Portfolio Committee on Trade and Industry 22 August 2014 IMPACT OF ADMINISTERED PRICES ON INDUSTRIALISATION Portfolio Committee on Trade and Industry 22 August 2014

Context Regulation of administered prices (electricity; port and freight rail and road; water) tariffs are neither functions nor core competencies of the Department of Trade and Industry Succesive iterations of IPAP have provided a perspective that sharply escalating administered prices constitute a serious economic shock to the viability and competitiveness of manufacturing sector, on top of external economic shocks especially the global recession. Data is difficult to obtain in a complex regulatory and institutional environment IPAP also pointed to the danger that further shocks to the manufacturing sector such as the proposed ‘carbon tax’ could push manufacturing to a tipping point unless these are carefully calibrated policy interventions The DTI recognises that the structure of production needs to shift towards energy efficiency and greater competitiveness. This is reflected in DTI programmes such as the National Cleaner Production Centre and incentives such as the 12(l) and (i) and the MCEP.

Electricity tariffs Successive IPAP iterations have characterised the problem as: Sharply escalating and bunched up electricity prices Significant tariff differentials in and and between municipalities; in some instances triple digit increases and price differentials within one municipality Significant anomalies and problems in relation to billing Municipalities distinguish between commercial, industrial and domestic users, where they reticulate electricity and recover costs from the indirect supply of Eskom power to industrial users. Tendency appears to be to load higher tariffs on industrial users which adds to the input costs of these users and has and could increasingly lead to their lack of viability.

Electricity tariffs Problem has roots in the funding structure of local government. Municipalities appear to be using electricity tariffs to generate revenue and for cost recovery inefficiencies; in some cases this may include without infrastructure upgrading and rehabilitation. Water may be an increasing problem especially with respect to water shut-downs. The dti is currently engaged in scoping the extent of the problem.

Electricity Tariffs Sources: Eskom EIUG

Country Comparisons: Electricity Tariffs Source: Frost and Sullivan report 2009

Port, freight and rail prices IPAP has consistently highlighted the fact that very high and mis-aligned domestic port tariffs constitute a very serious barrier to the competitiveness of SA manufacturers The World Bank Report of 2013 again highlighted that SA port charges are amongst highest in world; container and automotive cargoes face cost premiums of between 710% and 874% of the global norm according to the World Bank compounded by inefficiencies at ports, and rail and freight costs and inefficiencies The tariff regime is biased against local manufacturers and exporters. Tariffs for the export of primary commodities attracts lowest tariffs; imports are in the median and exports of value added goods attract highest tariff. This is a substantive hurdle as a greater focus on export growth is brought to bear; especially with respect to value added, tradable sectors.

Logistics cost as a share of total and transportable GDP Source: CSIR

Port tariffs comparison Tariff category Global average tariff South Africa tariff SA’s premium or discount of global average (%) Container $ 62 414.90 $287 217.80 360.2 Container with rebate $245 913.20 294.0 Automotive $92 682.80 $300 253.60 224.0 Automotive with rebate $289 560.70 212.4 Iron ore $257 113.20 $208 489.90 -18.9 Coal $124 307.80 $71 049.60 -42.8 Source: Ports Regulator report 2012

Implications of tariff structure SA Manufacturers have essentially ‘sub-sidised’ TNPA operations - with subsidies ‘passed on’ to exporters of primary commodities (mainly coal & iron ore) and importers of manufactured goods This model runs counter to national policy perspectives to support tradable; value adding and labour intensive manufacturing sectors. Recent changes to the tariff regime are welcome; but much more needs to be done. DTI argued that the TNPA pricing strategy needs to be further adjusted to take into account national policies and where possible adjustments to the Transnet operational and infrastructure investment financing models.

Carbon Tax In order to meet SA’s climate change mitigation obligations it is self evident that the energy intensive character of the SA economy has to be addressed. National Treasury have tabled a draft Carbon Tax policy. Climate change mitigation measures require, inter alia, that energy efficient production is supported. The dti does this through a range of measures to support stronger energy efficient production systems and investment in energy efficient capabilities. (National Cleaner Production Centre; 12 (i) and (l) tax incentives and the Manufacturing Competitiveness Enhancement Programme) The dti has previously indicated the risk associated with a 'one size fits all' carbon tax instrument across all sectors of the economy. A callibrated approach with due consideration to the most vulnerable sectors which are strategic to retaining the domestic industrial base is required. A carbon tax is viewed as a way of increasing fossil fuel costs in such a way that both substitution to cleaner energy technologies and energy conservation processes take place. These processes are however not simple and can be achieved either by changing output or adopting new production technologies or shifting consumption towards goods that are not carbon intensive. However, a carbon tax by itself is unlikely to change output, lead to the adoption of low carbon technologies or increase the consumption of goods with low carbon intensity. This will require large investments, and availability as well as access to new production technologies, which in turn depends on a number of factors. The first, and most important, of these factors is the removal of fundamental market barriers for low carbon technologies and goods. Market barriers refer to market structure and supply constraints such as high transaction costs, split incentives, and contract structures that make it difficult to capture low carbon opportunities, and removal of capital constraints in terms of access to capital, long pay-back periods and investment priorities for low carbon goods and technologies. The removal of barriers or the creation of a market will involve the institution of incentives, standards and regulations to provide large and certain markets for technologies and products as well as to drive down costs, and the removal of capital constraints to ensure the availability of sufficient capital for the development and use these technologies. It will also include a coherent and stable policy environment that includes both energy and 
industry policy.   Since these policies play an influential role in firms’ decision to invest, the absence of these policies would mean a reluctance to invest in South Africa due to negative business environment, uncertainty over government commitment to industry, and the long- term fiscal, regulatory and policy environment.

Carbon Tax This could, inter alia, include a carbon tax, levied in such a way that it allows for offsetting allowances or deductions that recognise: Investments in plant and equipment that mitigate carbon emissions. Shifting relative prices in favour of less carbon intensive sectors which are more labour intensive and value adding, in particular a shift to the pricing of intermediate inputs such as steel, polymers and aluminium at considerably below import parity levels. Investments in R&D, innovation and commercialisation of green technologies, products and services to be undertaken in South Africa. There is a concern that the carbon tax would lead to a loss of competitiveness, especially in the international market. There is therefore a related concern that certain high emissions firms and even industries may relocate from South Africa to countries that have low emission standards or weaker environmental regulations. The absence of an effective carbon price in these countries would serve as further incentive for relocation. However, this relocation would not be easy. Relocation would be influenced by other factors such as the costs of labour, raw materials, and transport costs. In addition, it is completely plausible, that if carbon pricing becomes an international phenomenon, no country will escape the problem of carbon border tax adjustments. Therefore, the prospect and likelihood of relocation of industries is debatable. It is thus, important to understand the likely impacts of the carbon tax on international competitiveness for South Africa.

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