Since 2015, South Africa’s manufacturing sector has been moribund; in real terms, it has not grown at all. For decades before that, the SA manufacturing sector had grown — strongly, in fact, between 2000 and 2010. But because the economy as a whole was growing too, the contribution of manufacturing to the economy declined — and it has continued to decline in absolute numbers. As a proportion of GDP, it has dropped from around 24% of GDP to around 12% of GDP today. 

Recently, the decline has become very noticeable, more so because the government has put such a high priority on localisation and manufacturing. SA’s significant tariff protection programme, the very interventionist approach of the Department of Trade and Industry, and the frequent statements by government ministers championing manufacturing over mere mineral extraction are all testament to the government’s ambitious aims.

Much of this issue has been covered before, so the reasons for SA’s deindustrialisation are pretty well known. Lots of local manufacturing has been obliterated by the emergence of very cheap Chinese manufacturing, which has blown many local businesses out of the water. Manufacturing is very dependent on globally competitive electricity prices — well, start with the availability of the electricity — and that has obviously been very spotty. SA’s strike-happy labour unions, supported by very facilitative labour legislation, are also a big problem.

These reasons are all very well known. But I think there is one other thing which is holding SA’s manufacturing sector back: heavyweight government ideological support for manufacturing. It’s odd, but so often when the government sets out to do something, the exact opposite actually happens. How does that terrifying magic work?

One of US president Ronald Reagan’s most famous quotes was: “The nine most terrifying words in the English language are ‘I’m from the government, and I’m here to help’.” I’m really not criticising the intention, we all want a helpful government and more manufacturing. One sympathises. But the fact is that in SA and almost everywhere else in the world, as a general rule, government and private enterprise don’t mix very well.

There is an old joke that the world’s two most well-known Scotsmen, Adam Smith and David Hume, were going out for a walk in a very built-up area of Edinburgh. Two women in the top-floor apartments across the road from each other were having a very loud argument. Hume said to Smith, “Yon twa wimmen will nere agree.”   

“And why is that?” Smith asked. 

“Because they are arguing from different premises,” Hume said.

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And so it is with the government and manufacturing; what they are looking for is so different that they are fundamentally incompatible. Of course, there should be an element of overlap, as there is in almost all countries. But in SA, what the government wants has so overwhelmed what business wants, that there is just no sense of equivalence. The result is that it’s physically diminishing the sector as a whole.

You can see this particularly at work in the Industrial Development Corporation. The IDC is now more than 80 years old, and has been responsible for some grand and important industrial projects. It was always run as a kind of halfway point between the government and the private sector. And it’s been a fantastic success — until recently.

The old philosophy of the IDC was to build and support large-scale industrial projects; projects so large they would struggle to find commercial funding. That was the idea: step in where the banks would not. Over the years, its successes, particularly in mining-adjacent projects, provided the organisation with an underpinning of solid income that has made the organisation self-sustaining, even though it’s a wholly owned government effort.

This bank of historical successes over the years makes reading the IDC’s financial statements very tricky. In the latest IDC annual report for the 2022 financial year, for example, we are told that the group revenue rebounded by 34.8%, from R16-billion during 2020/21 to R21.7-billion for 2021/22.  Great. Operating profit after tax came in at R6.3-billion. Fab. But at least half of that came in from its cushion of equity-accounted past investments. 

Strip out all the legacy businesses, and how is the organisation doing? It’s very hard to tell. The IDC claimed it loaned around R7.2-billion last year, vs R6.3-billion the previous year. That’s roughly in line with its profit. You can see the logic here: the organisation takes the profits and dividends it earns from its historic investments and invests in new projects. But the whole philosophy of investment in big manufacturing projects that can move the needle and make a real difference is clearly gone.

In its place is this hyperpoliticised philosophy; small businesses, black businesses and women’s businesses are its sole focus now. The focus sectors are small-scale agriculture and bit-piece manufacturing here and there.

That seems perfectly reasonable from a social development point of view, but given the huge number of other organisations catering for these segments, it doesn’t surprise me that big new industrial projects — really what the IDC was designed to generate — are just not happening.

The IDC is now basically a government department with its own, independent balance sheet. There is an interesting note in the annual report, which says that some of the IDC’s investments now have to comply with the notoriously bureaucratic Public Finance Management Act, and because they don’t, unauthorised expenditure has just exploded.

And then there is one other question: how many of all these investments into hyperpolitically correct projects are succeeding? Turns out not that many. Non-performing loans have “improved” from 40.3% to 31.2%. In other words, one out of every three projects is failing. It’s a huge relief that we have not had reports of large-scale corruption at the IDC and that’s a very big positive, but my guess is that if it weren’t for that huge cushion provided by past successful investments, the IDC would be another Eskom. BM/DM