service in the world. What's more labour productivity, on which mooted wage increase should be based, is down to 82% of what it was ten years ago. We will never reach governments own targets of 5 million new jobs this way.

 We have shed 2 million permanent jobs since 2000 . This process began way before the international financial crisis, on which the ANC now attempts to blame all our recent poor economic performance. Thus are doomed the majority of South Africans who are unemployed to blighted lives as a permanent underclass, foraging for scraps on the outskirts of our glass cities.

Organised labour is a vital part of South Africa's industrial landscape, but not in its current form. At the moment we sit with a country that not only has one of the highest recorded unemployment rates in the world, but simultaneously one of the highest strike rates in terms of man days lost. And our strikes are increasingly violent and always highly confrontational.

 Clearly we need a different way ahead, including looking at the example of Germany's social contract which sees labour represented directly on company Boards. We must rescue organised labour from itself. We must restore it  to being a shining example of non racialism, support for democratic and open government, and as a central player in a robust, democratic, peaceful and healthy political landscape. Otherwise we are nearing the point at which public money, and public borrowings will finally run out, and our hinterland will be contemporary Greece – if we are lucky.

Gavin Lewis (published in Business Report,26/6/12)

Cutting Red Tape

Red tape regulations cost the SA economy R79 billion a year. At least that was the case in 2004, when government launched a pilot project on Regulatory Impact Assessments (RIAs) for new regulations. More recently, the World Bank placed us at 34^th in "Ease of Doing Business" worldwide, but 91^st on registering property and 75th in dealing with construction permits (infrastructure development, anyone?). And a Grant Thornton survey of business leaders in Gauteng in January 2012 found that red tape was now the biggest single obstacle to doing business in the province.

For small business the impact is worse, largely because they lack the departments that see to compliance on a full time basis. Estimates show compliance costs of 0.2% on average for big business, versus 8.3% for SME's.This was underscored by a SBP (Small Business Project) SME Centre Report of November 2011, which surveyed 500 SMEs in SA on the impact of regulatory requirements.

It was news like this that prompted David Cameron's new government in the UK in 2011 to issue a ruling that there would be a three year moratorium on any new regulations that affected small business in that country.

Not far behind is the New Growth Plan, which views "unnecessary" red tape as a key obstacle to business growth in SA, even as Minister Patel comes up daily with new codicils on the hoops the private sector will have to jump through if it is to share in government's infrastructure investment programme. The NGP has called for, amongst other things, a move from red tape to "smart tape", for instance in speeding up drawn out land rezoning requirements.

In the Western Cape, progress has been made in its '"From Red Tape to Red Carpet" programme to speed up and smooth out obstacle to business in that province, with a dedicated unit established to that end, with its own website and call centre. Amongst its priorities is to slash turnaround times for all the permissions required before a new business can open its doors.

Indeed, worldwide remedies for reducing the burden of red tape abound. They include exemptions for SMEs, the elimination of duplication, the adoption of easy to access and use e-systems, and setting budgets for reducing the regulatory burden in business.

The point is that reducing the negative impacts of red tape does not happen in government as an afterthought, but as a concerted conscious, target setting exercise involving close cooperation with, for instance, local chambers of business. In any case, all new regulations should first be examined for their impact, and all new regulations should include an appeal process.

There will always be a need for regulations affecting business. Health and safety requirements spring to mind. Then there are regulations that are required, for instance those relating to the SA Revenue Service (SARS), but which are applied in a dilatory or apparently hostile fashion. Most annoying of all are those that simply clog up the works, or which are designed without consulting business, but which gave all sorts of unintended consequences. A list of some of the regulations makes the point:

1. SARS compliance.

2. Dealing with Companies and Intellectual Property Commission (CIPC) to register your company in the first place.

3. BBBEE requirements.

4. Labour and CCMA requirements.

5. New legislation requirements (e.g. the new Companies Act).

6. Consumer regulation requirements.

7. Requirements regarding local procurement from government.

8. Dealing with SETAs.

9. Obtaining operating permits.

10. Rezoning requirements.

11. Local planning and development requirements

12. Slow Environmental Impact Assessments (EIAs)

13. Sectoral regulatory requirements.

14. Licensing requirements.

15. The King 3 codes of good governance, with its over 70 stipulations and requirements.

And so on.

Ironically enough, it is the public sector, state –owned companies that often have the worst compliance record.

Improved administrative efficiency in itself would go a large way towards mitigating the impact of regulations. Issues such as poor service delivery, inadequate planning and controls, skills shortages amongst officials, poor coordination across government, and slow approval systems trip up the would be investor on all sides. Add to that poor communication, a lack of access to business information, cumbersome compliance procedures with long term planning, and a lack of transparency on municipal tendering, and the obstacles to business –led growth mount forbiddingly high.

In the OECD countries, which are equally concerned about this riding tide of red tape, several measures are being undertaken to remove the worst burdens. They include the European Commissions "Small Business Act" of 2012, the adoption of the "once only" principle requiring public authorities from requesting the same information and documentation and certification repeatedly from business owners, and speeding up the cost and time of starting a new business to Euro100 and three days respectively.

In South Africa dedicated red tape reduction projects should be put into place in all provinces, as a low cost, high impact intervention in the battle to grow businesses and create jobs. Greater use of e-Government platforms, exemptions for businesses below a certain threshold, and harmonisation across authorities, would all help. So would making use of the RIA system assessing the costs and benefits of all proposed new regulations before imposing them, across government at all three spheres, and process engineering to eliminate duplication and simplify procedures.

In sum, to address the wastage caused by unnecessary red tape a "whole of government" across the board approach is needed towards reducing it, and vigilant monitoring to ensure that it does not creep back in again via a hundred local regulations that have unintended consequences. As always the best source of information of the drag effects of red tape is the business community itself.

But there remains one remaining obstacle to dealing with red tape in South Africa, and that is administrative incompetence, verging on hostility towards business. As the SBD study concludes: "At a bare minimum, a concerted effort must be made by state agencies and bureaucracies to switch from and ethos of authority and punishment, to one of assistance and facilitation".