South Africa’s big five · 1 The low estimate (base case) includes the FSRU regassification...
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South Africa’s big five:
Bold priorities for
inclusive growth March 3, 2016
McKinsey & Company | 1
3
Key messages
2
1
Five bold priorities could transform the economy, adding R1 trillion
rand to GDP and creating 3.4 million jobs by 2030
▪ Advanced manufacturing: creating a global hub
▪ Infrastructure: partnering for productivity
▪ Natural gas: powering South Africa’s future
▪ Service exports: Riding the wave of Africa’s growth
▪ Agriculture: Unlocking the full value chain
South Africa has come a long way since democracy in 1994, but a
new recipe for growth and job creation is needed
South Africa will need to embrace some fundamental changes, not
least it will have to address a skills shortage through a dramatic
expansion of vocational training, at least 40% of the 3.4 million
jobs will require vocational skills
McKinsey & Company | 2 2
A new recipe for growth is needed
McKinsey & Company | 3
South Africa has some strong fundamentals
24.9
Russia 19.7
28.5
United States
Malaysia
68.4
Turkey
Kenya
13.6
15.3China
11.5
6.6
Brazil
Indonesia
South Africa
Nigeria
14.7
3.1
South Africa has
comparable productivity to
China and Brazil
Real productivity, 2012
($ thousand PPP per employee)2
SOURCE: World Bank World Development Indicators; Economist Intelligence Unit; McKinsey Global Institute analysis
1 South Africa’s peers are the other emerging markets that are popular with investors.
2 Productivity is based on GDP contribution per employee; levels in real 1990 purchasing power parity dollars.
South Africa has a good
environment for business
compared to its peers1
Overall risk, January 2015
(Lower score = less risk)
69
63
59
47
47
41
30
50
Russia
Nigeria
Malaysia
Indonesia
Turkey
Brazil
South Africa
Kenya
McKinsey & Company | 4SOURCE: McKinsey Global Institute
Analysed the South African economy
and its potential over 6 months
Prioritised the ideas by analysis of
their potential against three criteria
▪ Interviewed more than 50 experts in
academia, the public and private
sectors
▪ Conducted an extensive literature
review including the NDP, Harvard,
Goldman Sachs, World Bank, IMF,
OECD and other reports
▪ Generated more than ~100 ideas
through interviews, reading and idea
generation
▪ Completed a six month analysis to
assess the potential of the 100 ideas
at a high-level, and then a detailed
analysis of the big five priorities
1. Potential GDP growth of that
opportunity
2. Job creation potential of growth in that
sector
3. Significance of the broader social and
sectoral impact of each priority
1
2
3
McKinsey Global Institute research
▪ Combines the disciplines of economics
and management
▪ Examines microeconomic industry trends
to better understand the broad
macroeconomic forces affecting business
strategy and public policy
▪ Funded by the partners of McKinsey
independent from any other institution
Interviews were used to generate ideas, analysis to prioritise them
McKinsey & Company | 5
There are five catalytic opportunities for growth
SOURCE: McKinsey Global Institute
Capture the services growth opportunity
across Sub-Saharan Africa
Service
exports
Agricultural
value chain
Expand productive land and increase
productivity of existing land
Establish gas industry to complete SA’s energy
portfolio and capture Pan-African opportunitiesNatural gas
Deliver on our bold infrastructure build
programmeInfrastructure
Create a globally competitive advanced
manufacturing hubAdvanced
manufacturing
McKinsey & Company | 6
The big five priorities will grow the economy and create jobsReal GDP growth rate
%
1.8
5.4
3.6
1.8
1.1
National
Development
Plan target
Gap
1.8
Current
consensus forecast to 2030
Anticipated
improvement
Growth rate,
2008–14
Service
exports
0.3 (250)
Agricultural
value chain
Natural gas
0.3 (245)
0.2 (160)
Infrastructure 0.3 (260)
Advanced
manufacturing0.7 (540)
Incremental GDP, 2030
% (billion rand)
Incremental jobs, 2030
Thousand
490
460
330
660
1,500
Estimated total1 ~1.1 (1,000) ~3,400
SOURCE: Oxford Economics; Economist Intelligence Unit; IHS Economics; McKinsey Global Institute analysis
1 Gap numbers do not sum. The potential impact of each of the “big five” was modelled in isolation from the others. Because we did not calculate the
dynamic interactions between them, we cannot estimate their collective GDP impact by simply adding them.
NOTE: Waterfall numbers may not sum due to rounding.
McKinsey & Company | 7
Creating a global advanced manufacturing hub
McKinsey & Company | 8
South Africa’s manufacturing sector has halved in its relative contribution
to the economy since the ‘90s
SOURCE: World Bank
Manufacturing contribution GDP
Percent of total GDP
12
2424
8
10
12
14
16
18
20
22
24
-51%
20131020009080701961
McKinsey & Company | 9
Consequently, South Africa is punching below its weight in manufacturing
0
5
10
15
20
25
30
35
10 200 30 70605040
Netherlands
Turkey
United Kingdom
Thailand
Sweden
Norway
Chile
Indonesia
BrazilNigeria
Malaysia
South
Africa,
1990
2014
South Korea
Germany
Manufacturing value added as a proportion of GDP% of GDP
GDP per capita, PPPCurrent international $ thousand
Development trend1
1 Not a mathematical fit, but an observed trend that manufacturing peaks at 30–40% of GDP before gradually declining as a country’s wealth grows.
SOURCE: World Bank World Development Indicators; McKinsey Global Institute analysis
McKinsey & Company | 10
South Africa’s base cost structure is not a comparative strength$ per unit of input
SOURCE: Enerdata; World Bank; GWI; Passport GMID; Euromonitor; national sources; McKinsey Global Institute analysis
1 2012 for China, 2011 for Brazil.
2 Includes costs of documents, administrative fees for customs clearance and technical control, customs broker fees, terminal handling charges, and
inland transport. Assumes shipping from most populous city from a midsized company.
3 Malaysia and Thailand prices based on Hong Kong prices.
0.05
Germany 0.15
Brazil
Mexico
India
China
United States
South Africa
3.2
0.6
0.1
United States
Germany
Brazil
Mexico
South Africa
China
Thailand
Malaysia
India
Electricity price (including taxes) for
industrial users, 2015
$ per kWh
Water, 2014
Average rate across most populous cities
$ per cubic metre
2.4
1.6
0.2
Germany
Brazil
Malaysia
India
China
Thailand
Mexico
South Africa
United States
Industrial unit labour costs, 20131
$ compensation per $ output
450
1,794South Africa
2,588
Malaysia
China
India
Brazil
Germany
Mexico
United States
Thailand
Transport, 2014 average2
$ per 20-foot container
32.5
7.6
0.8
China
Mexico
United States
Thailand
Brazil
Germany
South Africa
Malaysia
India
Industrial wages, 2013 average
Total hourly compensation in manufacturing
(wages plus supplementary benefits)
$
863
789
536
South Africa
India
China
Malaysia
Mexico
United States
Thailand
Germany
Brazil
Steel market price, 2010–14 average3
$ per tonne
McKinsey & Company | 11
South Africa can be a meaningful player in advanced manufacturing
192
44%
24
6%
151
35%
67
15%
Global innovation for local markets
(includes advanced manufacturing)
Labour-intensive tradables
Regional processing
Energy- and resource-intensive commodities
CORE
LONG TERM1
ADJACENCIES1
SOURCE: IHS Economics; ITC Trade Map; McKinsey Global Institute analysis
1 Illustrative examples.
Energy intensityCapital intensityLabour intensityR&D intensity Trade intensity% of total SA manufactured exports, 2013
SA exports, 2013 (billion rand, 2010 prices)
South African manufactured exports
McKinsey & Company | 12
Capturing the
advanced
manufacturing
opportunity
1 Increase economies of scale by aggressively
pursuing export markets, investing in capital
equipment and focusing on innovation in
products, manufacturing processes and materials
12
3 Step up investment in R&D and build up South
Africa’s skilled employee base
2 Build up strong, close-knit manufacturing
clusters and supply-chain networks, with
increased depth and cost competitiveness;
government can support this through well-
designed Special Economic Zones
4 Government can expand trade agreements,
international partnerships and technical
alliances
McKinsey & Company | 1317
Infrastructure: Partnering for productivity
McKinsey & Company | 14
South Africa’s infrastructure spend level exceeds that of most other
economies
SOURCE: RSA National Treasury; PwC South Africa; McKinsey Global Institute analysis
4.7
3.9
2.3
2.5
3.0
3.6
4.1
4.4
4.7
4.9
5.1
5.3
8.9
Comparison country average2
Russia
Turkey
Mexico
South Africa forecast 2020
Brazil
India
Australia
South Africa
Vietnam
Saudi Arabia
China
Canada
1 Considers only the four major asset classes—power, water, telecom, and transport.
2 Average excludes South Africa and China.
Infrastructure spend as percentage of GDP, 1992–20121
McKinsey & Company | 15
547
289
579
2 189
133
2 322
3 737
Optimised NDP aspiration
Budgeted expenditure
Gap
Streamline delivery
Optimise project portfolio
Make the most of
existing assets
National Development
Plan (NDP) aspiration
SOURCE: National Development Plan; RSA National Treasury; McKinsey Global Institute analysis
Improve
productivity
to save
1.4 trillion rand
Improving the productivity of South Africa’s infrastructure expenditure
could result in a spend optimisation of 1.4 trillion rand by 2025Infrastructure investment and how it could be optimised
Cumulative 2016–25, billion rand, 2010 prices
NOTE: Numbers may not sum due to rounding.
McKinsey & Company | 16
The public sector can
take several actions…
Prioritise and clarify project pipeline
16
Propose proactive, innovative solutions
suitable for South Africa’s challenges and take on
a stronger sense of project ownership
Build capabilities for better specification, project
planning, and oversight
Push for better construction productivity
…while the private
sector also has a role
to play
Put more effective tendering processes in
place
Where appropriate, public-private partnerships can
offer a channel for providing funding
McKinsey & Company | 177
Powering South Africa’s future
McKinsey & Company | 18
New power plants will be required after 2020 to balance demand and supply
0
10
20
30
40
50
60
70
203029282726252423222120191817162015
-30
-20
-10
0Shortfall of capacity
before reserve
margin against
peak demand
GW
Low/high4
Reserve margin, 15%2 Peak demand3
Capacity before reserve margin
Energy forecast
based on existing
and committed
plants1
1 Includes Medupi and Kusile. Assumes an availability factor of 80% for non-renewables and 30% for renewables.
2 The South African Department of Energy recommends a reserve margin of 15% of peak capacity.
3 2014 peak demand, escalated at the growth rate set out in the integrated resource plan.
4 Plus or minus 1% growth from the base case.
SOURCE: Department of Energy Integrated Resource Plan; McKinsey Global Institute analysis
McKinsey & Company | 19
Gas is critical to complement the coal/ nuclear base load by 2030
Levelised
cost
R/kWh, real
2015
Lead times
years
SOURCE: IRP 2013 update; SA Coal Roadmap; UDI; EIA; CNE; EU Commission, Renewable Energy Progress Report
2009; EMEA EPNG Practice; Expert interviews; Team Analysis
0.92
0.73
0.861.10
Typical
risks
9-17
2-4
7-8
▪ Capital investment
risk management
– Budget and
timeline overruns
common
– 30 years since
Koeberg built
▪ Unit cost escalation
in Waterberg
– New coal sites
require logistics
infrastructure
– Require access to
water
▪ New sector has to be
built
– Uncertainty about
source of long-term
gas supply
– Forecast of price
trends uncertain
Coal Nuclear Gas
McKinsey & Company | 20
An investment of 600-1,000 billion rand is needed to unlock the long-term
potential of the gas industry
SOURCE: McKinsey Global Institute analysis
229
403
488
154
77
98
Midstream
oil and gas
(pipelines, LNG
regasification)1
Upstream
oil and gas
(shale drilling,
fracturing)
Total 650 1.053
8
565
383
106
Downstream
(gas, solar &
renewables
plants)
1 The low estimate (base case) includes the FSRU regassification terminal and associated pipeline infrastructure in the Saldanha and broader Western
Cape area. The high estimate includes both the Rovuma and Karoo-Johannesburg shale gas pipelines; either, both or neither of these pipelines may
materialise.
Total estimated investment requirements, 2015-2030
Billion rand, 2015 pricesHigh estimate
Low estimate
McKinsey & Company | 21
By 2030, the gas industry could boost GDP by 140 billion
to 250 billion rand annually and create up to 330,000 jobs
SOURCE: McKinsey Global Institute analysis
66
27
20
138
114
Total
251
138
Cement1Methanol1Polyethylene1Power
production
Shale
extraction
1 These three examples are indicative of the range of opportunities for potential downstream gas use, but none has been confirmed. The downstream
use realised after 2030 depends on gas market prices and regional and global demand for final products. Polyethylene and methanol would both be
exported; cement would either be consumed locally or exported to neighbouring countries.
2 Assumes an annual production range of 0.3 trillion to 0.7 trillion cubic feet.
3 Assumes that jobs will be transferred from existing plants.
NOTE: Numbers may not sum due to rounding.
GDP impact
captured
in
downstream
sectors
Annual incremental GDP impact by 2030
Billion rand, 2010 prices GDP impact from power—likely
GDP impact from industry—uncertain
Jobs created
(direct, indirect,
and induced)
Thousand
03 0–132 0–54 0–40 Up to 32844–1022
McKinsey & Company | 22
Government has
a critical role in
capturing the
natural gas
opportunity
1 Secure natural gas supply by investigating and
pursuing all options, including imports of LNG or
Mozambican gas, and running an appraisal program
to confirm South Africa’s own shale potential
3 Create gas demand by guaranteeing purchase of
gas as an end-user for power
2 Act quickly to finalise and clarify the regulatory
environment, including the Mining and Petroleum
Resources Development Act, the amended technical
regulations on hydraulic fracturing, permits for pilot
wells and the environmental impact assessments.
22
4 Ensure transparency to attract private funding,
as an estimated R600 billion to R1 trillion is needed
to drill wells, transport gas and install power plants
McKinsey & Company | 23
Service exports: Riding the wave of Africa’s growth
McKinsey & Company | 24
South Africa is punching well below its weight in the export of services
into sub-Saharan AfricaEach regional powerhouse’s market share of services in its home region
%
2
8
19
26
Brazil
(Latin America)
Japan
(Asia-Pacific)
South Africa
(sub-Saharan Africa)
United Kingdom
(Europe)
38 2712 25Share of
region’s GDP
%
SOURCE: UN Service Trade database; McKinsey Global Institute analysis
McKinsey & Company | 25
Expanding service exports could increase value added to GDP
by 245 billion rand and create 460,000 jobs by 2030
SOURCE: Stats SA; IHS Economics; UN Service Trade; Gartner; Government of India National Development Council; McKinsey databases: Panorama
Global Banking Pools, Global Insurance Pools; Infrastructure Projects Analytical Tool; McKinsey Global Institute analysis
99
43
26
204
79
3713
79
283+246
Potential
global value
added, 2030
Other business
services to SSA2
Financial
services to SSA
Construction
services to SSA
Global business
process
outsourcing
services
Baseline
SSA value
added, 2030
1 Sub-Saharan Africa.
2 Includes trade, catering, accommodation, transport, storage, communication, real estate, and business services.
NOTE: Numbers may not sum due to rounding.
Estimated annual incremental value added of service exports to GDP by 2030
Billion rand, 2010 prices
Assessed in detailHigh-level estimate
GDP impact
Jobs created (direct,
indirect, and induced)
Thousand
192 78 45 145 460
Measured
SSA1 value
added, 2012
McKinsey & Company | 26
China has the largest share of construction projects in sub-Saharan
AfricaDistribution of foreign contractors1 winning construction projects in sub-Saharan
Africa2, 2010–15
%
1 Contractor country determined by the location of company headquarters; includes projects worth $200 million or more.
2 Excludes projects in South Africa.
NOTE: Numbers may not sum due to rounding.
SOURCE: McKinsey’s Infrastructure Projects Analytical Tool database; McKinsey Global Institute analysis
Brazil China South Africa United Kingdom United States Rest of world
Fragmented; each country
wins no more than 3%
share of contracts
50
56
7
32
53
8
11
11
17
7
11
20
7
56
Project managementConstruction Consulting
McKinsey & Company | 27
Capturing the
services
opportunity
1 Government can drive a greater focus on services
trade, including staffing trade attaches in embassies,
and concluding more services-oriented trade deals
3 Banking services need to target the retail market,
particularly low-income customers, by developing
digital mobile offerings and other low-cost innovations
2 Construction companies need to develop their
local market intelligence, build a footprint of local
partnerships across the rest of Africa and send its
best talent into the region
27
4 Business Process Outsourcing requires a large
talent pipeline, an academy system should seek to
train up to 13,000 new people each year
McKinsey & Company | 2823
Agriculture: Unlocking the full value chain
McKinsey & Company | 29
South Africa’s best yields are in fruit; other products have room to improve
Average yield, 2013
Tons per hectare
17
38S.Africa
Australia
Oranges StrawberriesTomatoesGrapes Apples Sugar caneWheat Maize
Climate
percentile1
%
SOURCE: UN Food and Agriculture Organization Statistics Division; McKinsey Global Institute analysis
1 South Africa’s relative position (in yield) out of 100, among 28 countries with climates similar to South Africa’s: Algeria, Argentina, Australia, Bahrain,
Bhutan, China Taiwan Province, Cyprus, Egypt, Greece, Guadeloupe, Iraq, Israel, Italy, Jordan, Kuwait, Lebanon, Libya, Malta, Montenegro, Morocco,
Nepal, Pakistan, Portugal, Qatar, Saudi Arabia, South Africa, Tunisia, and Uruguay.
NOTE: Not to scale.
9
15
33
Lebanon
S.Africa
Taiwan
11
36
45Israel
Algeria
S.Africa
2
4
7
Iraq
S.Africa
Egypt
44
72
Cyprus 143
S.Africa
Tunisia 4
23
S.Africa
Israel
16
55S.Africa
Iraq
Egypt 114
10
44
S.Africa
Greece
94334 16 17 6922 63
McKinsey & Company | 30
0
25
50
75
100
125
150
175
200
225
250
3 210 8 16 1772 1918151310 201494 51 6
Agriculture GDP/national GDP
Nigeria
South Africa
Ecuador
Morocco
Indonesia
Portugal
United Kingdom
Brazil
Uruguay
Turkey
Russia
Japan
Spain
Malaysia
ItalyUnited
States
India
Germany
China
Argentina
Agro-processing GDP/agriculture GDP
Senegal
Natural country
development cycle
South Africa could experience a strong shift towards
more processed products by 2030
SOURCE: International benchmarks; IHS Economics; World Bank WITS; McKinsey Global Institute analysis
Weight of the agro-processing sector vs. agriculture sector
Countries with GDP per capita >$1,000, 2014 (%)
NOT EXHAUSTIVE
McKinsey & Company | 31
The agriculture value chain could increase value added to GDP by 160
billion rand, doubling GDP contribution and creating 490,000 jobs by 2030
107
124
28
68
78
146
Total potential
agricultural
value chain
GDP, 2030
Increased
processing
+163 309
Smallholder
growth
Commercial
farmer growth
11
Total output,
2013
SOURCE: IHS Economics; World Bank WITS; McKinsey Global Institute analysis
51 127 314 1,603
Annual incremental value added to GDP by 2030
Billion rand, 2010 prices
GDP impact
Agriculture
Processing
NOTE: Numbers may not sum due to rounding.
Jobs created (direct,
indirect, and induced)
Thousand
McKinsey & Company | 32
Capturing the
agricultural
opportunity
32
2 Shift the focus and investment towards greater
processing of foods, increase access to energy,
water and logistics in rural areas to facilitate this
growth
1 Develop an integrated national agricultural plan,
focused on achieving major gains in productivity
3 Focus on actions to increase competitiveness,
for example reducing feedstock costs for poultry and
meeting sourcing regulations and removing trade
barriers in markets in Africa, Asia and Europe
4 Transition smallholders to horticulture using
long-term financial and extension services support,
and the formation of cooperatives to access markets
McKinsey & Company | 3329
Equipping South Africans for the jobs of the future
McKinsey & Company | 34
18 22 1914
54
6162 64
45
35
76
13
11 10 7 12
17
6
Elementary
occupations
Skilled trade
workers2
Technicians
and associate
professionals
Professionals
Managers
Agriculture
190
42
Services
249
Energy and
natural gas
80
4
Construction
342
32
Manufac-
turing
339
3
SOURCE: Stats SA, Quarterly Labour Force Survey; McKinsey Global Institute analysis
Only 22 percent of jobs created could employ entry-level matriculants;
other roles require vocational skills or qualificationsBreakdown of estimated jobs created, by skill level and sector, forecast for 20301
%; thousand
1 Skill level defined using Stats SA Quarterly Labour Force Survey categories.
2 Skilled trade workers include roles such as clerks, sales operatives, skilled labourers and craftsmen, and plant and machine operators and assemblers.
NOTE: Numbers may not sum due to rounding.
11
6
Broader
economy
2,226
21
45
17
6
2030 total
employment
creation
3,428
10
48
22
14
McKinsey & Company | 35
0
5
10
15
20
25
30
35
40
45
50
55
0 5 10 15 20 25 30 35 40 45 50
Luxembourg
Belgium
Norway
South Africa
Germany
Austria
Czech Republic
Denmark
Netherlands
IsraelIceland
Finland
FrancePoland
HungaryIreland
Estonia
Spain
Youth unemployment rate (age 15–24)1
%
Enrolment in in-company vocational education2
1 2013 data for South Africa; 2010 data for other countries.
2 In % of the age cohort; for a sample of 17 OECD countries that offer in-company vocational education systems.
R2 = 0.4027
In both emerging and developed economies, youth employment correlates
positively with enrolment in vocational education
SOURCE: OECD; Stats SA, Quarterly Labour Force Survey; Lolwana, South Africa country report for the 2014 ministerial
conference on youth employment, May 2014; World Bank; McKinsey Global Institute analysis
In countries where enrolment in
in-company vocational education
is less than 15%, the risk that
young people will be unemployed
is double that in countries with
higher enrolment rates
McKinsey & Company | 36
Four initiatives
can foster
education for
employment
1 Expand vocational training, from its current 8 percent
of 15-24 year olds to 40 to 60 percent of South African
youth
3 Improve the youth’s “soft skills”, through coaching
on workplace behaviour, interview preparation,
customer relations, and communication skills as well as
initiatives such as job shadowing
2 Boost the quality of education, enhancing the quality
of school leaving qualifications and focusing on
strengthened language skills, mathematics and science
4 Invite business to play a greater role in education
and training, by creating more apprenticeships, and
participating in designing curricula
32
McKinsey & Company | 37
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