We spend a great deal of time working with financial accounting numbers these days. Justifiably so. The global standards for calculating and reporting these figures are robust and detailed. Investors and policymakers can do incredible things with a set of financial reports. But even accountants (sometimes) don’t mind admitting there are alternative quantitative lenses worth viewing businesses through. At the Centre for African Management & Markets (CAMM), we recently undertook just such a task, funded by cement company PPC*.
Our goal was to quantify the total economic benefits generated by a single entity. So we started with financial accounting figures. Those certainly give a good representation of what one corporation has done over the past year. However, we weren’t valuing a business. We wanted the big picture. Our task was to find out how much economic good accrued to all economic actors because the firm in question was operating successfully.
For example, when my shop buys capital equipment from your manufacturing business, you benefit, and so do your suppliers. And when my shop pays salaries to the cashiers, they use that money to pay rent and buy groceries. All of us pay tax (admittedly grudgingly).
Financial accounting methods exclude these upstream and downstream benefits (appropriately, given how we use those figures). For us economists, these transactions follow the well-known multiplier effect. And they must be included to properly decipher the full economic value of an action. This is where the input-output (IO) methodology, developed by Soviet-American economist and Nobel prize winner Wassily Leontief, and the social accounting matrix (SAM) approach come in handy.
Developed in the 1960s in Cambridge, the SAM evolved to perform a variety of calculations. At their heart, they enable the measurement of output at a national level (think GDP), a regional level or even a firm level. The IO method lets us expand our measurement to account for the knock-on benefits of transactions as they filter through an economy. We combined these two powerful tools to the South African cement industry, using PPC as our protagonist firm.
South Africa’s cement industry has an annual production capacity of about 22Mt. However, because of low demand and the displacement of domestic production by imports, it is producing only 13Mt a year
The import threat
To start, we applied the model for 2022. Based on PPC’s own data and publicly available figures, we calculated that the business generated R8.8bn in economic value. Again, that is the immediate value that accrued to the business itself plus the benefits upstream, downstream and to the fiscus that can be attributed to the operation of PPC.
That R8.8bn included an estimated 15,897 full-time-equivalent formal and informal jobs, generating R3.24bn in labour income.
Then we threw a spanner in the works. We modelled a hypothetical change in the scenario. This was informed by a very real threat: cheaper imported cement replacing locally manufactured cement.
This was no casual assumption; the import of cheap cement has been going on for years and has already affected the industry heavily. As it stands, South Africa’s cement industry has an annual production capacity of about 22Mt. However, because of low demand and the displacement of domestic production by imports (which can be priced up to 40% lower than locally produced cement), the industry is producing only 13Mt a year.
Our model injected the assumption of a negative local cement production shock of 50% at PPC production facilities in the Western and Eastern Cape. In this scenario, imported cement displaces local production; PPC’s Riebeek West and New Brighton plants, located in the Western Cape and Eastern Cape, respectively, cease their cement production entirely; and the De Hoek plant, near Piketberg in the Western Cape, continues operating at 80% capacity — all else equal.
In this “new normal”, PPC’s total contribution is R7.5bn. That means R1.3bn has been lost to the South African economy. An activity such as repairing urns happens overseas. And grocery shops in places such as Vietnam receive the multiplier effects of salaries that have left our shores.
Those 15,897 jobs we mentioned are at risk too. Our modelling suggests that as many as 2,241 might evaporate, along with R500m in labour income. And government coffers suffer. The R2.2bn in tax revenue from 2022 falls to R1.9bn — R300m in forgone tax collection.
Our approach also enabled us to analyse the impact at a provincial level. Here, the picture is particularly bleak for the Eastern Cape, where the model suggests that 138 of the 193 jobs sustained by PPC activity are at risk. For the Western Cape, 839 of the existing 1,800 may be lost due to import substitution.
Our role stops well short of policy advice. Given the nature of South Africa’s economic crisis, our hope is that our work can be of assistance as government and business tackle this challenge.
* The Socioeconomic Impact of Substituting Local Cement Production with Cement Imports study was funded by PPC Ltd
* The CAMM at the Gordon Institute of Business Science conducts academic and practitioner research and provides strategic insight on African markets. Saville is the founding director of the CAMM; Fouche is an economist and research fellow at the centre
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