South Africa has significant technological capacity in its mining equipment and services sector that should be nurtured and enhanced through supportive government policy, a recently published academic paper argues. But it also warns that prevailing government policy does little to mitigate existing constraints to the sector’s growth and fails to fully recognise its potential contribution to economic development.
Entitled ‘South African Mining Equipment and Specialist Services: Technological Capacity, Export Performance and Policy’, the paper was produced under the auspice of a research project which examined linkages in seven African countries entitled ‘Making the Most of Commodities’. The paper asserts that, in South Africa, this sector is already located at the “global technological frontier”.
It gauges such prowess on the basis of the fact that mining-related patents comprise a larger share of South Africa’s total patenting activity at the US Patent and Technology Office (USPTO) than is the case for comparator countries and these innovations receive significantly more citations than other South African patents.
Author David Kaplan, who is professor of business-government relations at the University of Cape Town’s School of Economics, notes that a search of patents at the USPTO revealed no other significant cluster of high-value South African patents.
Moreover, South Africa is a world leader in many mining products and services. Home-grown mining equipment and associated services already carry high levels of local content, constitute a significant value-added export and have a strong presence in the dynamic African market – a market that is expected to grow further, owing to the continent’s unexploited mineral wealth and the growing demand for commodities in countries such as China and India.
Trade data interrogated shows that there is no other South African manufacturing sector that has substantial exports with a positive trade balance and high local value addition. In 2008 and 2009, South Africa’s imports of capital equipment were three times greater than exports. But it was a net exporter of mining equipment.
Policy Problems and Debate
However, Kaplan cautions that the sector’s current successes rest on an earlier period of mining-industry expansion, during which elaborate public support for research and training was introduced.
This support enabled mining equipment and services enterprises to exploit “economies of scope” rather than “economies of scale” – in other words, South Africa’s mining industry offered a large number of potential customers for specialist suppliers of mining equipment and services rather than scale.
But many of the foundations that provided that support have been eroded. In addition, the sector’s outlook, which should be positive in light of the outlook for commodities, is being “severely” curtailed by skills shortages, declining public and private support for research and development, and limited access to finance.
The paper has emerged as the governing African National Congress (ANC) continues to deliberate on its ‘State Intervention in the Minerals Sector’, or Sims, draft policy document, which has drawn a mixed reaction from business and civil society.
The mining industry has welcomed its rejection of blanket nationalisation, but has raised concerns about the potential for burdening the sector with new and higher taxes.
Inside the ANC, the themes contained within Sims were broadly accepted by delegates at a party policy conference in late June, but they are still to be debated and adapted ahead of the ANC’s upcoming five-yearly National Conference in December.
As is the case with Kaplan’s paper, Sims highlights the potential and importance of the mining equipment and services sector, having identified so-called ‘backward linkages’ as central to “using a natural comparative advantage to develop a competitive advantage”.
The linkages discussed in Sims relate to mining’s potential to offer spin-offs for specialised inputs, such as chemical and biological products, machinery and equipment and specialised services, such as consultancy services into mining and non-mining areas of the economy.
But Sims also highlights the need to build fiscal (a resource rent tax), forward (beneficiation), knowledge and spatial linkages to extract greater socioeconomc benefits from South Africa’s natural mineral endowment.
Kaplan’s paper acknowledges the potential advantages of exploiting these ‘knowledge’ and ‘lateral’ advantages.
He writes that any expansion in output in the relatively patent-rich mining equipment and specialist services milieu would be accompanied by a greater increase in ‘knowledge content’ when compared with an equivalent expansion in output in other sectors, which have a lower knowledge content.
“Output expansion in mining and specialist services will be accompanied by greater learning, innovation and associated externalities as compared with output expansion in other sectors,” he avers.
The paper adds that two other factors also underpin the case for greater policy support.
Firstly, the concentration of manufactured exports in a few product and sector categories underlies the need to ensure sector support favours those sectors that have a strong likelihood of growth. “South African mining equipment and services have both a strong presence and distinctive advantages in relation to a market where there are clear prospects for growth, namely mining activity in Africa.”
Secondly, the sector is characterised by a large number and variety of firms, institutional supports and a clustering of activities. The paper found that the South African mining equipment sector is located primarily in Ekuhuleni, in Gauteng province. A database of some 678 such firms also shows that these enterprises employ 95 000 people, are mostly (67%) owned by South Africans and are, in the main, not listed on the JSE.
Kaplan argues, therefore, that the mining equipment and specialist services sector “merits recognition and specific sectoral support”.
Such support should focus on enhancing the competiveness of the sector and dealing with the critical constraints in relation to skills and training, public support for research, linkages to the universities and science councils and access to finance.
In particular, the paper calls for a reversal of the current tendency of a weakening in the link between the industry and research institutions. “There is a widespread view, both in the industry and in the science councils, that, while some research capacity remains in the science councils, there has been a clear reduction in funding for research and a consequent deterioration over time,” the paper laments.
It says the decline is most notable at the Council for Scientific and Industrial Research, which previously had large mining programmes. But there were also weaknesses at Mintek, which focuses on minerals processing and metallurgical engineering, and the Council for Geoscience.
The weakening in support for innovation would also make it difficult to spread mining-linked technologies and companies into new non-mining related products and markets – a ‘lateral’ migration for which the Sims document also calls.
“One possible direct mechanism for doing this would be the creation of a ‘challenge fund’ . . . to support firms that utilise their existing technological capacities in relation to mining in order to adapt or develop new products and enter into new markets outside the mining industry,” Kaplan argues, adding that such a fund would meet part of the costs incurred by the firm.
Government policy could have a “large influence” on achieving the objective of upscaling the sector, as well as facilitaing lateral movement.
But current government policy “does little to mitigate any of the constraints that have been identified as inhibiting the further development of the mining equipment and specialist service sector”.
The potential for growth of this sector and its potential contribution to broader economic development, the paper adds, is “almost entirely unrecognised”.