Dr Roelof Botha

SA drone industry Economic Impact Assessment

Dr Roelof Botha

Characteristics of the South African business environment in mid-2017 (selection) Low levels of business & consumer confidence

Below-optimal economic growth (0.3% in 2016) Rising unemployment Government revenue sources under pressure High levels of violent socio-political unrest Imports from China placing pressure on the balance of payments

Energy policy fiasco & signs of state capture Wide-ranging infrastructure deficiencies

Socio-economic disadvantages of an excessively regulated business environment Barriers to entry into the relevant industry

Reduces the level of domestic competition in the economy Acts as a disincentive for foreign direct investment Reduces a country’s international competitiveness Lowers total output in the economy (GDP) Reduces the rate of employment creation

Loss of a variety of taxation revenues for government Negative impact on technology transfer & national development goals

The Zuma era’s dismal scorecard for SA’s global competitiveness (for public sector corporate governance)

Indicator

(Source: WEF - 2016)

2009

2016

Decline

Govt. procurement - hi-tech products

34

99

-65

Favouritism by govt. officials

50

115

-65

Wastefulness of govt. spending

29

88

-59

Public trust in politicians

50

109

-59

Diversion of public funds

49

96

-47

Quality of primary education

104

126

-22

Government debt

54

73

-19

Pay & productivity

81

98

-17

Cooperation between labour & employers

123

138

-15

Burden of govt. regulation

95

116

-11

GDP growth remains on a downward trajectory (Source: Stats SA)

Year-on-year %

4.5

3

1.5

-1.5

-3

3 Q 1' 17

3 Q 1' 16

3 Q 1' 15

3 Q 1' 14

3 Q 1' 13

3 Q 1' 12

3 Q 1' 11

3 Q 1' 10

3 Q 1' 09

Q 1' 08

0

Global rankings for the quality of air transport infrastructure – selected countries & BRICS (Source: WEF) South Africa (11) Portugal (20) Australia (29) South Korea (31) Greece (40) China (58) India (71) Russia (79) Argentina (91)

Score

Brazil (113)

3

3.5

4

4.5

5

5.5

6

Key sectors for the application of UAS services (selection) Agriculture

Filming

Real estate

Private security

 Purchases of homes

Public safety

 Home rentals

National defence systems

 Property development

Road & railway inspections

Mining

Water reservoir inspections

Energy grid

Border control

Industrial infrastructure

Sea rescue operations

Shipping

Emergency medical services

Postage

Fire fighting

Impact of global UAS industry – some facts Number of UAS (for leisure) in the EU in 2025 (est.)

7 million

Number of UAS (for leisure) in the US in 2021 (est.)

3.5 million

Number of UAS (commercial) in the EU in 2025 (est.)

400,000

Number of UAS (commercial) in the US in 2021 (est.)

1 million

Drones being registered in the US per month

Value of European demand for UAS services (p.a.) Timing of launch of one-ton capacity drone (in China) Cost saving on delivering by drone in rural China (vs. truck)

50,000

Euro 10 bn 2 years 70%

Est. job creation upon full UAS integration in US (in 10 years)

100,000

Est. Drone industry contribution to US GDP until 2025

$82 bn

Methodology for determining the economic impact of the Unmanned Aircraft Systems (UAS) Industry Step

Method

1

Sample survey conducted amongst members of CUAASA

2

Extrapolation of results into total estimated turnover

3

Determination of average multiplier effects for relevant sectors

4

Classification of multiplier effects into direct, indirect & induced

5

Calculation of impact on output, jobs & tax revenues

6

Comparison of results with SA/EU and SA/US GDP ratios

Sources

(i) (iii) (iv) (v) (vi)

CUAASA Quantec Data Stats SA Association for Unmanned Vehicle Systems International Single European Sky ATM Research/EU

Anticipated % increase in key UAS indicators 2017 to 2018

290 %

260 230 200 170 140 110 80 50 Value equip.

UAS (numbers)

Employment

Turnover

Value aircraft

Summary of macro-economic impact of the South African drone industry in 2017 Economic output

R million

Industry turnover

2 052

Total SA output

6 497

Broadening of tax base

R million

Personal income tax

725

Corporate tax

699

Indirect taxes

1 177

Employment creation

Number

Formal employment

24 667

Informal employment

9 763

Composition of the economic impact of the UAS industry (Rm) Total output: R6.5b Total taxes: R2.6b

Industry sales: 2,051

Personal income tax: 725

Corporate tax: 699

Indirect output other sectors: 1,058 Indirect taxes: 1,177

Direct output other sectors: 836

Industry salaries: 1,239

Industry value added: 1,314

Comparison of Economic Impact of the UAS industry with past six AAD Exhibitions (Sources: AAD Organisers’ Office; Botha RF)

6000

R million

5000 4000 3000 2000 1000 0 AAD 2006

AAD 2008

AAD 2010

AAD 2012

AAD 2014

AAD 2016

UAS

10-year GDP impact of UAS industry in SA based on different scenarios 30 R billion

25

20

15

10

5 25% growth p.a.

30% growth p.a.

SA/US GDP ratio

35% growth p.a.

SA/EU GDP ratio

Macroeconomic advantages of the expansion of the UAS industry Higher level of efficiency due to automation Higher level of customer satisfaction Cost savings to a wide range of businesses Shareholders receive higher dividends Broadening of the taxation base Positive effect on GDP Diffusion of technological advancement More emphasis on appropriate skills development More accurate data collection Mapping of inaccessible locations

Macroeconomic advantages of the expansion of the UAS industry (continued) Preventative maintenance inspections in energy sector Enabling of precision agriculture Assistance with humanitarian assistance More effective policing via identification of endangered citizens & hazards More effective maritime surveillance Enhanced border security Combating of poaching More accurate topographic surveying More efficient stock-pile management Transfer of real time data from fire & emergency scenes

Some indicators supporting a sovereign credit downgrade

CAASA Aviation Activity Index (CAAI) for South Africa (3-quarter moving average)

160

Index; Q1 2014=100 Note: avg. annual real growth = 6.3 %

150 140 130 120 110 100 90 Q1'14

2

3

4

Q1'15

2

3

4

Q1'16

2

3

4

Q1'17

Quarterly motor trade sales (at current & constant 2017 prices) (Sources: Stats SA; SARB; own calculations) 180

R billion

170 Real

160 150 140 Nominal

130 120

Q 1' 17

3

Q 1' 16

3

Q 1' 15

3

Q 1' 14

3

Q 1' 13

3

Q 1' 12

3

Q 1' 11

110

A “state of capture/incompetence” in SA – some proof

• • • • • • • • • • • •

Sassa grant debacle (Minister found guilty of fraud in 2006) Energy policy fiasco (100% increase in electricity tariffs in 3years) PetroSA loss in 2015 = R14.5 billion (due to incompetence)* SAA loss in 2015 = R5.6 billion* Irregular municipal expenditure doubles to R14.8 billion* High Court of SA exposes DMR as “irrational & incompetent” 3,600 public servants found guilty of corruption

Hawks’ attack on ex-Finance Minister Gordhan nonsensical Reckless cabinet reshuffle; clearly influenced by Guptas 80 ANC municipalities dysfunctional due to corruption/incompetence

ANC admits it may be destroyed by corruption & fraud *Note: 650k houses, 210k jobs, R100b output

Non-resident ownership of South African government bonds (Sources: National Treasury; SARB)

900

Rb 800 700 600 500 400 300 200 100 2009

2010

2011

2012

2013

2014

2015

2016

Speculation over downgrade fuelled by the increase in total public sector gross debt as % of GDP since the recession…

% 45

40

35

30

19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16

25

…and SA’s leading business cycle indicator continues to lag behind that of key trading partners… (Source: SARB) Index, 2010 = 100

125 US

115 Other countries

105

95 SA

85

75 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q2'16 Q3'16 Q4'16

…whilst GDP growth remains on a downward trajectory (Source: Stats SA)

Year-on-year %

4.5

3

1.5

-1.5

-3

3 Q 1' 17

3 Q 1' 16

3 Q 1' 15

3 Q 1' 14

3 Q 1' 13

3 Q 1' 12

3 Q 1' 11

3 Q 1' 10

3 Q 1' 09

Q 1' 08

0

…caused mainly by the commodity price declines between 2011 and 2015 (Source: World Bank) Cotton Iron ore Sugar Coal Maize Platinum % decline

Bananas Aluminium Oranges Gold

0

10

20

30

40

50

60

Average ratio of foreign direct investment to GDP from 2010 to 2015 – selected emerging markets (Source: Unctad) Ghana Chile Zambia Tanzania Brazil Mexico %

Poland Turkey Egypt South Africa

0

1

2

3

4

5

6

7

8

Burden of taxation continues to shift towards individuals (Sources: National Treasury; own calculations)

44

% of total

Individuals

36

VAT

28

20 Companies

12 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '15 '16 '17 '18

Reasons for modest optimism over SA’s growth prospects

The recession is over – prepare for higher growth Dr Roelof Botha

The repo rate and inflation – inconsistency in gap tolerance, but rate cut imminent (Sources: Stats SA; SARB) 7.1

%

Repo rate

6.7 6.3 5.9 5.5 5.1 4.7

CPI

4.3

4 Q 1' 17

3

4 Q 2' 16

3

2

4 Q 1' 15

3

2

4 Q 1' 14

3

2

4 Q 1' 13

3

2

4 Q 1' 12

3

Q 2' 11

3.9

Ratings agencies often ignore a number of fundamental indicators, such as the recovery of taxation revenue (at constant 2015 prices)… 1000

Rb 900

800

700

600

500 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

…and the existence of a highly diversified composition of taxation revenue by emerging market standards (FY 2016/17- Rb)…

Total R 1.2 trillion Individuals 443

Fuel & elec. 73

Companies 200

Skills levy 18

Dividend tax 25

Excise duties 44 Property tax 16 Customs duties 55

VAT 301

…furthermore, government’s borrowing requirement as % of total gross debt continues to decline (fiscal years, National Treasury forecasts for 2017-’19)…

20

% 18 16 14 12 10 8 6 4 2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

…as well as, arguably, the most important gauge of a country’s

creditworthiness – the total public debt/GDP ratio, where South Africa compares favourably with most key trading partners USA Singapore UK Germany India Brazil Malaysia

%

South Africa China Australia Mexico Russia

0

20

40

60

80

100

Fiscal stability is also reflected in a budget deficit/GDP ratio that is only marginally above 3% and forecast to decline further

1.5 % (fiscal years)

0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

-1.5 -3 -4.5 -6 -7.5

According to the World Economic Forum, South Africa remains the most competitive large economy in sub-Saharan Africa - out of 144 countries Mauritius Ranking

South Africa Rwanda Botswana Namibia Ivory Coast Zambia Kenya Gabon Ethiopia

30

40

50

60

70

80

90

100

110

South Africa possesses balance of payments stability, due to a huge financial account surplus (Source: SARB; Note: 2016 = preliminary) 250

R billion

200 Financial account

150 100 50 0 -50

'03

'04

'05

'06

'07

'08

'09

'10

-100 -150 -200 -250

Current account

'11

'12

'13

'14

'15

'16

South Africa has some stunning competitiveness strengths to build on (Source: WEF - 2016) South Africa’s highest-ranked competitiveness indicators (selection out of 138 countries)

Auditing & reporting standards

1

Soundness of banks

2

Financial services meeting business needs

2

Regulation of securities exchange

3

Efficiency of legal framework

9

Quality of air transport infrastructure

10

Strength of investor protection

14

Quality of management schools

21

Capacity for innovation

25

Domestic market size

27

Selected commodity price changes between early 2016 and April 2017 (Source: World Bank) Iron ore Coal Tin Oranges Aluminium Sugar

%

Gold Nickel Platinum Tobacco

0

10

20

30

40

50

60

70

Mineral sales at current prices (quarterly) (Sources: StatsSA; own calculations) R billion

120

115

110

105

100

95

90 Q1'14

2

3

4

Q1'15

2

3

4

Q1'16

2

3

4

Q1'17

Tourist arrivals from overseas (Source: Stats SA)

‘000 2 600 2 500 2 400 2 300 2 200 2 100 2 000 1 900 1 800 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Primary agriculture trade balance (R91b surplus since 2013) (Source: SARS)

70

Rb

60 Exports

50 Imports

40 30 20 10 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Continued progress with employment creation in South Africa (2.2 million jobs created since Q1 2010) Source: Stats SA

16.3

Million (formal sector = 70%) 16.05 15.8 15.55 15.3 15.05 14.8 14.55 14.3 14.05

Q 4 1' 17

Q 2' 16

4

Q 2' 15

4

Q 2' 14

4

Q 2' 13

4

Q 2' 12

4

Q 2' 11

4

Q 2' 10

4

Q 2' 09

13.8

Ratio between household disposable income & debt (Sources: SARB; own calculations) Index; Q1 2014 = 100

108 107 106 105 104 103 102 101 100 99 98 Q1'14

2

3

4

Q1'15

2

3

4

Q1'16

2

3

4

Q1'17

South Africa’s real GDP per capita has reached a structurally higher level & the country is classified by the UN as “upper middle income" Source: SARB

74

R ‘000 (constant ‘15p) 71 68 65 62 59 56 53 50 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Researched & prepared by Dr Roelof Botha Sources of basic data include the SA Reserve Bank, Stats SA, The Economist Intelligence Unit, the IMF & the World Bank Group

Biographical notes:  Dr Roelof Botha received his early schooling in Sweden, Germany, the Netherlands and three different provinces in South Africa  A diversified career has been followed in management accounting; financial journalism; lecturing; consulting; and economic research  He is a regular commentator & columnist in the national media and has authored more than 500 articles, books and research publications  His Honours and Masters degrees were both obtained cum laude at the University of Pretoria, whilst the Doctorate was completed at the University of Johannesburg  In 2005, he received the prestigious Finmedia Economist of the Year award, based on the accuracy of forecasts of key economic indicators  Current activities include being a Senior Adjunct Faculty member of the Gordon Institute of Business Science (GIBS)  Economic advisor to PricewaterhouseCoopers for the past 27 years Mobile no: 083 226 8921; E-mail: [email protected]