The Contribution of Shipbuilding to the South African Economy



|An Overview Shipbuilding in KZN and its Contribution to the South African Economy |

|By Prasheen Maharaj, KZN Shipbuilding Cluster |

“There are things that we have to try that we have not tried. We cannot do more of the same,” said The Honorable Deputy President of South Africa, Phumzile Mlambo-Ngcuka on a frank assessment of the Accelerated and Shared Growth Initiative for South Africa (Asgisa) [Sunday Times, 15 April 2007].

An Overview of the South African Shipbuilding Industry

Shipbuilding is very much part of South Africa’s proud maritime tradition – two oceans, an immensely long coastline, skilled and dedicated workers and businesses, and a long-proven ability to design, build and operate excellent vessels of many types. So make no mistake: shipbuilding is part of our heritage. It is not and should not be viewed as a “dying/dead industry.” We can and will compete successfully with the best in the world in niches and areas we choose.

Shipbuilding is an international industry and any shipyard, in order to compete, must be able to build to the quality and pricing according to worldwide standards. The demand for ships in South Africa is sporadic and insufficient to provide the local shipbuilding industry with a basic workload on a sustainable basis; therefore South African shipyards must compete on the international market for contracts.

For many years shipbuilding, together with other maritime industries, was recognised as strategically important to economic and industrial development in many countries. Among many countries in the last three decades, direct government subsidies were provided for shipyards in Germany, United Kingdom, USA, France, Russia, Poland, Romania, Japan, Korea and China.

Time is now right for South Africa and the rest of Africa to enter the shipbuilding industry and enjoy the benefits of the widespread stimulatory effects of the industry. We as South Africans and Africans cannot continue to rely on Western Nations to build our productive assets for us. Africa as a continent needs to build strategic manufacturing capabilities in order to unleash its full potential and fight the scourge of poverty that engulfs this continent – this will give true meaning to the African Renaissance initiative.

Who are the local players?

• Southern African Shipyards – Durban (the biggest Shipyard in Southern Africa

• DORMAC – Durban (primarily a ship repair yard)

• Elgin Brown and Hammer – Durban (primarily a ship repair yard)

• Damen Shipyards – Cape Town

• Veecraft Marine – Cape Town

What have we built in KZN before?

The KZN shipbuilders have previously built the following vessels:

• Offshore Oil Platform for Mossel Bay

• South African Navy’s Strike Craft

• South African Navy’s Mine Hunters

• South African Navy’s Fleet Replenishment Vessel (the largest Ship built in South Africa to date)

• Harbour Tugs and launchers

• Coastal Vessels

• Fishing Trawlers

• Container vessels

• Luxury Motor yacht Casco’s. In this role, it has already achieved international recognition as the 2nd largest supplier of “Mega” Luxury Motor yachts to a discerning international market.

What is the Status Quo?

The industry is currently not operating at full capacity and does not have a full order book. The shipyards are building the following vessels:

• Bunker Barges

• Fishing Trawlers

• Some Harbour patrol vessels and launchers

• A few motor yachts

• Five harbour tugs for the TRANSNET National Ports Authorities worth R400 million.

We find ourselves in this unfortunate position for many reasons, but to name a few:

• Competition from Far East and Eastern European Shipyards that receive large subsidies from their governments in contravention of international trade agreements.

• High steel prices charged by steel monopolies – it is possible to sometimes import steel cheaper than we can purchase it locally. In an era where we are trying to locally beneficiate our raw materials instead of exporting, this is a sad paradox.

• Losing government orders to international shipyards – this occurred in the Naval acquisition (was built in Germany) and vessels built for the Department of Environmental Affairs (built in Eastern Europe). Not only did the industry lose out on more than R600 million of wages that could have been paid to the workers, but the country was systematically disposed of skills, mainly welders and boiler makers. Furthermore, the local shipbuilding industry has yet to see the promised offset benefits of the National Industrial Participation Programme. There have been a lot of promises by the international shipyards that have yet to materialize.

• Lack of support from local shipping lines that have chosen to purchase their vessels overseas.

• High Overhead Cost Structures – as an example SA Shipyards pays R12 million in rent and rates to our government. Shipyards in the East get their facilities for free. This high cost makes us internationally uncompetitive immediately, without due consideration to other costs.

• Lack of investment in shipbuilding infrastructure due to uncertainty. For a long time there has been talk of the three Durban shipyards been taken away by TRANSNET to make way for the expansion of the container terminal. The owners of the shipyards are thus reluctant to invest in productive capacity only to find that a few years later that they will be dispossessed of their facilities.

There are a numerous other reasons, but time does not permit us to exhaust them all.

The Shipbuilding Cluster

However, not all is doom and gloom for the Shipbuilding Industry. There is a niche market that we have identified in which we can effectively compete in. To this end the industry has formed the Shipbuilding Cluster which is being supported and funded by the Ethekwini Municipality (Economic Development Unit and KZN Provincial Government

The aims and objectives of the cluster are:

• Bring the Shipbuilding Industry into the National Agenda

• Realise the full potential of the Shipbuilding Industry in South Africa

• Construct the relevant infrastructure needed

• Embark on skills development and training initiatives in order to be competitive internationally

• Ensure technology transfer through international joint ventures and the creation of the Research and Development Centre of Excellence.

• Position South Africa internationally as a world-class shipbuilding destination

• To align shipbuilding to the macro-economic objectives of the country, including amongst others:

o Job Creation

o Poverty Alleviation

o Increase in fixed investments

o Increase in Export Earnings

• To get government support and commitment to the Shipbuilding Industry

• To ensure the viability and sustainability of the Shipbuilding Industry

• To encourage dialogue and information sharing between members of the cluster.

In addition the government has offered the following support mechanisms:

1. TRANSNET has made it a condition of their tender that their tug boats must be built in SA.

2. The Navy is also insisting that the 6 new patrol boats it requires must be built in SA.

3. The DOT has included the development of the Shipbuilding in its draft Maritime Transport Policy.

What Are The Niche Opportunities For South Africa?

Opportunities lie in smaller vessels, less than 150m long that have high technology content. We feel that Tugs, Offshore Supply Vessels, Navy/Coast Guard Patrol Vessels and Ferries present the perfect opportunity for South Africa.

Why Tugs?

Orders for innovative tugboat designs have surged in recent years, coinciding with the introduction of bigger bulk carriers handling increased trade. There's a whole new generation of LNG tankers coming on stream, and also a new generation of tankers and bulk carriers. The world fleet of LNG tankers is expected to more than double within the next few years.

As new ships come on stream, the harbours and ports need a new generation of faster, more powerful tugboats to escort large tankers and container ships around the world.

Why Offshore Supply Vessels?

Oil prices have touched record highs and this has led to a dramatic rise in the level of exploration activities with several oilrigs being set up. The increased exploration activities are likely to drive demand for offshore vessels. However, 73% of the OSV’s are more than 20 years old – they will need to be replaced in order to meet the demands of the market.

Why Navy/Coast Guard Vessels?

One of the greatest challenges facing Africa’s maritime nations is its inability to effectively protect its marine resources and environment, protect its offshore oil and gas platforms, police illegal immigration and combat piracy that threatens its economic trade routes. We see an enormous potential for Navy Patrol Boats to play a role in mitigating these threats that stops Africa from reaching its full potential. It is in this niche market for Navy Patrol Boats that we as a company want to play in. The African Patrol Vessel market for new ships is estimated to be around R10 billion.

We believe that there is sufficient work in South Africa alone to keep the industry busy for at least then next 10 years despite of the current international financial crisis. These are vessels that are needed by the South African government to keep the country working. These include:

|Vessels Required |Status |Value |

|NPA: 11 Tugs boats |Tender is currently being adjudicated for 8 |R960 million |

|Navy: 2 Tug Boats |Technical specs for tender are being drawn up. Tender is expected to|R220 million |

| |come out in mid 2009 | |

|Navy: 6 Patrol Vessels |Need has been established. Budetary process on going. Tender |R2 billion |

| |expected in late 2010. | |

|DEAT: 1 Polar research vessel |RFI Out. Tender in March 2009 |R1.5 billion |

|SAMSA: 2 Tugs |Feasibility study being conducted. Tender out in early to mid 2010 |R890 million |

|Total | |R6 billion |

The Economic Benefits of the Shipbuilding Industry to South Africa

The beneficial effects of the industry are:

• Direct and indirect employment

• Skills enhancement

• Technology transfer

• Technological Stimulation

• Industrial Stimulation

• Black Empowerment

• Export earnings

• Import replacement.

• Contribution to the National Treasury

Employment

In a report written by A.A. van Wyk, M.J. Havenga and M. Bhavan of the IDC in 1995, it was stated “The backward and forward linkages (of the shipbuilding industry) are similar to that of the heavy engineering industry, with an estimated employment multiplier factor of around 8”, as calculated by Prof. Hupkes of UNISA. As the industry stabilises, and local technological inputs increase, this multiplier is expected to increase to about 10.

The same report states, “The shipbuilding industry has proved itself to empower the labour force. The Central Statistical Service figures show that the wealth distribution in the industry favours labour, taking about 77c in the Rand of value added.

The following categories of employment will be provided:

- Welders - Boilermakers

- Crane drivers - Riggers

- Administration staff - Project management

- Planning - Draughtsmen

- Marine Engineers - Accountants

- Information Technologists - Fitters

- Turners - Supervisors

- Painters

Sub contractors will provide employment for:

- Cleaning staff - Security Guards

- Electricians - Electronic engineers

- Carpenters - Joiners

- Mechanical Engineers

Skills Enhancement

Most of the skills can be drawn from and re-absorbed by other industries. Much of the expertise needed, particularly welding and boiler making, is available in the currently unemployed group in the immediate surrounding area of the Shipyards. Graduates from Technical institutions are sufficiently skilled so that, with a reasonable amount of theoretical and on-the-job training, they will be able to produce an effective workload in a very short space of time.

The subcontractors and suppliers to the industry will also provide immediate benefit for the unemployment levels, but the longer term benefit to skills levels will be felt as local technology is stimulated to manufacture and supply the more sophisticated inputs required by the industry. There are currently almost 120 artisans being trained by the various shipyards in KZN.

Technological Stimulation

As the demand for shipbuilding components becomes reliable, local suppliers will begin manufacturing components locally. In turn these suppliers will begin to export significant quantities.

Equipment currently being imported, which could be manufactured locally, includes:

- Stern frame castings - Bulbous flats (Holland profile steel)

- Main engines - Pumps

- Winches - Cranes

- Specialised ropes - Propellers

- Tail shafts - Hatch covers

- Cranes - Electronic radar equipment

- Sewage processing equipment - Fresh water generators

- Navigation equipment - Watertight doors and manholes

- Communication equipment - Partitioning

- Wet Units - Generators

- Gearboxes

Industrial Stimulation

The technological stimulation above gives rise to capabilities within suppliers to the shipbuilding industry to supply the industry worldwide as well as to diversify and provide products to other industries, both locally and worldwide.

Export Earnings.

As an example, if Southern African Shipyards is able to operate at full capacity, it can create export income of approximately R2 billion over a five year build Programme. This can certainly contribute positively to the current account deficit.

Contribution to the National Treasury

Apart from the major socio economic benefits to be derived from the reduction of unemployment through the shipbuilding industry, there are direct financial benefits to the national fiscus in the form of direct taxation levied on the employees and VAT. Using Southern African Shipyards as an example, an indicative calculation reveals that R405 million will accrue to the National Treasury in the form of income taxes and VAT.

What is the Way Forward?

The government should develop a new shipbuilding and industrial marine policy framework. This policy must focus on opportunity, growth and innovation in niche markets where South Africa can compete. It should recognize the value of marine transportation as an important industrial infrastructure, with environmental as well as economic benefits. And it should focus on partnerships, as it is only by working together that we can succeed. This new policy should focus on the commercial market, falling into five categories: capturing domestic opportunities, looking globally, innovation as key to competitiveness, financing and stronger partnerships.

Capturing Domestic Opportunities — Policy Elements

• Increase efforts to secure South African industrial benefits from the development of offshore oil and gas, in partnership with the industry, provinces and other stakeholders.

• Promote complementary investment in oil and gas technologies to strengthen South African capability to respond to offshore opportunities.

• Develop a “Buy South Africa “policy on a competitive basis and review Government procurement prospects in more detail – specifically for future Naval Contracts.

Looking Globally — Policy Elements

▪ Promote shipbuilding and industrial marine exports within the framework of Team South Africa Inc.

▪ Enhance efforts at the WTO and the OECD to reduce trade-distorting practices.

▪ Continue to consult with the industry during the negotiation of any trade agreements where the inclusion of shipbuilding and industrial marine products is proposed.

Innovation as Key to Competitiveness — Policy Elements

▪ Develop guidelines for the application of Scientific Research and Experimental Development tax credits to the shipbuilding and industrial marine industry.

▪ Facilitate access to Technology Partnerships South Africa (TPSA) for the development of innovative technologies through international technology programmes.

▪ Develop a Technology Road Map to help identify technologies that could be supported by TPSA.

▪ Assist small and medium-sized enterprises through an Industrial Research Assistance Program, e.g., to introduce best practices to improve productivity and competitiveness.

▪ Undertake a human resources sector study and, based on the results, establish a sector council that will assess skill and training requirements and will work with stakeholders to implement the recommendations.

Financing — Policy Elements

▪ Continue to provide competitive, non-concessionary export financing through IDC.

▪ Create an infrastructure development fund to provide “soft loans’ and/or grant funding to develop shipbuilding infrastructure to world-class standards

Stronger Partnerships — Policy Elements

Establish an industry advisory committee or other consultative process to assist in implementing the policy framework and continue to advise on issues affecting the competitiveness of the industry. Minister of Trade and Industry to organize annual stakeholders’ forum. This Government Cluster needs to be made up of all

Conclusion

The historical benefits to various national economies worldwide are there for all to see. The advancement of Germany, Japan, Korea and now China cannot be ignored and the role of the Shipbuilding Industry is indisputable.

The opportunity to unleash the full potential of the KZN shipbuilding industry within the climate of the international shipbuilding boom and R6 billion of projects and R10 billion of other African projects , is an opportunity that should not be missed. Further development of the industry locally and throughout Africa can form a cornerstone for ASGISA, NEPAD and the African Renaissance.

In the life of every society there comes a time when the door opens and lets in the future. That moment has arrived for the South African Shipbuilding Industry.

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