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…..
