Burdened by Bureaucracy

South Africa Prospects Stunted by Red Tape

By Hariesh Manaadiar

South Africa has arguably some of the best infrastructure on the African continent and can have several infrastructure development programs on the go at any one time.

With its 4,000-kilometer coastline and nine active ports, capable of handling some of the most complicated, heavy and abnormal type cargoes for use in the mining, power, renewable energy, transportation and infrastructure industries, South Africa is well-positioned to serve many countries in the region as a transport and logistics hub.

Combine this with the presence of many experienced companies in the fields of engineering, construction, mining, energy and logistics, and South Africa has long been considered the gateway to the African continent and especially Sub-Saharan Africa.

South Africa serves as a gateway to the bordering markets of Zimbabwe, Botswana, Lesotho, Swaziland, Mozambique, Namibia; to near regional markets such as Zambia, Angola, Malawi; and in some cases to distant regional markets like the Democratic Republic of Congo and Guinea.

But Sub-Saharan Africa may be losing its sheen and is seen to be stagnating while the rest of the Southern African Development Community region is catching up and may end up becoming less and less dependent on South Africa.

According to Africa’s Pulse, a biannual analysis of the state of African economies conducted by the World Bank, Sub-Saharan Africa experienced a slowdown in growth from nearly 8 percent in 2014 to 1.0 percent in 2018 and to 1.3 percent in 2019 before it is expected to rise to 1.7 percent in 2020, coinciding with a sharp deceleration in economic growth in Africa.

This report analyzes trends in infrastructure quantity, quality and access, and explores the relationship between infrastructure growth and economic growth in the region.

While South Africa has made great progress in telecommunications coverage and in access to safe water, little progress has been made in per capita electricity generating capacity in more than two decades.

As per the report, only 35 percent of the population has access to electricity, with rural access rates less than one-third urban ones. Transport infrastructure is likewise lagging with Sub-Saharan Africa the only region in the world where road density has declined over the past 20 years.

Still Room for Growth

But PwC has reported that Sub-Saharan Africa, which has been on a strong, sustained growth trajectory since the late 1980s, is projected to grow from 2.6 percent in 2017 to 3.9 percent in 2022 on the back of its commodity exports and rapidly transforming economies.

Sub-Saharan Africa is expected to spend 10 percent more in infrastructure per year over the next decade.
As the two largest economies in Africa, South Africa and Nigeria are seen as the leaders participating in this growth and spend, but Ghana in the West, Kenya, Tanzania and Ethiopia in the East and Mozambique in the South are fast catching up to these two countries.

While there are many challenges for South Africa, there have also been drivers for growth as recent announcements of projects in mining, energy and infrastructure and also improvement of sentiment bear testament to.

However, Filda Jacobs, general manager industrial projects of Hellmann Worldwide Logistics, explained that some clients are a little wary about spending on various projects due to some of the current market uncertainties in South Africa.

Age-old challenges such as issuance of road transport permits, port charges, and uncertainties in terms of documentation still exists. “The authorities who issue the permits for the movement of abnormal cargo along the roads will only issue the permits once the cargo has been fully loaded, lashed and secured on the trailer that will carry this cargo,” Jacobs said. “All this loading, rigging, etc., must be done inside the port before the cargo is moved out. This may take some time and while waiting for this, the port already starts charging the client for storage as they only have a limited standing time for the cargo in port.

“While this issue increases the time taken for delivery to the destination, this also affects the costing for the projects, in some cases rendering the movement via South Africa uncompetitive.”

Renewable Opportunities

South Africa has been very involved in renewable energy projects, including wind and solar farms, for several years.

The renewables sector in South Africa had proven its capacity to contribute to the country’s economic growth, and also contributed to its development objectives through the creation of jobs, social progress and creating new opportunities for economic ownership. But many of these projects have either slowed or stalled over the past few years.

This has been attributed to indecision, incapacity and lack of skills within the government departments and regulatory authorities, combined with policy uncertainty created by stop-start procurement in previous years.
During that period, state-owned electricity generator and distributor Eskom was seriously contemplating nuclear energy projects, due to no new licenses being issued to renewable energy projects or companies.

As an example, DCD Wind Towers, a joint venture project between the Industrial Development Corp. and DCD Group, was set up in 2013 based on an expected investment in new wind generation capacity which was supposed to come online through to 2030.

However, this ZAR400m (US$28.3 million) facility, which supplied steel towers to wind farms in the Eastern Cape from April 2014, shipped out its last order in November 2016.

This shutdown is attributed to failure by Eskom to finalize the power purchase agreements with private wind energy firms, although these were approved by the Department of Energy as part of their renewable energy program. This is just one example of an inefficiency within the government’s transport department.

Licensing Headaches

Other inefficiencies are costing truckers millions and restricting capacity for growth and service offering.
There are limited transporters with access to specialized trailers capable of transporting windfarm project cargoes. The few transporters that were operating in this space had to send equipment out of South Africa because of several issues related to registering these specialized trailers with the Department of Transport due to regulations and system inefficiencies.

A leading project forwarder who declined to be named said that red tape surrounding project cargo moves through South Africa is “one of the continuing problems.” For example, each province in South Africa has its own permit requirements. So a project cargo that moves from Durban in Kwa Zulu Natal Province to Botswana via Free State Province, Gauteng Province and North West Province requires permit approvals from each of these provinces, although all of the provinces are in South Africa.

The forwarder further attributed the slowdown in project cargoes into South Africa to one entity in particular: Eskom.

Eskom is responsible for 95 percent of the country’s energy needs and the world’s 11th-largest power utility in terms of generating capacity. It ranks ninth in terms of sales, making up 60 percent of the total electricity consumed on the African continent, and boasts the world’s largest dry-cooling power station.

For many years, Eskom was the single-largest project cargo importer into the country. Due to the sheer volume of Eskom’s projects, this business is handled by several project forwarders and consultants.

Although dubbed as the “single-largest disaster in South Africa’s economic history” by the South African media, Eskom’s Medupi and Kusile projects, two of the biggest coal-fired generating plants in the world, were the source of many project cargo shipments for project forwarders. This work has now come to an end along with the appearance of substantial cracks in Eskom’s operability.

Operator Problems Stack Up

Eskom’s high-profile administrative problems relating to State capture, corruption, mismanagement, flouting of procurement procedures, neglected maintenance resulting in constant breakdowns and load shedding, electricity theft, non-payment by municipalities and other issues has resulted in Eskom’s debt ballooning to around ZAR419 billion (US$29.7 billion).

“Until this serious issue is sorted out, Eskom is in no position to start any other projects,” the forwarder said.
Its nuclear energy program has also been shelved for the foreseeable future due to lack of funding in Eskom and the government’s reluctance to involve private companies in the process.

So, is it all doom and gloom for the project industry in South Africa? Not according to Juan Enslin, CEO of Contour Logistics, a forwarder in South Africa.

“South Africa still has most of the project cargo business, and the reason underpinning this is the expertise and reaction time to service the customers. While some of the neighboring countries may have taken some work away, it was mainly based on costs. But not all these have been successful due to infrastructure and equipment requirements/issues in those countries.”

Enslin added: “South Africa has a good potential in terms of its projects industry despite all the above challenges. In fact, if anything, the challenges mentioned above, create opportunities for more projects.
Companies that are able to react to these challenges and opportunities will reap benefits in the years to come.”
He said that while mining projects have picked up, power and energy as well as maintenance on previous water projects are also topping up the current projects landscape.

Several projects, such as Vedanta Zinc International’s Gamsberg mine near Aggeneys in the Northern Cape, manufacturing of wind turbine tower sections for Kangnas Wind Farm at the Atlantis Special Economic Zone in the Western Cape, coal exploration projects in Botswana, desalination plants in Sub-Saharan Africa, and the Lesotho Highlands project, are expected to improve project business into and via South Africa.

Mining Outlook Positive

The outlook for the mining sector in South Africa for 2019 remains fairly bullish, and there is cautious optimism in the mining sector on the back of strong commodity prices.

Shirley Webber, coverage head natural resources at Absa Corporate and Investment Banking, said: “Platinum, palladium and diamonds seem to be leading this charge currently with improved base metal prices for copper and nickel foreseen on the back of global commodity demand for infrastructure development, especially in China and the U.S.”

Duncan Bonnett, of Africa House, a consultancy company specializing in various projects in Africa, added: “Power generation is a critical element in South Africa and Africa’s future given all the issues that we have been seeing in the recent past.” He said that there has been a significant increase in power projects on the continent, with many African countries investing in power projects.

“The South African project market and infrastructure is quite mature and has the capacity to handle many of the projects destined for Africa and its hinterland,” Bonnett said. “There is a growing number of renewable projects across the region, including solar, wind and geothermal, that are requiring sophisticated logistics solutions.”

But he also warned that while South Africa has been the main gateway to Sub-Saharan Africa and other African countries for several years, countries in the East, such as Kenya, Tanzania, Ethiopia, and ports like Lobito and Walvis Bay, are getting competitive and are working on taking a big share away from South Africa. Projects in countries like DRC can now get their cargoes in via Lobito and Walvis Bay more cheaply and with a quicker transit time than via South Africa.

However, Bonnett added: “In many instances, the logistics chain in other countries is not developed enough to manage cargoes of this nature, especially into remote areas, so project developers will look to companies with experience in delivering these solutions.

“Many projects happening within Africa are driven from outside of South Africa and Africa. With the last few projects that were delivered into Mozambique, not a single nut or bolt came from or via South Africa. Countries like Australia are delivering fully built-up and prefabricated cargo for these projects.”

Uptick Still Expected

Based on extensive research by Africa House on the African continent, Bonnett is confident that the project basket in Sub-Saharan Africa will increase with mining projects in South Africa including platinum group metals, manganese, coal and other mines, hydro and rail projects in Ethiopia, coal and gas in Mozambique, oil projects in Uganda, and infrastructure projects in Kenya and Tanzania all in play. West Africa is also seeing an uptick in areas such as mining, power, ports and rail to support both mining and oil and gas, as well as urban development.

Despite the recent financial crisis facing industry giants like Aveng, Basil Read and Group Five, Fitch Solutions predicts that the South African construction industry will emerge from recession in 2019 but at a lukewarm 2.4 percent growth.

Issues facing local construction companies are likely to drag down the performance of the construction industry in Southern Africa compared with other Sub-Saharan Africa regions.

Fitch expects the construction industry in the Sub-Saharan region to grow by 6.8 percent year-on-year, and this growth and investment flow is expected to continue over the medium term in order to meet pressing infrastructure demands.

Ethiopia is expected to remain Sub-Saharan Africa’s top performer, with its construction industry value likely to increase 12.3 percent in 2019.

South Africa is the largest economy in the African continent and an important member of the BRICS economic group (Brazil, Russia, India, China and South Africa). Project cargoes and their handling have been a staple in South Africa’s logistics and transport offering for many of the countries around South Africa for many years.
South Africa has the infrastructure, capacity, capability and skills required to handle the projects that are in the pipeline and those which are envisaged. However, the current administration in South Africa is holding back progression with a severe erosion in public and investor confidence in its abilities to create jobs and drive economic growth. For the government, the public of South Africa and its investors, a great deal hinges on the outcome of the elections in South Africa in May.

Much depends on how the government plans to handle core issues such as its infrastructure projects, its development programs, its socio-economic issues and Eskom and its affairs. Many investors are consequently playing a waiting game. If the government plays its cards right, South Africa can look forward to a massive resurgence in the development of its projects and transit business.  

Hariesh Manaadiar is a shipping and freight professional in the industry for over 30 years and also the author of Shipping and Freight Resource.

Image credit: Hellmann Worldwide Logistics