Multiplier presentation march 2011

Southern African Institute of Steel Construction

Multiplier in structural steel fabrication and construction

March 2011

What is the multiplier effect ?

Knock-on characteristics of economic activities:

• Example: Investment in a steel building / warehouse

• Structural steel has to designed, fabricated, painted, transported and erected

• Raw steel has to be produced in furnaces and rolled into useable plate and sections

• Iron ore has to be mined and processed• Each step requires materials, equipment,

etc.• People are employed throughout and spend

their income in the economy

The Multiplier study

Conningarth Economists• Macro-Economic Impact Analysis• Social Accounting Martrix (SAM) - with

info from BSA, SARB, StatsSA and Treasury

• Model analyses requirements for commodities, electricity, water, etc. as well as the expenditure on wages and salaries and the income received by state and government

The Multiplier impacts

On a new structural steel project

• Direct: Effects in structural steel sector

• Indirect: Effects in supply industries

• Induced: Economic impacts from salaries and wages paid in the industry as well as sectors indirectly linked

The Multiplier calculations

BASE INFORMATION STRUCTURAL STEEL

• 6000 TONS PER YEAR: (Medium sized company)– People employed in fabrication: 210– People employed in construction: 150– Total employment for 6000 tons per annum: 360

* Jobs created for every 1000 tons produced: 60

• 720 000 TONS PER YEAR: (Industry)– People employed in fabrication: 25 200– People employed in construction: 18 240– Total people for 720 000 tons per annum: 43 200

The Multiplier creates jobs

EMPLOYMENT Company Industry• Direct: 360 43 200• Indirect: 192 23 040• Induced: 378 45 360• TOTAL: 931 111 720

- A multiplier of X 2,6 “decent jobs” therefore applies in the economy for every person directly appointed by a fabricator or erection contractor- A further multiplier of X 4 applies to all those dependants relying on each income earner

The Multiplier calculations

BASE INFORMATION STRUCTURAL STEEL

• 6000 TONS PER YEAR: (Medium sized company)– Sales value of fabrication: R 121 m – Sales value in construction: R 52 m– Total turnover for 6000 tons per annum: R 173 m– Capital Investment required: R 53,97 m

* Capital investment required per job created: R 150 000

• 720 000 TONS PER YEAR: (Industry)– Sales value of fabrication: R 14,520 bn– Sales value in construction: R 6,240 bn– Total turnover for 720 000 tons per annum: R

20,760 bn– Total Capital Investment: R 6,476 bn

Multiplier growing the economy

Value Added / Gross Domestic Product (GDP)*:

R Millions Company Industry• Direct: 94 11 280• Indirect: 44 5 280• Induced: 110 13 200• TOTAL: 248 29 760

Multiplier: 2,6X

* GDP: Sum of salaries, Gross Operating Profit and indirect taxes

The Multiplier grows investment

Impact on capital formation / investment:R Millions Company

Industry• Direct: 54 6

480• Indirect: 92

11 040• Induced: 205 24

600• TOTAL: 352

42 240• R6,5 billion invested in the industry

(X6,6) stimulates R 42,2 billion investment in RSA

The Multiplier stimulates the economy

A R1000 000 000 structural steel project

causes R1.43 billion of economic activity:

• 50% (R715 million) for manufacturing• 20% (R286 million) for financial

services• 10% (R143 million) for community,

social• 7% (R100 million) for wholesale and

retail• 4% (R60 million) for transport and

storage• 9% (R126 million) for all other sectors

The Multiplier pays taxes

R1billion structural steel project causes R1.43 billion of economic activity, and:

Results in R390 million of taxes being collected

• For investments in infrastructure• For incentives for investment and

export• For social and other grants • For services ………

The Multiplier used

A R1billion imported structural steel project supplied and erected by overseas contractors:

• Requires R1bn cash outflow to the supplier

• Loses 25% of potential taxes (14% VAT earned)

• Loses R1,43 billion of economic activity• Loses 5500 decent jobs for a year• Loses R 312 m of potential capital

formation• Does not make economic sense !

The Multiplier used

R1 billion of imported fabricated steelwork only * erected by local contractors:

(Represents 50 000 tons per annum)

• Requires R1bn cash outflow• Loses 25% of taxes (After 14% of VAT

earned)• Loses R2,5 billion* of GDP / Value added• Loses 8600* decent jobs for a year• Does not make economic sense !

* Multiplier of 2,9X applies

The Multiplier in practice

• CONCLUSIONS• A multiplier applies in all industries• Import substitution is a job creator• Local content economically justifies a 25%

differential compared to imports• Buying South African makes business sense• This provides a realistic business case basis

for Government decision making on import protection, designating products and investment support…..