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Multiplier effect affirms that ‘local’ is imperative

The Southern African Institute of Steel Construction (SAISC) has called on the South African Business Community to take note of the powerful ‘multiplier effect’ and to do whatever is in its power to follow a policy of awarding local firms contracts wherever possible.

“It seems logical that promoting local firms would stimulate the economy but when viewed in the context of the power of the multiplier effect, it becomes an imperative, which we ignore at our peril,” says Kobus de Beer SAISC industry development executive.

He adds that at this time, when job creation is the prime focus of politicians, government departments and responsible South African companies, it makes sense to improve our understanding of both the characteristics and the dynamics of the ‘multiplier effect’ in the steel construction and other industries and to act accordingly.

Multiplier Effect

The basic concept is not difficult to understand as the mechanics are similar to how interest compounds.  The building of a new warehouse, for example, requires a structural steel framework to be supplied and erected. The structural steel contractor buys steel, employs artisans and others, uses their installed equipment to cut, drill, weld, blast, paint or galvanize, handle, assemble and transport fabricated steelwork to site where a construction contractor employs people and cranes to erect the frame, using bolts or welding.

These activities have a positive knock-on effect on every supplier. For example, the steel plate and sections are supplied by a merchant employing people and equipment, using steel bought from a steel mill employing people and equipment, having bought iron ore and scrap from sources employing people and equipment, each of them using transport contractors and others… in short, a “ripple effect” felt throughout the whole economy.

The various people employed earn salaries and wages which in turn are spent on food, clothing, transport, schooling, furniture, entertainment etc – each area stimulating its suppliers and contractors across an almost unlimited range of sectors and industries.

All of this requires the participation of financial facilitators such as banks and insurance houses and, importantly, the South African revenue services which participate actively through collecting value added tax, personal income tax, company tax and a host of levy’s such as on fuel, tobacco, alcoholic drinks etc.

Calculating the multiplier effect

While it is difficult to calculate the bottom line effects of the ‘multiplier’ with complete accuracy, CSIR consultants have been doing studies to develop and validate this complex set of calculations over a period of some thirty years. In the process they have done extensive research into the typical breakdown of sectors of the economy, each with its own detailed pattern of products, supplies, people employed and expenditure patterns.  “As these are dynamic variables, continual updating is made to accommodate price changes, the effect of changing buying patterns and technological advances,” de Beer explains.

The SAISC commissioned these consultants, Conningarth Economists, to analyze the steel construction industry, based on some typical recent projects undertaken in the mining industry and the results make interesting reading.

Structural Steel

For the purposes of this study the primary focus was  on the impact of fabrication and painting of welded and bolted structural steel as well as the use of these to construct the supporting steel frameworks essential to building mining infrastructure projects.  

The use of structural steel facilitates the installation of conveyors and processing equipment, roof sheeting and side cladding as well as all the electrical installations, water and product pipes, etc.  
The supply and erection of structural steel typically comprises 8% to 15% of the value of a mining infrastructure project.  The steel construction industry directly employs 60 people in sustainable jobs per 1000 tons produced per annum. A medium-sized company producing and erecting 6000 tons per year (500 tons per month) would therefore typically employ up to 360 people.

The local steel construction industry produces about 720 000 tons of fabricated and erected structural steel per annum representing 43 200 direct jobs.  It is also significant that this production figure includes more than 150 000 tons of fabricated steel exported competitively per year from South Africa to more than 100 countries.

The multiplier exercise shows that 1, 26 additional jobs are created in the supporting industries to steel construction, giving a total in the country of 112,320 jobs directly and indirectly related to the use of structural steel.  To this must be added all the other work associated with the construction of a mining project.  In typical mining infrastructure projects the many other disciplines involved in the supply and construction each create additional direct sustainable jobs as well as further indirect jobs through the multiplier.  

The ‘tax man’ is a major beneficiary…

Some of the various taxes and levies applicable were listed earlier. These are calculated to add up to more than 39 % of the project value.  In other words, for every R1 billion spent on investment projects, R390 million is made available to the local, provincial and national governments. “This is a significant consideration and helps to explain why competitive countries take extraordinary trouble to protect their industries and to promote the execution of projects by home- based companies,” says de Beer  

…and so are all of us

A structural steel project worth R 1 billion therefore multiplies to roughly R1.43 billion in the economy as follows:
-    R715 million for manufacturing
-    R 286 million for financial services
-    R143 million for community, personal and social services
-    R100 million for wholesale and retail trade
-    R60 million for transport and storage
-    R126 million for all other sectors
And as a direct result of all these activities:
-    R390 million for the National Government in taxes.

Conclusions

“The ‘Multiplier Effect’ is the key to supporting infrastructure development in South Africa,” says de Beer. “The DTI has recently introduced a number of investment initiatives, which should be fully utilised by South African infrastructure investors including fabricators and suppliers investing in new plant and equipment.”

Major Southern African projects must make use of South African producers and contractors as the benefits to the country and society are phenomenal.

South African producers and contractors must in turn remain internationally competitive with pricing, technology and professional services being in line with best practice world wide.
“It is clear that a proven avenue exists to help meet the ambitious job creation targets set for this decade.  It is incumbent upon all South Africans to gear up to be worthy of making this multiplier work for us all,” de Beer concluded.


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