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Why agriculture is vital for SA’s economic future

Pretoria- Countries that tax agricultural sectors are normally poor. Countries which subsidise the agricultural sector are normally rich.

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This is according to agricultural economist professor Mohammad Karaan, a speaker at National Treasury’s Public Economics Winter School being held at the University of Pretoria this week. Karaan shared evidence to show why agriculture should be part of economic and industrial policy.

“Agriculture must form an important part of the economic future of South Africa,” he said. Most economic evidence does not favour agriculture as a future development path. But there is enough evidence to show that agriculture can play a role in modernising economy, he explained.

Looking at China as an example, within 15 years, the country was able to take almost 20% of its population out of poverty through agricultural development. Much of economic development in South-East Asia, China, Singapore and others was based on industrialising agriculture, introducing land reform and developing the manufacturing industry, he explained. A country’s future is also developed around planning with surplus factors of production such as labour.

Agriculture as part of industrial development

The fact that technical change brings about specialisation and productivity, shows that agriculture should be part of an industrial development strategy. “If it was not for technical change which has taken place in the last 20 years in agricultural research and innovation, we would not be able to deal with the current drought, the worst in 100 years,” said Karaan.

Looking at the growth of South Africa’s real GDP per capita over the last 300 years, prior to the gold rush and the discovery of diamonds, GDP was low. At the time South Africa was largely an agricultural economy, exporting field crops, wool and wine. “If a sector only relies on agriculture, it will get poorer overtime, unless there is some industrialisation,” he added.

Challenges to SA’s agricultural sector

In South Africa, other than land reform being a challenge, policy inconsistency is another issue. A second problem is related to the capacity of the State.

“There is no shortage of people in state departments.

“The Department of Rural Development and Land Reform has over 2 000 people who work there. If you have 2 000 people working in nine provinces, then it should be possible to deliver land reform.

“However, the capacity to execute it is not there,” he said.

The level of domestic investment is another issue. Foreign Direct Investment follows domestic investment; it does not lead domestic investment, said Karaan.

“The problem with agriculture is that domestic investment is too low compared to current Foreign Direct Investment.”

It’s not usually governments which bring about jobs or investment flows, much of it comes from markets. There is little collaboration between the private sector and the state to advance economic growth in the sector. “The incentives (on the) state side to encourage private sector investment is not there,” he said.

South Africa’s agricultural sector’s employment levels 100 years ago, was around 1.8m to 2m people. It is currently down to 850 000 to 900 000 people, said Karaan.

In 2008 the level had dramatically declined from 850 000 to 650 000. The levels increased again in 2012 with the introduction of minimum wage.

“Job creation potential is there … 450 000 out of 960 000 jobs created were formed in developing areas,” he said.
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Low commodity prices a wake-up call for Africa to boost manufacturing

The slowdown of China’s economy and its declining demand for commodities is a “good wake-up call” for African economies, according to Geoffrey Qhena, CEO of South Africa’s Industrial Development Corporation (IDC).

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Speaking at the recent World Economic Forum on Africa, Qhena said this situation presents an opportunity for the continent to figure out how to grow in the face of lower commodity prices.

Despite having vast resources, most African economies rely on imports for everything from food to clothing to electronics due to an under-developed manufacturing industry that faces many hurdles.

Johan Aurik, managing partner and chairman of consulting firm A.T. Kearney, said local manufacturing is an enormous “missed opportunity”. Aurik observed Africa’s shortcoming in manufacturing has to do with inefficiencies across the value chain, such as the sourcing of raw materials, distribution and innovation.

“When people think about production or about manufacturing they see a factory… and that’s the wrong image because it is often the least important part of what [we] are talking about.”

“If one part of the chain does not work well or is not optimal then the final product… often doesn’t even reach the final customer. These are very complex systems and that is why it is so hard to do. In Europe and in North America they had 200 years – or even longer – to grow the systems over time slowly. Africa needs to move faster,” noted Aurik.

Supply chain gaps one key hurdle

Namibian entrepreneur Ally Angula said she faces several hurdles operating manufacturing businesses. She is co-founder and managing director of Leap Namibia, a diversified group of companies involved in the agro-processing and fashion industries.

One of Leap’s divisions manufactures garments that are retailed through its network of My Republik branded outlets. She cited gaps in the supply chain and labour market as key hurdles. For instance, her company imports print labels for clothing from South Africa because they are not available locally.

“There are a lot of links within the supply chain [that] as a manufacturer you have to either fill those links yourself – or you pay double the price to fill those links,” Angula said.

“In some of our manufacturing industries that we are going into it is industries that we are creating from scratch.”

She explained how her company set up a manufacturing plant in a village in Namibia that employed locals. But when the rainy season started, the village did not have power for three weeks. While this was a fate the locals were used to, it was distressing for her business.

“Unfortunately for a manufacturing entity you can’t be without power for three weeks.”

Technology vs employment

Technology could help address some of the challenges in Africa’s manufacturing sector, however, the panelists argued there should be a multifaceted approach that involves both new technologies and employment. Innovation that excludes human labour, the IDC’s Qhena warned, would leave behind millions who desperately need jobs.

“The important [thing] is to create real jobs, sustainable work. Yes, it is true that technology if it is introduced too quickly often has a negative effect on unemployment. You see that in many places around the world – for instance, online retail is replacing many retail jobs. But over the long run they tend to be replaced with other types of work.”

Need to highlight manufacturing success stories

Although it involves various elements – from product design to production to retail – manufacturing is not as hard as people make it seem, said Angula. Once the process is broken into digestible parts, people become more inspired to go into industry.

“What we have experienced is exposure plays such a big role. We have had many people come through to our company to see what it is that we are doing. Once you have had the conversation the person will say to you: ‘But I didn’t know it was so easy to make clothes’ or ‘I didn’t know it was so easy to dehydrate an onion product and get that on the shelves’.”

“We need to be showcasing a lot more in terms of the success stories on the continent when it comes to manufacturing… That will motivate people to get into the different industries,” she added.

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Manufacturers benefit from cost-saving measures in a slow economy

There is a clear business case for investment in organisational sustainability – smart adaptations that save manufacturers money while cleaning up their environmental act – when slow growth releases pressure on the production line.

Sustainable production: a global issue

Increased demand and technical advances over the last century raised production levels, often with very little consideration for the environmental ramifications. This century is a watershed, where population growth, consumption patterns and production methods threaten the natural system that has buttressed our road to social and economic wealth.

Environmental policy revision, corporate reform and consumer activism share the objectives of accountability and sustainable development. A greener global economy requires industrial development that assures economic growth and increased standard of living, whilst at the same time reducing resource use, pollution, waste and its impact on nature and communities.

The business case: industrial sustainability in Africa

A taxing economic climate fuels the urgency to sharpen any organisation’s competitive edge, thereby liberating resources for investment in growth and job creation. South Africa’s Department of Trade and Industry (the dti) believes Africa’s growing domestic markets – 1 billion plus consumers – must be served by boosting local manufacture and free trade.

With African manufactured output doubling over the last decade, the pressure is on for local producers – big contributors to carbon emissions and massive users of water and energy resources – to realise the investment opportunities presented by improved efficiencies in energy and water conservation, waste and GHG reductions.

International and South African authorities have put attractive incentives and support mechanisms in place to aid manufacturers keen on investing in positive change. In short, it is prudent to ‘clean house’ while the economy is slow.

Support mechanisms: industry aided

The United Nations’ Industrial Development Organisation (UNIDO) and Environment Programme (UNEP) have been establishing national cleaner production centres (NCPCs) in developing economies since 1994. These NCPCs roll out resource efficiency and cleaner production (RECP) programmes that equip emerging economies with improved competitive technologies sensitive to best-practice environmental and natural resource use. So far, RECP programmes exist in 47 developing and transition countries to harmonise productivity, environmental and social imperatives. The network, known as RECPnet, provides a useful platform for sharing success stories, policies and best practices.

In South Africa, the National Cleaner Production Centre of South Africa (NCPC-SA) is funded by the dti as its key industrial sustainability programme for the manufacturing industry focused on energy, water and materials efficiency, as well as waste management.

The NCPC-SA actively engages producers on resource efficient business practices, and offers support through in-plant assessments and training programmes using the RECP toolkit.

RECP assessments are carried out at participating companies targeted using a sector approach, aligned to government’s Industrial Policy Action Plan (IPAP). The process includes energy, water and material assessments to gauge current consumption levels and opportunities for reduction; as well as waste assessments, to benchmark existing waste generation against reduction targets.

Proven cost savings: material drop in energy use

By implementing innovative energy-saving measures, resource-intensive manufacturers find that they can meet the growing demands of consumers for more and cheaper goods, whilst migrating to cleaner production processes and methodologies, reducing their carbon footprint and liberating capital for investment in growth.

This is not pure theory, with many South African success stories in the bag. Businesses adapting in a timely manner through innovative and more efficient methodologies have demonstrated remarkable resilience by developing new business models that recognize the need to do more with less.

Profitability: a steamy return on energy investment

Stanger-based manufacturer Gledhow Sugar Company runs a factory 24/7 nine months of the year to process 1.5 million tons of sugar cane into refined white sugar, fibre for paper production and molasses.

Although Geldhow generates enough steam power for internal use by burning coal and bagasse during harvesting, the factory relies on electrical power from the local municipality out of season, three months of the year.

In 2011, Gledhow Engineering Manager, Barry Parkin, commissioned the NCPC-SA’s Industrial Energy Efficiency (IEE) Project to conduct a baseline study into the factory’s energy and mass balance, keen to improve the factory’s energy efficiency, reduce
the amount of coal used and to increase profitability.

Numerous opportunities were identified to improve Gledhow’s steam distribution network, leading to improvements in thermal insulation, boiler controls and the introduction of a steam trap and steam leak maintenance programme. This saved the company R500,000 in energy costs during 2012 alone!

Gledhow invested R210,000 into cleaner production methods, which included courses in energy management; motors; and steam, compressed air and fan system optimisation for the engineering manager, mechanical and electrical engineers, and electrical technician. After attending the courses, the engineering team were equipped to actively champion energy optimisation technologies and initiate energy optimisation projects at the factory, with the tools and insight to ensure success.

Because the investment cost was recouped within six months, Gledhow possessed capital to invest a sizeable R2,25 million into four more energy-saving projects during 2013. This year, Gledhow also installed soot blowers and automated boiler blow down systems on its coal-fired boiler.

To boot, Parkin not only became on of the country’s first Expert Level Steam Specialists, but Gledhow now operates as a Training Host Plant with the IEE Project, fast-tracking advanced energy efficiency implementation for future gain.

As a spin-off, improved energy efficiency may enable GSC in future to bid for renewable energy cogeneration in the Department of Energy’s Renewable Energy Independent Power Producer (REIPP) Procurement Programme.

Put your energy behind smarter savings

The Industrial Energy Efficiency Project (IEE Project) teaches South African industries how to use available energy resources more productively, so that energy-intensive industrial stakeholders (such as mining, automotive, metals, chemicals and agro-processing plants) can implement and optimise energy management systems.

Now in its fourth year, the IEE Project (run by the NCPC-SA, in collaboration with UNIDO) focuses on implementation of energy saving interventions and training energy experts to drive and manage the processes.

To date, 31 experts have been trained and 111 more are undergoing expert level training in energy management systems (EnMS) and/or energy systems optimisation (ESO) – the optimisation of energy systems, including fan, motor, steam, compressed air and pump systems.

An increasing number of companies are signing up as demonstration plants, where energy experts practice their newly acquired skills, implementing energy efficiency interventions that result in substantial energy savings and carbon emission reductions.

To date, EnMS and ESO interventions at demonstration plants have resulted in energy savings of over 270 GWh, which translates into a cost saving of R 229 million and carbon emission reductions of almost 255 000 tons of CO2.

Incentivising savings: return on investment

To support industrial sectors in enhancing their competitiveness and job creation targets, the South African government offers a suite of incentive schemes to bolster cleaner and more resource efficient production with financial support. The dti’s Manufacturing Competitiveness Enhancement Programme (MCEP), launched in May 2012 as a key driver of the Industrial Policy Action Plan (IPAP) 2012/13 – 2014/15, helps manufacturers to upgrade their production facilities and methods through one of two mechanisms, co-managed with the Industrial Development Corporation (IDC):

• the Productivity Incentive (PI) and

• Industrial Financing Loan Facilities.

In granting financial assistance for new technology and advanced manufacturing, the dti makes sustainable transformation more accessible to companies, particularly small and medium enterprises, in sectors under threat from international competition, low margins and increased compliance requirements.

Call to action: the buck starts here

For South African industry to compete in an increasingly environmentally aware global marketplace and on a Continent geared for growth, local companies cannot afford to exclude resource efficiency and cleaner production from their business mandate. And in the face of increasing energy and resource prices, efficiency is now a business imperative – not a nice-to-have…

By committing to implementing sector-relevant adaptations and by increasing awareness among employees and supply chains of this imperative, manufacturers can realise substantive downstream business opportunities – not only in garnering customer and industry reputational mileage, but tangible financial benefits at this time while the focus and feasibility for change is at its greatest!