Research on the Performance of the Services Sector

Main Growth Areas

The ICT sector has grown over the years and is expected to continue to grow as new technologies emerge and the industry becomes more innovative and competitive. The main areas for expected growth are Internet usage, Broadband speed and quality and ICT technologies.

Increased Internet access and usage by emerging and developing countries

Improved technology and speed and quality of broadband

Widespread use of broadband networks create an opportunity for growth and development in innovation and competitive advantage

Key Problem Areas

Key challenges to the growth of the international market are:

Human capital and innovation- there is a shortage of skilled workers in the industry and there is a need to develop the industry through education

Attracting Foreign trade and FDI is a key problem area as the market is extremely competitive and innovative

Infrastructure (telecommunications, electricity, transportation) is an important part of any development especially for ICT where the sector depends on infrastructures such as electricity and road access

Regulatory reform and red tape reduction for policies to improve development of ICT industries and create friendlier business environments to attract FDI

National Trends

In South Africa, the ICT sector has been identified as a key sector for economic growth and long term sustainability. The ICT sector in the country contributes an estimated 7% to the country’s GDP⁵⁵. Over the years the South African economy has shifted from an economy rooted in the primary sectors to an economy that is driven by the tertiary sectors. The economy is now moving towards a knowledge based economy with a focus on technology, e-commerce and financial services. The local IT industry is based in both the services sector and manufacturing sector, and South African companies specialize in pre-payment, revenue management and fraud prevention systems. Some manufacturing (e.g. Set-top boxes) does take place locally and these products are exported successfully to the rest of the world. It should be noted however that manufacturing within the ICT sector is still within its infancy.

South Africa has comparatively higher prices in terms of ICT products, than other African countries, as well as OECD countries. Furthermore, whilst South Africa can be characterized as having the most developed telecom networks, this area of the ICT Sector continues to lag behind. In terms of broadband penetration, South Africa has fallen behind many global competitors with similar GDP’S. This includes ICT sectors of countries like Argentina, Poland and Brazil. ⁵⁶According to the Network Readiness Index (2010-2011), South Africa is ranked number 61, well below their African counterpart Mauritius (rank 47). The rest of the other African countries lie within the lower half of the NRI rankings.

Although South Africa has managed to surpass other sub-Saharan countries in terms of development of the ICT Sector, it has recently begun to fall behind. Between 2007 and 2009, South Africa fell five positions from 52^nd to 47^th on the World Economic Forum Readiness Index. ⁵⁷ The drop in the ranking can be attributed to relatively low market penetration especially in broadband in South Africa. The low market penetration is largely due to the high costs of telecommunication and broadband in South Africa, however as more competitors enter the market this should drop prices and hence increase access.

Prospects for future growth and development of South Africa’s ICT sector remain promising. In 2009 South Africa was amongst some of the African countries that represented the top five countries in the African region, as indicated by the ICT Development Index (IDI). Other countries included Seychelles, Mauritius, Gabon and Cape Verde. The ICT sector contribution to GDP has increased considerably over the past five years, as the country has developed its network capacity and improved infrastructure, and globalization. However, this contribution has been outperformed by other performing African economies, and in particular, some of the Asian countries as well.

South Africa’s ICT Sector can be described as being relatively concentrated, in terms of market structure. The market concentration of the sector is comparable to other concentrated markets like New Zealand (50%), Mexico (monopoly) Switzerland (>50%) and Norway (>59%). In 2008, South Africa had the fifth highest market concentration (measured in HHI), which may contribute to the relatively higher pricing of ICT products. The ICT sector in South Africa consists of IT services and some manufacturing of devices and components. Furthermore, the ICT sector in South Africa can be categorized into three sub sectors; Communications, Electronic components, and Software and IT services.

Within South Africa the ICT sector has grown across the nine provinces, however there are still areas such as the Eastern Cape that are underdeveloped. The three main hubs are Gauteng with 57% of ICT firms, Western Cape with 17% and KwaZulu-Natal with 8%.

The Gauteng ICT sector contributes around 6%⁵⁸ to regional GDP and the sector offers a diverse range of products from manufacturing to software design and software management. International companies such as Microsoft, Hewlett-Packard, IBM, ICL, Cisco and Unisys are all based in Gauteng.

It is estimated that the ICT sector in the Western Cape generates an annual turnover of R9 billion and the sector is expected to grow between 15-20% per annum⁵⁹ between 2008 and 2013. KwaZulu-Natal is becoming an attractive place for ICT investment as the province has a number of advantages for business growth. The infrastructure and access to transport as well as the existing manufacturing base provide the sector with opportunity for further growth. Twelve digital community hubs have been established in the rural areas as a way to increase access to digital information to communities.