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Cablegate: South Africa's Response to Usitc Study On Sub-Saharan

VZCZCXRO5899
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #2156/01 2751043
ZNR UUUUU ZZH
R 011043Z OCT 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 5874
RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 02 PRETORIA 002156

SIPDIS

PASS TO USITC FOR L. SCHLITT

E.O. 12958: N/A
TAGS: ECON ETRD ENRG EPET OTRA ASEC SF
SUBJECT: SOUTH AFRICA's RESPONSE TO USITC STUDY ON SUB-SAHARAN
AFRICA: EFFECTS OF INFRASTRUCTURE CONDITIONS ON EXPORT
COMPETITIVENESS, PART TWO

REF: A. STATE 85109, B. PRETORIA 1751, C. PRETORIA 1288,
D. CAPE TOWN 52

1. This cable responds to the items requested in paragraph six and
seven of Reftel A. Supplemental documentation will also be sent via
e-mail. Transportation/ICT Officer Daleya Uddin (Uddinsd@state.gov
or +27-12-431-4344) and Economic Specialist Christo Esterhuizen
(EsterhuizenJC@state.gov or +27-12-431-4417) are the main points of
contact at post.

2. Electricity and transport infrastructure in South Africa are
mainly developed, maintained, and controlled by South African
Government (SAG) departments or state-controlled companies. Reftels
B and C and previous referenced reporting provide additional
background information on Eskom (the state-owned power producer) and
Reftel D provides background information on Transnet (the
state-controlled freight and transport logistics group).

--------------------------
Infrastructure Bottlenecks
Constrain Growth and Trade
--------------------------

3. Credit ratings agency Standard & Poor's estimates that
infrastructure constraints will postpone attempts by the SAG to
reach its earlier 6.0 percent medium-term gross domestic product
(GDP) growth target, with potential GDP growth remaining at an
estimated 3.9 - 4.5 percent for the foreseeable future. The most
important infrastructure constraints relate to transport and, most
urgently, to power. It is estimated that a low power capacity
margin will shave about 0.5 percentage points off GDP growth in
2008. Sustained investment by Eskom and a greater focus on managing
demand are likely to contain the effects thereafter, but the energy
constraint will remain until the early years of the next decade.
Some major energy-intensive investments have already been
postponed/cancelled as a result of the power shortage.

4. Transnet officials explained that major bottlenecks occurred
due to the lack of investment in infrastructure maintenance and
expansion during the 1990s. At the time, the SAG was considering
plans to privatize some of its state-run entities and the lack of
infrastructure investment is blamed on stalled privatization plans.

5. The SAG has since abandoned privatization plans and is
currently undertaking significant infrastructure expansion projects
through state-owned companies to address bottlenecks. Both Eskom
and Transnet are currently investing tens of billions of dollars to
improve electricity and transport/logistics capacity and to address
infrastructure bottlenecks that are hampering growth and trade.
Investment has been lacking for many years and the cost of
"catch-up" is rising exponentially, especially given the global
demand and tight supply for much of the same equipment.

----------------------------
Rising Costs and Bottlenecks
Hurt Textile Trade
----------------------------

6. The cost of transporting and storing goods in South Africa
amounts to approximately 14.7 percent of GDP, which industry
officials believe is significantly higher than most of South
Africa's trading partners. Global fuel price increases are adding
further pressures to transport costs since the majority of cargo is
transported via road. Approximately 12 percent of the South African
textile industry's operational cost is made up of transport costs.


7. Transnet's expansion plans include shifting freight volumes
Q7. Transnet's expansion plans include shifting freight volumes
from road to rail transport systems. However, rail's share of
freight volume is still on the downward spiral because of Transnet's
poor history of service delivery. Road transport infrastructure is
being taxed by increased transport of cargo. Rail is unable to cope
with any volume increases due to the lack of past investment and
protracted procurement procedures. Where the rail infrastructure is
operational, it is inefficient and underutilized.

8. The South African textile and clothing industry experiences
long lead times for exporting goods. For example, it takes about 26
shipping days for the industry to transport goods to Italy, which
makes it uncompetitive. Shipping frequencies need to be increased
to improve competitiveness. The Ports of Cape Town and Durban do
not have enough capacity to handle existing demand. Often goods
have to be transshipped from Cape Town to Durban because of a lack
of capacity at Cape Town. This additional transshipment increases
cost and volumes handled in Durban, which has a negative impact on
Durban's ability to cope.

PRETORIA 00002156 002 OF 002

-------------------------------------
World Cup and Improved Infrastructure
Expected to Boost Tourism Growth
-------------------------------------

9. Efforts are underway to increase airport infrastructure and
create limited public transport systems in the Gauteng, Cape Town,
and KwaZulu-Natal provinces before the start of the 2010 FIFA World
Cup. The World Cup has provided impetus for investments, but many
projects extend beyond the World Cup. The tourism sector is
creating packages to leverage growth opportunities presented by the
World Cup. The Department of Transport is negotiating liberalized
bilateral air-lift strategies to increase air service into all three
international airports (Johannesburg, Cape Town, and Durban). Deputy
Minister of the Department of Environmental Affairs and Tourism
(DEAT) Rejoice Mabudafhasi announced that South Africa is on track
to receive 10 million tourists per year by 2010.

LA LIME

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