Astute African manufacturers will move to clean power to align with global investor and importer expectations

Pictured: Forbes Padayachee

The attraction of global investment into our manufacturing sector is pivotal for driving industrialisation and economic growth, so understanding investor requirements in local manufacturing projects is essential for industry stakeholders - as are the expectations of importers sourcing goods from local manufacturers. Key factors influencing investment and import decisions include political stability, policy certainty,  regulatory frameworks, infrastructure quality, workforce skills - and sustainability. 

South Africa's competitive advantages in manufacturing, such as abundant natural resources and a growing consumer market, present considerable opportunities. However, realising these benefits requires addressing challenges in areas such as supply chain efficiency and technology adoption. 

In terms of sustainability measures, a widespread transition from grid power to renewable energy, like solar, would enhance the local manufacturing industry’s position in global value chains, as well as support robust export levels in the next few years. 

This transition can only be enabled by a fast-growing renewable energy sector, which is likely to see accelerated growth in Africa in the years ahead, as capacity requirements increase and the declining cost of renewable power continues to be able to deliver material savings versus increasingly expensive and erratic grid-sourced power

Local manufacturers need to reduce carbon emissions to stimulate investment and export

To outline the wider context of carbon emissions, the European Union, a key market for South Africa-based manufacturers,  began implementing its Carbon Border Adjustment Mechanism (CBAM) transition phase in October 2023; it is scheduled to come into full force in 2026. This is the EU's tool to “put a fair price on the carbon emitted during the production of carbon-intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries.”

• During the transition phase, EU-based importers of goods covered by CBAM from non-EU countries must report the embedded emissions of their imports, without incurring any financial liabilities.

• However, after 2026, if carbon emissions exceed the prescribed amount, importers will need to pay an additional tax or purchase carbon credits to offset their emissions. For now, the industries subject to CBAM are electricity, aluminium, iron, steel, cement, fertilisers, and hydrogen. Agriculture is currently excluded but indications are that food imports will be taxed by 2035.

Meanwhile, the UK is putting in place its own CBAM, which will include agriculture far sooner. Canada and Japan are also working on their own CBAMs.

According to Africa Confidential, impact assessments suggest that South Africa’s economy will be hit hardest by CBAM in Africa, with a possible 4% drop in exports to Europe.

Against this context, it is clear that locally-based manufacturing companies that put in place infrastructure to significantly reduce their carbon footprint stand to stay on the right side of evolving global legislation with respect to carbon emissions and avoid any negative pertaining investment/export impact.

Operationally, transitioning from grid power to a solar energy solution, via a power purchase agreement (PPA) with an independent power producer, is a practical, cost-effective solution to achieving this goal. 

Key points I covered at the 2024 Manufacturing Indaba

Factors driving investment considerations around different countries

• Stability and certainty of policy framework: for example, are private investors welcome in the country? What is the ease of doing business in the country? Is there institutional capacity to support policy framework?

• Basic economics: Is there a market; is it cost-effective, and does it deliver a competitive advantage vs alternatives (e.g. imports)?

• Cost and time certainty of the market opportunity: How easy is it to price in the development cycle? For example, here in South Africa’s renewable energy sector, the Government has had a clear policy and the right institutional support, with a defined timetable, which led to significant investment in the sector and turned the REIPPPP programme into a success story.

Africa’s competitive advantage question

Africa faces competition from other developing economies like India, China and Vietnam and South Africa needs to look at the specific incentives that can attract manufacturing to the country, including:

• Africa is home to the youngest population in the world with 70% of Sub-Saharan Africa being under the age of 30 years. By 2030, 42% of the world’s youth would be in Africa, 75% of which are under the age of 35 years. This is good for a productive and young workforce (all things being equal, including training opportunities for a competitive workforce).

• Land availability: SA, and Africa in general, has plenty of land to support the development of businesses and development zones.

• With CBAM considerations in mind, the low cost of energy and the use of renewable energy in lowering costs for manufacturers - there has been a  76% decrease in solar PV (photovoltaic) costs in South Africa, since 2010, with a 55% decrease in wind energy costs in the same period

• Finally, our greatest asset is our people. Continuous education and investment in our workforce are vital to our long-term success in the manufacturing sector.

In closing

My main message for manufacturers, at the Plenary Panel discussion: Future-proof your energy strategy today. The world is competitive and South Africa has tremendous potential. Manufacturers need to future-proof their energy needs and their operations so that they can focus on their core business.