Value Chains

Value chain participation is a crucial driver of the Industrialization Strategy in view of it's potential for expanding production possibilities and enhancing cross-border utilization of the natural and human resources of the region. This participation can be of regional or global nature.

By nature, global and regional value chains involve the ‘unbundling’ of factories across international borders so that individual tasks are performed in different countries, which enjoy competitive advantage in a specific activity. A key element in the evolution of global and regional value chains is outsourcing by firms in mature economies of unskilled-labour-intensive activities and their relocation in low-wage economies. Typically, firms seek to retain high value-added tasks at home where the necessary skills and intangible capital are available.

The focal point of the SADC Industrialization Strategy is participation in regional and global value chains. The strategy sets out three Resource-Based Industrialization (RBI) preferred growth paths towards industrialization in the region – agro- processing, minerals beneficiation and industry and service-driven value chains. The three paths are mutually inclusive, encompassing the combination of downstream value addition and backward integration or the upstream provision of inputs, intermediate items and capital equipment.

Value Chain Participation in SADC

SADC value chain participation takes the following features:

(i) Cross-Border Participation

While regional value chains in SADC are, developing – most rapidly in services – participation in GVCs is modest, with the exceptions of apparel and in South Africa’s case, automobiles. SADC value chain participation is mainly upstream – the export of primary commodities, minerals, tobacco, sugar, and beef – with limited local value addition. The region is involved at the lower segment of value chains while focus should be on enhancing participation at the upper end and diversification into new high-productivity activities.

(ii) Hub-and-Spoke Value Chains

Regional value chains are primarily hub-and-spoke in structure with South African corporates as the lead firms with relatively few linkages to GVCs. Growing South African dominance, most notably in services, favours a hub-and-spokes regional model.

(iii) Remoteness

Participation in GVCs is constrained by geography – remoteness of major global hubs thereby strengthening the argument for emphasising the need for regional value-chains. Distance and weak connectivity have adverse effects – on costs, on delivery times and network flexibility. SADC economies participation in RVCs and GVCs is generally stunted by weak logistics and inadequate physical and natural capital, as well as serious skills deficiencies.

(iv) Scale

Small populations – less than two million people in the BLNS, Mauritius and Seychelles – restrict the size of the industrial sector, inhibit both diversification and cluster developments. Scale effects are exacerbated by regional imbalance between South Africa, accounting for over 60 per cent of regional GDP, and the other 14 with much smaller economies in terms of GDP.

Criteria for Identifying Value Chain Potential in SADC

A number of specific and dynamic criteria need to be satisfied for identification of potentially successful value chains within the SADC development environment. These include the following:

1. Growth Potential

Growth opportunities in output, employment and exports should be disaggregated so as to assess the potential economic impact of different value chain segments in different countries.

2. Availability of and Access to Resources

Linked to the growth potential, is the need for availability and access to resources. Aside from raw material and intermediate inputs, the crucial elements of successful value chain participation are financing, skills, technology, infrastructure and logistics.

3. Levels and Segments of Participation

Value chain impacts are greatest where entry occurs in the middle segment of the chain. Middle segments are defined as exports of intermediate products for downstream processing in other countries (Forward Integration). Middle segment participation is a function of trade openness, of the level of industrial sophistication in an economy, and skills and education levels.

4. Upgrading Potential

Upgrading potential is a key consideration because policymakers do not want to be locked into low-technology sweatshop-type operations that are competitive regionally and globally primarily because unskilled labour is cheap or because there is access to low cost natural resources. Upgrading potential will be greater where there are diversification opportunities while the benefits will be greater where firms enjoy knowledge and technology spill-overs.

5. End Markets and Market Access

Market entry is driven in part by market considerations. Taiwanese investors in the Lesotho garment industry were motivated by access to the US market through the Africa Growth and Opportunity Act (AGOA). South African investors in the clothing chain were driven by cost competitiveness considerations – lower wages in Lesotho allied with close proximity to the lucrative South African market. Upgrading in Madagascar has been greater than in Lesotho or Swaziland partly because its market shifted from the US (under AGOA) to the EU and South Africa.

6. Competitiveness

In a fast-changing global economy, competitiveness is dynamic forcing policymakers to distinguish between current and future competitiveness. Firms are much more likely to be highly competitive in task manufacture within a regional or global value chain than in a vertically-integrated national value chain.

7. Complementarity

There are extensive complementarities in both demand and supply in SADC, which will promote increased value chain participation on the basis of participant firms seeking to exploit their competitive advantage at different stages of the value chain.

8. Potential for Embeddedness

The evidence underlines the importance of participants committed to embedding their operations in the country where the value chain link is located. Case studies show how the degree of embeddedness varies according to the strategic motivation of the lead firms in the value chain. The impact is more positive where the investor is a long-term player with an interest in upgrading the value chain than where the value chain partner is a quota- or island-hopper. Regionally embedded investors from Mauritius and South Africa have had a significantly greater positive impact in other SADC states, like Madagascar or Lesotho, than those from further afield.

Regional Value Chain Potential in SADC

The Costed Action Plan of the SADC Industrialisation Strategy and Roadmap as approved by Summit in March 2017, identifies six priority value chain clusters.

These are:

(i) Agro-processing
(ii) Minerals Beneficiation and related mining operations
(iii) Pharmaceuticals
(iv) Consumer goods
(v) Capital Goods
(vi) Services

Specific sectors and the SADC countries that can potentially participate in each value chain have been identified by Member States and is given in the table below:

The Value Chains Unit

The Value Chains function was created in 2017 to coordinate the implementation and monitoring of the SADC Industrialisation Strategy and Roadmap (2015-2063) with specific focus on the development and enhancement of regional value chains and value addition, including mineral beneficiation.

Key focus areas include putting in place policies and strategies for the development of Regional Value Chains, developing value chain programmes and projects, industrial value chain clusters and public-private dialogues.

List of documents - Protocol, Policies and Strategies

- SADC Protocol on Mining (2000)
- Regional Mining Vision and Action Plan (2019)
- RISDP 2020-2030
- SADC Vision 2050
- SADC Industrialisation Strategy and Roadmap (2015-2063)

In terms of programmes and projects implementation, the Unit currently oversees, in collaboration with the Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH (GIZ), the implementation of the Support to Industrialisation and Productive Sectors (SIPS) project. SIPS is a SADC Programme supported by the European Union (EU) and the German Federal Ministry for Economic Cooperation and Development (BMZ) to facilitate expansion of regional value chains and promote dialogue between the private and public sectors. The German development agency, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) oversees Result Area 2 and 3 which have been allocated €10 million from the EU and €2.83 million from BMZ. Result Area 1, to be administered by SADC, is funded to the tune of €8 million.

Result Area 1 deals with enhanced policy, regulatory and operational business environment on national and regional levels for the development and sustainable operation of regional value chains (for selected products) in the agro-processing and pharmaceutical sectors.

Result 2 ensures that private sector participation in regional pharmaceutical and medical value chains is enhanced, while Result Area 3 ensures that private sector participation in regional leather value chains is enhanced.

SIPS builds on other programmes being implemented by SADC and funded by the European Union, which all have a bearing on value chain development and these are; the Trade Facilitation Programme (TFP), Trade Related Facility (TRF) and Support to Improving the Business Environment in the SADC Region (SIBE)..

Value chain profiling

Significant progress was recorded with regard to the profiling of SADC regional value chains in agro-processing (including aquaculture), mineral beneficiation, and pharmaceuticals. To date, 26 out of the 32 value chain clusters as prioritised in the Costed Action Plan of the SADC Industrialisation Strategy and Roadmap (2015-2063) have been profiled. Accordingly, the profiling has identified over 30 value chains with great potential for upgrading, thereby empowering SADC governments with knowledge of which value chains to target and hence increasing the likelihood of further regional developmental gains. Majority of these are from the Agro-processing and Minerals beneficiation value chain clusters.