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Enabling ICT based Businesses in South Africa

by: Ajaya Kusum, SPI

South Africa’s economy has been traditionally rooted in the primary sectors as a result of a wealth in mineral resources and favourable agricultural conditions. Recent decades, however, have seen a structural shift in output. Since the early 1990s, economic growth has been driven mainly by the service sector, which includes wholesale and retail trade, tourism and communications. Now South Africa is moving towards becoming a knowledge-based economy, with a greater focus on technology, e-commerce and financial and other services. This made the Information and Communication Technologies (ICT) sector bloom in recent years. It might be surprising to learn that the ICT sector in South Africa is larger than the agriculture industry sector. This is one of the findings from Stats South Africa’s latest information and communication technology satellite account for South Africa report.1

The advent of ICT has taken the world by storm. Its recognition and importance have been unwavering. Worldwide, the money spent on ICT has been estimated as €3.2 trillion2 and more businesses have been adopting these technologies for their operation.  

The South African economy has been at the forefront in Africa through the use of ICT.  Unlike most other African countries, South Africa has already developed some cutting-edge public and private sector 4IR technologies.

South Africa has a large economic potential in the ICT sector. The country´s ICT market has held an overriding importance given its new innovative global platforms, including cloud services, Big Data applications and the Internet of Things (IoT). There is a high demand in IT security products and data analytic services in cloud computing for financial and retail companies.

This document is focused on providing insights to enabling ICT based business opportunities and challenges in South Africa. The document provides a short overview of enabling ICT based business opportunities and challenges in South Africa and, therefore, targets the following audiences:

  • EU start-ups, investors and venture capitalists with strong business acumen in the ICT sector who are interested in South Africa;
  • Financial institutions, governing bodies and relevant stakeholders who want to further their knowledge on the South African market; and
  • Tech firms and IT enthusiasts.

 

South African ICT and internet infrastructures are underdeveloped relative to the EU. The government is encouraging private R&D and innovation, cooperation with large companies and public-private partnerships in the ICT sector. The weak links between the business and research community hamper digitalisation and commercialisation of innovations. Nevertheless, the ICT sector in the country is expected to have a large business potential and transformative effect for the economy.

The next levels delve into the ease of doing business in South Africa and offer an understanding of why investment in the Western Cape could be a lucrative option.

 

"IDC - Global ICT Spending - 2018 - $3.8T". IDC: The premier global market intelligence company.

ICT landscape in South Africa

Over recent years, there have been increasing opportunities with regard to the South African economy in the ICT sector, which can potentially help the economy tackle a wide range of health, social and economic problems. By improving access to information and enabling communication, ICT can play a role in fighting poverty and accomplishing better economic outcomes.

South Africa has vigorously welcomed ICT in its business operations, which has led to a positive outlook on its entire economy. It has created a suitable network infrastructure making it tempting for EU firms who want to invest in the African region. The World Bank and International Finance Corporation (IFC) rank South Africa in 39th place in the world for ease of doing business.3

Due to a well-developed financial sector, the effort needed to get a credit in South Africa is similar to the EU. The government of South Africa realises the importance of foreign investors for the economic development, therefore it has been making generous attempts to further smooth the ease of doing business by creating favourable policies to EU firms involved in the ICT sector and providing tax cuts.

 

Demand Analysis

In the review of the ICT indices to measure digital development of a country, overall, South Africa ranks 92nd. The appetite of internet consumption is quite high. There are numerous business industries that rely heavily on internet use for daily operation and the individual ownership of smartphones and digital accessories are also increasing at an alarming pace.

There is a significant division in Africa with regard to access to electricity, with 40% of households in rural areas not connected to the main electricity grid.4 But South Africa´s case is different in comparison to its African neighbours. South Africa is ranked number one in terms of households with electricity access. An astounding majority of the households, approximately 89%, are connected to the main grid. Only 6% do not have access to electricity and the use of internet. There are very few places in the urban and rural region that are deprived of electricity and internet access.

 

Fostering ICT Businesses

There is no denying that South Africa has been doing considerably well in the ICT sector. It is the 20th largest consumer of IT products and services in the world. With a network which is 99.9% digital, South Africa has one of the most developed telecommunication networks.5 The industry is moving fast. However, the major problem is that South Africa has not been able to empower human assets in the ICT sector. South Africa still faces a deficit of experienced human resources in the ICT area, who could improve national internet investment, policy and regulatory decisions and the technical foundation. By improving the human assets, South African businesses can execute their operations efficiently and can fully utilise 4IR technologies like Internet of Things (IoT), big data and more. Investments in human development and digital skills are necessary to build a pipeline of future talent that can embrace this dynamic and increasingly digitised environment.6

In addition, from an academic point of view, the World Economic Forum has already shown the significance of African educators to design future-ready curricula that accelerate the acquisition of digital and STEM skills to match the way people will work. The African governments, and the ICT businesses, have an opportunity to develop tailored approaches to understanding the region's evolving skills base and emerging jobs scenarios. To take advantage of what 4IR has to offer business, governments must be able to develop, attract and retain the skills and capabilities.

 

Why ICT sector?

The ICT sector remains the largest employer and contributor to the South African economy. The overall employment rate increased by 19% in 2018.7  

 

EU and Africa

The EU has been working fervently in developing cooperation and strategic partnership with Africa to strengthen digital innovation and foster collaboration with ICT based companies in Africa to establish EU-Africa ICT ecosystems. It has formulated policies towards reinforcing the development and establishment of digital networks, fostering the development of digital start-ups through networks and creating mutually beneficial cooperation between African and European Digital Innovation Hubs

In a similar sense, the EU has been very active in South Africa. Looking at the bilateral relationship between the two, the Trade Development and Cooperation Agreement (TDCA) has improved the economic development process. The agreement covers a wide range of issues from political cooperation, development and establishment of a free trade area (FTA). Their economic relations have flourished more since the "Strategic Partnership" in 2007. After the signature of the Agreement, trade in goods between the two partners has increased by more than 120%, and foreign direct investment has grown five-fold.8 Presently, South Africa is the EU's largest trading partner in the region and the EU is by far South Africa’s most important development partner, providing 70% of all external assistance funds. The following is a brief observation on trade between the two:9

  1. Due to the Trade, Development and Co-operation Agreement between South Africa and the EU, there is a free trade area that covers 90% of bilateral trade.
  2. South Africa's exports to the EU are growing and the composition of these exports is becoming more diverse. South Africa is gradually moving from mainly commodity-based products to a more diversified export profile that includes manufactured products.
  3. South Africa's primary exports to the EU are fuels and mining products, machinery and transport equipment, and other semi-manufactured good
  4. EU exports to South Africa are dominated by machinery and transport equipment, chemicals and other semi-machinery.

 

Reasons to Invest

The strong tie between the EU and South Africa gives meaningful reasons for the EU companies to collaborate with the South African companies in the ICT sector.  The following are some additional factors that may justify a stronger focus on South Africa for ICT opportunities:

  1. It offers a first world development infrastructure and a growing emerging market.
  2. The investment lies in its multiplicity of sectors and industries.
  3. It is a major trading nation, exporting and importing more than €148 billion worth of goods every year, from a location that makes it an ideal gateway into African and other global markets.10
  4. It has numerous trade agreements that provide an export platform into global markets.
  5. With colossal government spending on infrastructure, South Africa has the largest air and port network that links into the African continent.
  6. South Africa produces an abundance of skilled, talented and capable workforce and offers a diversified skill set, emerging talent, large pool of trainable labour, and government support for training and skills development.
  7. South Africa is the multinationals’ location of choice. Global corporates reap benefits of doing business in South Africa, with its growing and supportive ecosystem as a hub for digital innovation.
  8. South Africa provides better political stability and a stable macroeconomic environment compared to other countries in Africa. 

 

Cluster and Collaboration

The European Cluster Collaboration Platform (ECCP) offers a cluster community, support services for cluster collaboration within Europe and beyond. Some of the European cluster partnerships in the ICT sector that target South Africa for internationalisation are as follows:  

  1. SENTINEL - Cluster Network for Hospitality Sustainable Development and Internationalization. SENTINEL is a cluster network enabling SMEs going international, integrating themselves in a global value chain, towards emerging markets in the hospitality sector.
  2. SpaceWave - The SpaceWave consortium plans to study the international markets and trends in the Blue Growth Economy in particular: explore Blue Growth market trends; extract, within these trends, sectoral challenges where Earth observation data could provide value-added solutions for Blue Growth; identify the current and future commercial and technological potential of Earth Observation technologies in selected sectoral challenges and define the most promising; and identify clusters and business networks in targeted countries including South Africa.

 

Presence of ICT companies in South Africa

  1. Musato Technologies:  It is one of the leading ICT companies in South Africa with technological footprints throughout Africa and the world. They specialize in business process automation.
  2. VisionITSolved: Since its operation in 2012, the company has become a one-stop IT solution provider, delivering services in AI, blockchain, business intelligence and more.
  3. BCX: The Company has been at the forefront in the ICT area, especially in the Cloud or development of customised applications.