In this episode of the South Africa Growth Through Inclusion series, Ketan Ahuja, Research Fellow at the Growth Lab, joins Joanne Bate, Chief Operating Officer of South Africa's Industrial Development Corporation, for a discussion on how South Africa can build new engines of economic growth in green industries and how it can use its unique capabilities to help the world decarbonize and develop its economy.
Welcome to the Growth Lab podcast.
The Growth Lab at Harvard Kennedy School is a research program that pushes the frontiers of economic growth and development policy research by collaborating with policymakers to design actions and sharing insights through teaching tools and publications.
Today's episode is part of our South Africa growth through inclusion series which takes a deeper dive into our two year research engagement in South Africa.
If you'd like to learn more about this work or download the full report, visit our website at growthlab.hks.harvard.edu.
Over the last two years, we've been engaged in a research project with the government of South Africa that aimed to diagnose South Africa's economic challenges and chart a path to accelerate growth and include more South Africans in the process.
I'm Ketan Ahuja, your host for this podcast and I lead the growth lab's research agenda on green growth.
We're lucky enough to be joined by Joanne Bate, the chief operating officer of South Africa's Industrial Development Corporation, which is a state owned enterprise tasked with building industries for the future in South Africa.
In this episode, we'll discuss how South Africa can build new engines of economic growth in green industries and how it can use its unique capabilities to help the world decarbonize and develop its economy.
At the same time, in 2008, a South African company called Optimal Energy launched the dual car at the Paris Roadshow.
The car was a prototype electric vehicle and was considered one of the world's front runners in electric vehicle technology, but it never got off the ground.
Optimal Energy declared bankruptcy in 2012 over in California in 2008, a South African entrepreneur called Elon Musk began producing Tesla's first electric vehicle, the Roadster in 2009, Tesla received a $465 million loan from the US government to begin mass production of its cars.
And it's now the world's most valuable automaker with an 18% share of battery battery electric vehicles.
Our research suggests that one of South Africa's main sources of comparative advantage was its ability to create cheap electricity from coal.
This enabled South Africa to develop many energy intensive industries such as in mining steel, synthetic fuels and chemicals.
But South Africa has now lost that comparative advantage as coal has become an uncompetitive energy source.
And South Africa's electricity system has faltered because of its ailing utility.
South Africa now needs to develop new sources of comparative advantage that can give it leadership in industries of the future overseas and solve pressing problems at home such as high unemployment, high inequality, and low economic growth.
Some of its best opportunities are gonna be in green growth industries that supply the world with goods and services.
It needs to decarbonize.
At the Growth Lab, we think of Green Growth as creating the industries that the world needs to decarbonize and generating economic development for the host country or region in the process.
Our report suggested South Africa has three main strategies to do this.
Its first strategy should try and make new products that can help the world decarbonize such as critical minerals, electric vehicles, electrolyzers, wind turbines and their components.
Its second strategy should be to make existing heavy industrial products such as steel, ammonia and chemicals in green ways, harnessing South Africa's well beating solar and wind energy resources.
And its third strategy should be to export know-how related to decarbonization by providing services or licensing technology.
South African companies have some crucial know-how for decarbonization such as Sasso's knowledge of fisher trope processes that may be required to make green fuels bed.
South Africa needs smart industrial policy that's sensitive to its institutions and contexts.
We have the distinct pleasure of welcoming one of South Africa's extraordinary industrial policy leaders, Joanne Bate, who's the chief operating officer of South Africa's Industrial Development Corporation.
The IDC is a state owned enterprise tasked with building the industries of the future in South Africa.
It's been a crucial player in South Africa's industrial development so far supporting some of the companies that drove South Africa's initial industrialization such as its steel industry and its fuels and chemicals producer.
Joanne began her career at South Africa's IDC and went on to lead a number of major private companies before returning recently to the IDC.
Thank you so much, Joanne for joining us.
Thanks so much, Ketan and it's great to be here, Joanne.
I'd like to start with a bit on your background. So you're a real asset to South Africa here at the IDC.
But you've had a diverse career spanning many different sectors.
What led you back to the IDC? And how do you see your role as contributing to South Africa's future?
So I have had a career and the ID in the, in the, in the mid 19 nineties and what drew me to the IDC was the opportunity to learn about different industries.
We worked at that stage in teams of three being a technical marketing and financial person looking at the country at the company's potential to be to be successful and to deliver solutions and be viable as opposed to my audit background, looking backwards and seeing what the company had achieved.
So I really like that forward looking view of how to analyze risk and understand potential.
And every second week, we're in a different province in a different industry with a different team of engineers and and marketing people.
And that really gave me the, I think the appetite for, for learning. So every, every week you were learning something different. My aptitude test that I should have been an engineer. So I am an engineer and I really think that that's what, what kept me at the IDC for probably a decade.
And in that time I saw a complete transformation of the organization as the country was just going through independence. And I was fortunate enough to be involved in the Mozal Aluminium Smelter project in Mozambique where I got to see how the IDC took risk in those days.
It was with partners who were strong technical partners spending time on the ground in Mozambique, understanding the social needs and and and risks planning for mitigating those in the project implementation.
And we probably it is 18 months before breaking ground to plan the project.
So it really was about spending time in the community which made Mozal an incredibly successful project development.
And it was my first interaction with Harvard where we presented the Mozal case studies to Harvard. And all of the the students said it could never happen in Africa for a project to land on budget and on time and it was ahead of budget and ahead of time and I then decided it was time to, to try something different after a decade in one place and spend time in banking.
And what while in banking, I did a lot in the infrastructure, public sector and mining space.
And again, enjoyed the development side of public sector and and mining then led a project on client innovation looking at how we need to think about our clients to innovate with our clients, not from a digital perspective, but how to ensure clients can be partnered in being successful into the future.
And what I found was a template in how to actually build for the future as opposed to a client proposition for each individual client. And unfortunately, banking is not that ambitious.
So the the bank didn't see the potential of what we actually had, which was a template for, for change.
And then decided to take a sabbatical and think about what to do next and in thinking about what to do next, my decision was to move to a company that was thinking about the next 25 years and planning the actions we need to take today to ensure that we build a future relevant company in 25 years time.
And the IDC opportunity came up and I thought we better to plan for the next 25 years than in the IDC, which was one of still one of the most rewarding entities I've ever worked in and came back to the IDC as the Chief Operations Officer responsible for our client side of the business, including project development and planning.
So everything that we thought about in the context of client innovation, solving for end users sits within our, you know, primary sector has been been mining and agriculture through our manufacturing sector into the we don't cover retailers, but ultimately everything that gets manufactured ends up being consumed by you and me and everything else is there to support it.
So it's quite interesting to see this ecosystem of opportunity that we've been able to unpack and build at the IDC.
Thank you, John. That's a fascinating history.
You've you've got a really terrific long term perspective thinking 25 years in advance what the future industries are gonna be.
And that's really from what I understand embedded in the lifeblood of the I DC.
You know, the IDC was, was crucial to South Africa's initial industrial industrialization. So could you tell us a bit about how the IDC came about and began to industrialize South Africa? And, and what led to the creation of companies like SASO hm.
So the IDC was created in 1940 was it received its initial seed capital and it was rec largely response to the, the Second World War and needing to ensure that South Africa became self sufficient.
And it started with the building of what is now ArcelorMittal and Kumba Iron Ore. It was a company that that was EO which was an integrated iron ore and steel producer that resulted in there's a number of.
So the, Hendrik van der Bijl was actually the first CEO of the IDC.
And Vander Bijl Park is where Sas, where, where AMA is, is located. So a very long history in heavy manufacturing.
We still have a shareholding in Arsal Mattel today which contributes to the carbon content of our portfolio.
And then in the 1950's, there was a company, a private company that was exploring the Fisher troughs technology and had reached out to government for some support and government saw the enormous potential of the Fisher Traps technology and started working with the company and the private sector company then walked away and government took over the, the initiative invested through the IDC significant funds.
But at one stage, SASL was 90% of the IDC's asset base.
So it was, you know, substantial risk that was taken in order to build. It took a series of restructurings in order to create a viable entity, but we now have ended up with you know, some of the best gas to liquids and solid liquid technology that is around the technology has been taken into China, into the US.
And I mean, it really is a phenomenal petro homegrown petrochemicals company and Sal really, I think is you know, again, a very significant carbon carbon emitter within our balance sheet.
But both Arsal Mattel and Fasil give us the opportunity of playing that strong industrial role again in the Green Hydrogen Space in order to decarbonize our book and the Real economy and create some very green, globally competitive companies.
So the question I posed at our recent Green Hydrogen Conference this week is, you know, is it a question of where is the next Sass L or is it a question of what's needed to create the next Sasol? Because I do think that, you know, can you imagine an organization today investing 90% of its asset based in developing a single asset?
Hm, that's fascinating. So, you know, our research found that South Africa's industrial comparative advantage is based on its coal resources and the IDC was integral to developing those coal resources to create hassle and, and, and took huge risks to do so.
And what do you see is what you see is essential to what's needed to develop the renewable energy resources in solar and wind and, and other areas that could be fundamental to South Africa's next generation of industrial competitiveness in areas such as hydrogen.
And it's a really good question and it is to me about taking the conversation out of energy into industrialization. There's been this obsession with the renewable energy program which I think is a a global first in the programmatic approach that we took in the renewable energy program.
And you know, it was hugely successful but deployed five gigawatts over a decade and not significant industrialization because the focus was on getting electrons onto the grid.
And if we look at what is needed to support electricity for the next 25 years, we need to deploy five gigawatts of electricity for of renewable electricity for per year for the next 25 years and a similar amount for, for green hydrogen.
So it really is important that we understand the demand of industrial products, both for our renewable energy build as well as for our transmission.
But his point is building the renewables without the distribution network in place, which presents enormous opportunity for significant industrialization to localize the deployment of those, those assets.
It also allows us to deploy them greener than if we are putting them on ships across the the world.
So we need to start thinking about shortening and greening supply chains in order to feed our industrial growth.
There also then is, you know, the new technologies because all of that that I've mentioned is, you know, easy to do, everyone's done it. It's the case that, you know, the the the technology is proven and there's, there's little oh what's the term? Price parity has been achieved.
So there's not much. There'll be incremental savings over time but not exponential savings over time. Whereas if you look at green hydrogen there, I think we need to be looking at the decisions and the risk appetite of the 1950's.
Whereas if you look at green hydrogen there, I think we need to be looking at the decisions and the risk appetite of the 1950’s.
Because what we know is if we can reach commercial scale in green hydrogen, we will have a globally competitive green hydrogen industry. But what we need to reach commercial scale is investment in non-commercial projects, which we either need to leverage the contractor differences in export markets or we need to look at what the economic potential is from that and decide are there subsidies that we as a country can actually commit to unlocking those opportunities or differently?
How do we provide, how do we think differently about risk, risk appetite, you know.
So with SAS L, we knew that the demand for the fuel would be there so we could build to scale for CAL to for SAS L to come online. But what we need to do now we're waiting for all takes for various projects and that's delaying the build out.
So what can we do for a policy perspective to actually encourage entities like the I DC to take the risk of building commercial scale, knowing that he who is first to market will have access to market rather than being cautious and waiting for the market to be proven and somebody else having taken it.
So I think there's a couple of things we need to think about in how we can change our risk appetite to actually drive industrialization of the very new technologies.
That's very interesting. So one of one of the big problems in this space is financing these technologies, you know, with such a high upfront capital cost and zero marginal cost, these projects become very, very sensitive to the financing and it seems like private players aren't necessarily willing to do that. And in South Africa, the cost of capital is, is very high.
So how do you see ID C's role in, in taking sensible risks but necessary risks to build this industry and managing down the cost of capital for these sorts of projects?
We do have project development funding.
So we will get involved from scoping and pre-feasibility stage where there would be no cost to the project if the pre-feasibility is unsuccessful, but we would then take equity and be an equity sponsor with the partners in order to once the project is bankable and then raise capital with them.
You know, as I say, the inhibitor at the moment really is around the offtake because we have a number of projects that are largely good to go.
But to commit $4 billion in in in capital when there's no proven market starts becoming challenging thing. And I think that's where our role needs to be in more actively creating the local market. And, you know, I think we've been a bit purist in our approach to green hydrogen that we can only accelerate fuel cell deployment once we have green hydrogen.
The reality is a fuel cell manufactured in South Africa is a more cost effective and emissions friendly alternative to diesel generators.
So, should we not be looking at how we build the market demand for electro for fuel cells? And in parallel, look at the development of the green hydrogen projects so that you, you have demonstrated the use case if we know that the market is there, we can build the projects. I’m also looking at alternative uses for green hydrogen. I think it's no longer a play of, you know, what at what cost can we produce green hydrogen? But at what value can we create green steel? At what value can we create green ammonia we use in the country?
And we currently import the majority of our fertilizers. A lot of them are highly chemical and toxic. What is the cost to our environment of the toxicity from those chemicals?
And how do we actually understand what the value is from green ammonia in the country?
So I think we need to think very differently about risk. I think there's a different level of modeling that's needed.
There is a balance of payments, benefits for not importing products into the country.
How do we start understanding that as a potential subsidy or concession to unlock the potential of these projects?
So I think that there just is no, we need more data, we need more modeling, we need to make informed risk-based decisions. And I think with the right data, in fact, we actually can start changing the risk models. Fascinating.
So, you mentioned fuel cells and electrolyzers as an opportunity you see for South Africa and I understand South Africa has a number of nascent fuel cell manufacturers. How do you think about developing that ecosystem? And what's the economic opportunity for South Africa in that industry? And it is so the economic opportunity is enormous, particularly in the PGM based fuel cells and electrolyzers.
There’s obviously multiple technologies and you know, currently the you know, or rather about two years ago, the conversation was well, we need to be careful in which technology we choose. The current conversation is the demand for fuel cells and electrolyzers globally cannot be met by the available demand.
So whatever is available is the right technology today. I think with, you know, with that context, there certainly is a good case to be made for doubling down on building platinum based electrolyzers and fuel cells and building out the use cases, you know, we've got, I think one of the challenges sal was a single entity that was developing the technology, whereas here we have multiple platinum players who are seeing the benefit for PG MS but not necessarily wanting to collaborate with their competitors. So I think we also need to change that competitive landscape because there is very real and tangible benefits to the platinum industry players in South Africa for a rapid development of the platinum based electrolyzers and fuel cells. I think that is the next stage of collaboration, we need to look at how can we encourage these parties to collaborate together with us to share risk in rapidly deploying fuel cell technology and building electrolyzers in the country.
23:19We have the technology, we can attract new technology and we we actively engaging Asian and European partners who are technology providers to set up, you know, dual manufacturing facilities. And we just really need to take action in my view.
That sounds terrific.
And South Africa is one of the world's leading suppliers of platinum with more than 70% of the market. And I think its exports in platinum are over about $26 billion a year. So it's a huge industry and more generally, the world needs more critical minerals to do green growth. And South Africa, South Africa has as a leading miner in many of those mineral value chains, but it's miners.
How do you do it, how do its miners capture that growth opportunity?
I think there's two questions there. The one is, how do we ensure that we take advantage of it? The other is how do we ensure that we diversify the ownership base in doing it?
You know, I think that part of the green economy opportunity is diversifying the, the asset ownership globally. Ensuring that emerging markets take a greater hold of the equity and upside from the minerals in the countries that in the countries where the minerals are found.
So we are looking at models for, for ownership. We're looking at a critical mine.