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South Africa’s big five:

Bold priorities for

inclusive growth March 3, 2016

McKinsey & Company | 1

3

Key messages

2

1

Five bold priorities could transform the economy, adding R1 trillion

rand to GDP and creating 3.4 million jobs by 2030

▪ Advanced manufacturing: creating a global hub

▪ Infrastructure: partnering for productivity

▪ Natural gas: powering South Africa’s future

▪ Service exports: Riding the wave of Africa’s growth

▪ Agriculture: Unlocking the full value chain

South Africa has come a long way since democracy in 1994, but a

new recipe for growth and job creation is needed

South Africa will need to embrace some fundamental changes, not

least it will have to address a skills shortage through a dramatic

expansion of vocational training, at least 40% of the 3.4 million

jobs will require vocational skills

McKinsey & Company | 2 2

A new recipe for growth is needed

McKinsey & Company | 3

South Africa has some strong fundamentals

24.9

Russia 19.7

28.5

United States

Malaysia

68.4

Turkey

Kenya

13.6

15.3China

11.5

6.6

Brazil

Indonesia

South Africa

Nigeria

14.7

3.1

South Africa has

comparable productivity to

China and Brazil

Real productivity, 2012

($ thousand PPP per employee)2

SOURCE: World Bank World Development Indicators; Economist Intelligence Unit; McKinsey Global Institute analysis

1 South Africa’s peers are the other emerging markets that are popular with investors.

2 Productivity is based on GDP contribution per employee; levels in real 1990 purchasing power parity dollars.

South Africa has a good

environment for business

compared to its peers1

Overall risk, January 2015

(Lower score = less risk)

69

63

59

47

47

41

30

50

Russia

Nigeria

Malaysia

Indonesia

Turkey

Brazil

South Africa

Kenya

McKinsey & Company | 4SOURCE: McKinsey Global Institute

Analysed the South African economy

and its potential over 6 months

Prioritised the ideas by analysis of

their potential against three criteria

▪ Interviewed more than 50 experts in

academia, the public and private

sectors

▪ Conducted an extensive literature

review including the NDP, Harvard,

Goldman Sachs, World Bank, IMF,

OECD and other reports

▪ Generated more than ~100 ideas

through interviews, reading and idea

generation

▪ Completed a six month analysis to

assess the potential of the 100 ideas

at a high-level, and then a detailed

analysis of the big five priorities

1. Potential GDP growth of that

opportunity

2. Job creation potential of growth in that

sector

3. Significance of the broader social and

sectoral impact of each priority

1

2

3

McKinsey Global Institute research

▪ Combines the disciplines of economics

and management

▪ Examines microeconomic industry trends

to better understand the broad

macroeconomic forces affecting business

strategy and public policy

▪ Funded by the partners of McKinsey

independent from any other institution

Interviews were used to generate ideas, analysis to prioritise them

McKinsey & Company | 5

There are five catalytic opportunities for growth

SOURCE: McKinsey Global Institute

Capture the services growth opportunity

across Sub-Saharan Africa

Service

exports

Agricultural

value chain

Expand productive land and increase

productivity of existing land

Establish gas industry to complete SA’s energy

portfolio and capture Pan-African opportunitiesNatural gas

Deliver on our bold infrastructure build

programmeInfrastructure

Create a globally competitive advanced

manufacturing hubAdvanced

manufacturing

McKinsey & Company | 6

The big five priorities will grow the economy and create jobsReal GDP growth rate

%

1.8

5.4

3.6

1.8

1.1

National

Development

Plan target

Gap

1.8

Current

consensus forecast to 2030

Anticipated

improvement

Growth rate,

2008–14

Service

exports

0.3 (250)

Agricultural

value chain

Natural gas

0.3 (245)

0.2 (160)

Infrastructure 0.3 (260)

Advanced

manufacturing0.7 (540)

Incremental GDP, 2030

% (billion rand)

Incremental jobs, 2030

Thousand

490

460

330

660

1,500

Estimated total1 ~1.1 (1,000) ~3,400

SOURCE: Oxford Economics; Economist Intelligence Unit; IHS Economics; McKinsey Global Institute analysis

1 Gap numbers do not sum. The potential impact of each of the “big five” was modelled in isolation from the others. Because we did not calculate the

dynamic interactions between them, we cannot estimate their collective GDP impact by simply adding them.

NOTE: Waterfall numbers may not sum due to rounding.

McKinsey & Company | 7

Creating a global advanced manufacturing hub

McKinsey & Company | 8

South Africa’s manufacturing sector has halved in its relative contribution

to the economy since the ‘90s

SOURCE: World Bank

Manufacturing contribution GDP

Percent of total GDP

12

2424

8

10

12

14

16

18

20

22

24

-51%

20131020009080701961

McKinsey & Company | 9

Consequently, South Africa is punching below its weight in manufacturing

0

5

10

15

20

25

30

35

10 200 30 70605040

Netherlands

Turkey

United Kingdom

Thailand

Sweden

Norway

Chile

Indonesia

BrazilNigeria

Malaysia

South

Africa,

1990

2014

South Korea

Germany

Manufacturing value added as a proportion of GDP% of GDP

GDP per capita, PPPCurrent international $ thousand

Development trend1

1 Not a mathematical fit, but an observed trend that manufacturing peaks at 30–40% of GDP before gradually declining as a country’s wealth grows.

SOURCE: World Bank World Development Indicators; McKinsey Global Institute analysis

McKinsey & Company | 10

South Africa’s base cost structure is not a comparative strength$ per unit of input

SOURCE: Enerdata; World Bank; GWI; Passport GMID; Euromonitor; national sources; McKinsey Global Institute analysis

1 2012 for China, 2011 for Brazil.

2 Includes costs of documents, administrative fees for customs clearance and technical control, customs broker fees, terminal handling charges, and

inland transport. Assumes shipping from most populous city from a midsized company.

3 Malaysia and Thailand prices based on Hong Kong prices.

0.05

Germany 0.15

Brazil

Mexico

India

China

United States

South Africa

3.2

0.6

0.1

United States

Germany

Brazil

Mexico

South Africa

China

Thailand

Malaysia

India

Electricity price (including taxes) for

industrial users, 2015

$ per kWh

Water, 2014

Average rate across most populous cities

$ per cubic metre

2.4

1.6

0.2

Germany

Brazil

Malaysia

India

China

Thailand

Mexico

South Africa

United States

Industrial unit labour costs, 20131

$ compensation per $ output

450

1,794South Africa

2,588

Malaysia

China

India

Brazil

Germany

Mexico

United States

Thailand

Transport, 2014 average2

$ per 20-foot container

32.5

7.6

0.8

China

Mexico

United States

Thailand

Brazil

Germany

South Africa

Malaysia

India

Industrial wages, 2013 average

Total hourly compensation in manufacturing

(wages plus supplementary benefits)

$

863

789

536

South Africa

India

China

Malaysia

Mexico

United States

Thailand

Germany

Brazil

Steel market price, 2010–14 average3

$ per tonne

McKinsey & Company | 11

South Africa can be a meaningful player in advanced manufacturing

192

44%

24

6%

151

35%

67

15%

Global innovation for local markets

(includes advanced manufacturing)

Labour-intensive tradables

Regional processing

Energy- and resource-intensive commodities

CORE

LONG TERM1

ADJACENCIES1

SOURCE: IHS Economics; ITC Trade Map; McKinsey Global Institute analysis

1 Illustrative examples.

Energy intensityCapital intensityLabour intensityR&D intensity Trade intensity% of total SA manufactured exports, 2013

SA exports, 2013 (billion rand, 2010 prices)

South African manufactured exports

McKinsey & Company | 12

Capturing the

advanced

manufacturing

opportunity

1 Increase economies of scale by aggressively

pursuing export markets, investing in capital

equipment and focusing on innovation in

products, manufacturing processes and materials

12

3 Step up investment in R&D and build up South

Africa’s skilled employee base

2 Build up strong, close-knit manufacturing

clusters and supply-chain networks, with

increased depth and cost competitiveness;

government can support this through well-

designed Special Economic Zones

4 Government can expand trade agreements,

international partnerships and technical

alliances

McKinsey & Company | 1317

Infrastructure: Partnering for productivity

McKinsey & Company | 14

South Africa’s infrastructure spend level exceeds that of most other

economies

SOURCE: RSA National Treasury; PwC South Africa; McKinsey Global Institute analysis

4.7

3.9

2.3

2.5

3.0

3.6

4.1

4.4

4.7

4.9

5.1

5.3

8.9

Comparison country average2

Russia

Turkey

Mexico

South Africa forecast 2020

Brazil

India

Australia

South Africa

Vietnam

Saudi Arabia

China

Canada

1 Considers only the four major asset classes—power, water, telecom, and transport.

2 Average excludes South Africa and China.

Infrastructure spend as percentage of GDP, 1992–20121

McKinsey & Company | 15

547

289

579

2 189

133

2 322

3 737

Optimised NDP aspiration

Budgeted expenditure

Gap

Streamline delivery

Optimise project portfolio

Make the most of

existing assets

National Development

Plan (NDP) aspiration

SOURCE: National Development Plan; RSA National Treasury; McKinsey Global Institute analysis

Improve

productivity

to save

1.4 trillion rand

Improving the productivity of South Africa’s infrastructure expenditure

could result in a spend optimisation of 1.4 trillion rand by 2025Infrastructure investment and how it could be optimised

Cumulative 2016–25, billion rand, 2010 prices

NOTE: Numbers may not sum due to rounding.

McKinsey & Company | 16

The public sector can

take several actions…

Prioritise and clarify project pipeline

16

Propose proactive, innovative solutions

suitable for South Africa’s challenges and take on

a stronger sense of project ownership

Build capabilities for better specification, project

planning, and oversight

Push for better construction productivity

…while the private

sector also has a role

to play

Put more effective tendering processes in

place

Where appropriate, public-private partnerships can

offer a channel for providing funding

McKinsey & Company | 177

Powering South Africa’s future

McKinsey & Company | 18

New power plants will be required after 2020 to balance demand and supply

0

10

20

30

40

50

60

70

203029282726252423222120191817162015

-30

-20

-10

0Shortfall of capacity

before reserve

margin against

peak demand

GW

Low/high4

Reserve margin, 15%2 Peak demand3

Capacity before reserve margin

Energy forecast

based on existing

and committed

plants1

1 Includes Medupi and Kusile. Assumes an availability factor of 80% for non-renewables and 30% for renewables.

2 The South African Department of Energy recommends a reserve margin of 15% of peak capacity.

3 2014 peak demand, escalated at the growth rate set out in the integrated resource plan.

4 Plus or minus 1% growth from the base case.

SOURCE: Department of Energy Integrated Resource Plan; McKinsey Global Institute analysis

McKinsey & Company | 19

Gas is critical to complement the coal/ nuclear base load by 2030

Levelised

cost

R/kWh, real

2015

Lead times

years

SOURCE: IRP 2013 update; SA Coal Roadmap; UDI; EIA; CNE; EU Commission, Renewable Energy Progress Report

2009; EMEA EPNG Practice; Expert interviews; Team Analysis

0.92

0.73

0.861.10

Typical

risks

9-17

2-4

7-8

▪ Capital investment

risk management

– Budget and

timeline overruns

common

– 30 years since

Koeberg built

▪ Unit cost escalation

in Waterberg

– New coal sites

require logistics

infrastructure

– Require access to

water

▪ New sector has to be

built

– Uncertainty about

source of long-term

gas supply

– Forecast of price

trends uncertain

Coal Nuclear Gas

McKinsey & Company | 20

An investment of 600-1,000 billion rand is needed to unlock the long-term

potential of the gas industry

SOURCE: McKinsey Global Institute analysis

229

403

488

154

77

98

Midstream

oil and gas

(pipelines, LNG

regasification)1

Upstream

oil and gas

(shale drilling,

fracturing)

Total 650 1.053

8

565

383

106

Downstream

(gas, solar &

renewables

plants)

1 The low estimate (base case) includes the FSRU regassification terminal and associated pipeline infrastructure in the Saldanha and broader Western

Cape area. The high estimate includes both the Rovuma and Karoo-Johannesburg shale gas pipelines; either, both or neither of these pipelines may

materialise.

Total estimated investment requirements, 2015-2030

Billion rand, 2015 pricesHigh estimate

Low estimate

McKinsey & Company | 21

By 2030, the gas industry could boost GDP by 140 billion

to 250 billion rand annually and create up to 330,000 jobs

SOURCE: McKinsey Global Institute analysis

66

27

20

138

114

Total

251

138

Cement1Methanol1Polyethylene1Power

production

Shale

extraction

1 These three examples are indicative of the range of opportunities for potential downstream gas use, but none has been confirmed. The downstream

use realised after 2030 depends on gas market prices and regional and global demand for final products. Polyethylene and methanol would both be

exported; cement would either be consumed locally or exported to neighbouring countries.

2 Assumes an annual production range of 0.3 trillion to 0.7 trillion cubic feet.

3 Assumes that jobs will be transferred from existing plants.

NOTE: Numbers may not sum due to rounding.

GDP impact

captured

in

downstream

sectors

Annual incremental GDP impact by 2030

Billion rand, 2010 prices GDP impact from power—likely

GDP impact from industry—uncertain

Jobs created

(direct, indirect,

and induced)

Thousand

03 0–132 0–54 0–40 Up to 32844–1022

McKinsey & Company | 22

Government has

a critical role in

capturing the

natural gas

opportunity

1 Secure natural gas supply by investigating and

pursuing all options, including imports of LNG or

Mozambican gas, and running an appraisal program

to confirm South Africa’s own shale potential

3 Create gas demand by guaranteeing purchase of

gas as an end-user for power

2 Act quickly to finalise and clarify the regulatory

environment, including the Mining and Petroleum

Resources Development Act, the amended technical

regulations on hydraulic fracturing, permits for pilot

wells and the environmental impact assessments.

22

4 Ensure transparency to attract private funding,

as an estimated R600 billion to R1 trillion is needed

to drill wells, transport gas and install power plants

McKinsey & Company | 23

Service exports: Riding the wave of Africa’s growth

McKinsey & Company | 24

South Africa is punching well below its weight in the export of services

into sub-Saharan AfricaEach regional powerhouse’s market share of services in its home region

%

2

8

19

26

Brazil

(Latin America)

Japan

(Asia-Pacific)

South Africa

(sub-Saharan Africa)

United Kingdom

(Europe)

38 2712 25Share of

region’s GDP

%

SOURCE: UN Service Trade database; McKinsey Global Institute analysis

McKinsey & Company | 25

Expanding service exports could increase value added to GDP

by 245 billion rand and create 460,000 jobs by 2030

SOURCE: Stats SA; IHS Economics; UN Service Trade; Gartner; Government of India National Development Council; McKinsey databases: Panorama

Global Banking Pools, Global Insurance Pools; Infrastructure Projects Analytical Tool; McKinsey Global Institute analysis

99

43

26

204

79

3713

79

283+246

Potential

global value

added, 2030

Other business

services to SSA2

Financial

services to SSA

Construction

services to SSA

Global business

process

outsourcing

services

Baseline

SSA value

added, 2030

1 Sub-Saharan Africa.

2 Includes trade, catering, accommodation, transport, storage, communication, real estate, and business services.

NOTE: Numbers may not sum due to rounding.

Estimated annual incremental value added of service exports to GDP by 2030

Billion rand, 2010 prices

Assessed in detailHigh-level estimate

GDP impact

Jobs created (direct,

indirect, and induced)

Thousand

192 78 45 145 460

Measured

SSA1 value

added, 2012

McKinsey & Company | 26

China has the largest share of construction projects in sub-Saharan

AfricaDistribution of foreign contractors1 winning construction projects in sub-Saharan

Africa2, 2010–15

%

1 Contractor country determined by the location of company headquarters; includes projects worth $200 million or more.

2 Excludes projects in South Africa.

NOTE: Numbers may not sum due to rounding.

SOURCE: McKinsey’s Infrastructure Projects Analytical Tool database; McKinsey Global Institute analysis

Brazil China South Africa United Kingdom United States Rest of world

Fragmented; each country

wins no more than 3%

share of contracts

50

56

7

32

53

8

11

11

17

7

11

20

7

56

Project managementConstruction Consulting

McKinsey & Company | 27

Capturing the

services

opportunity

1 Government can drive a greater focus on services

trade, including staffing trade attaches in embassies,

and concluding more services-oriented trade deals

3 Banking services need to target the retail market,

particularly low-income customers, by developing

digital mobile offerings and other low-cost innovations

2 Construction companies need to develop their

local market intelligence, build a footprint of local

partnerships across the rest of Africa and send its

best talent into the region

27

4 Business Process Outsourcing requires a large

talent pipeline, an academy system should seek to

train up to 13,000 new people each year

McKinsey & Company | 2823

Agriculture: Unlocking the full value chain

McKinsey & Company | 29

South Africa’s best yields are in fruit; other products have room to improve

Average yield, 2013

Tons per hectare

17

38S.Africa

Australia

Oranges StrawberriesTomatoesGrapes Apples Sugar caneWheat Maize

Climate

percentile1

%

SOURCE: UN Food and Agriculture Organization Statistics Division; McKinsey Global Institute analysis

1 South Africa’s relative position (in yield) out of 100, among 28 countries with climates similar to South Africa’s: Algeria, Argentina, Australia, Bahrain,

Bhutan, China Taiwan Province, Cyprus, Egypt, Greece, Guadeloupe, Iraq, Israel, Italy, Jordan, Kuwait, Lebanon, Libya, Malta, Montenegro, Morocco,

Nepal, Pakistan, Portugal, Qatar, Saudi Arabia, South Africa, Tunisia, and Uruguay.

NOTE: Not to scale.

9

15

33

Lebanon

S.Africa

Taiwan

11

36

45Israel

Algeria

S.Africa

2

4

7

Iraq

S.Africa

Egypt

44

72

Cyprus 143

S.Africa

Tunisia 4

23

S.Africa

Israel

16

55S.Africa

Iraq

Egypt 114

10

44

S.Africa

Greece

94334 16 17 6922 63

McKinsey & Company | 30

0

25

50

75

100

125

150

175

200

225

250

3 210 8 16 1772 1918151310 201494 51 6

Agriculture GDP/national GDP

Nigeria

South Africa

Ecuador

Morocco

Indonesia

Portugal

United Kingdom

Brazil

Uruguay

Turkey

Russia

Japan

Spain

Malaysia

ItalyUnited

States

India

Germany

China

Argentina

Agro-processing GDP/agriculture GDP

Senegal

Natural country

development cycle

South Africa could experience a strong shift towards

more processed products by 2030

SOURCE: International benchmarks; IHS Economics; World Bank WITS; McKinsey Global Institute analysis

Weight of the agro-processing sector vs. agriculture sector

Countries with GDP per capita >$1,000, 2014 (%)

NOT EXHAUSTIVE

McKinsey & Company | 31

The agriculture value chain could increase value added to GDP by 160

billion rand, doubling GDP contribution and creating 490,000 jobs by 2030

107

124

28

68

78

146

Total potential

agricultural

value chain

GDP, 2030

Increased

processing

+163 309

Smallholder

growth

Commercial

farmer growth

11

Total output,

2013

SOURCE: IHS Economics; World Bank WITS; McKinsey Global Institute analysis

51 127 314 1,603

Annual incremental value added to GDP by 2030

Billion rand, 2010 prices

GDP impact

Agriculture

Processing

NOTE: Numbers may not sum due to rounding.

Jobs created (direct,

indirect, and induced)

Thousand

McKinsey & Company | 32

Capturing the

agricultural

opportunity

32

2 Shift the focus and investment towards greater

processing of foods, increase access to energy,

water and logistics in rural areas to facilitate this

growth

1 Develop an integrated national agricultural plan,

focused on achieving major gains in productivity

3 Focus on actions to increase competitiveness,

for example reducing feedstock costs for poultry and

meeting sourcing regulations and removing trade

barriers in markets in Africa, Asia and Europe

4 Transition smallholders to horticulture using

long-term financial and extension services support,

and the formation of cooperatives to access markets

McKinsey & Company | 3329

Equipping South Africans for the jobs of the future

McKinsey & Company | 34

18 22 1914

54

6162 64

45

35

76

13

11 10 7 12

17

6

Elementary

occupations

Skilled trade

workers2

Technicians

and associate

professionals

Professionals

Managers

Agriculture

190

42

Services

249

Energy and

natural gas

80

4

Construction

342

32

Manufac-

turing

339

3

SOURCE: Stats SA, Quarterly Labour Force Survey; McKinsey Global Institute analysis

Only 22 percent of jobs created could employ entry-level matriculants;

other roles require vocational skills or qualificationsBreakdown of estimated jobs created, by skill level and sector, forecast for 20301

%; thousand

1 Skill level defined using Stats SA Quarterly Labour Force Survey categories.

2 Skilled trade workers include roles such as clerks, sales operatives, skilled labourers and craftsmen, and plant and machine operators and assemblers.

NOTE: Numbers may not sum due to rounding.

11

6

Broader

economy

2,226

21

45

17

6

2030 total

employment

creation

3,428

10

48

22

14

McKinsey & Company | 35

0

5

10

15

20

25

30

35

40

45

50

55

0 5 10 15 20 25 30 35 40 45 50

Luxembourg

Belgium

Norway

South Africa

Germany

Austria

Czech Republic

Denmark

Netherlands

IsraelIceland

Finland

FrancePoland

HungaryIreland

Estonia

Spain

Youth unemployment rate (age 15–24)1

%

Enrolment in in-company vocational education2

1 2013 data for South Africa; 2010 data for other countries.

2 In % of the age cohort; for a sample of 17 OECD countries that offer in-company vocational education systems.

R2 = 0.4027

In both emerging and developed economies, youth employment correlates

positively with enrolment in vocational education

SOURCE: OECD; Stats SA, Quarterly Labour Force Survey; Lolwana, South Africa country report for the 2014 ministerial

conference on youth employment, May 2014; World Bank; McKinsey Global Institute analysis

In countries where enrolment in

in-company vocational education

is less than 15%, the risk that

young people will be unemployed

is double that in countries with

higher enrolment rates

McKinsey & Company | 36

Four initiatives

can foster

education for

employment

1 Expand vocational training, from its current 8 percent

of 15-24 year olds to 40 to 60 percent of South African

youth

3 Improve the youth’s “soft skills”, through coaching

on workplace behaviour, interview preparation,

customer relations, and communication skills as well as

initiatives such as job shadowing

2 Boost the quality of education, enhancing the quality

of school leaving qualifications and focusing on

strengthened language skills, mathematics and science

4 Invite business to play a greater role in education

and training, by creating more apprenticeships, and

participating in designing curricula

32

McKinsey & Company | 37

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