The fifth in a series of webinars focused on localisation in terms of South Africa’s approach to designation and government procurement. Sponsored by Access Bank, the webinar was presented by Dr Clive Vinti, Head of Research at XA International Trade Advisors and Francois Fouche, founder and director of Growth Diagnostics and a research associate for the Centre for African Markets and Management at GIBS Business School.
Designation and government procurement
The concept of localisation became popular during the late 1970s and 80s, and this trend appears to back in vogue in 2022. While the idea of localisation in South Africa may sound like a good one – we create everything that we need within the country – is this realistic and, more importantly, desirable?
A 2021 Intellidex report commissioned by BUSA and BLSA entitled ‘Localisation: What is Realistic?’ surveyed 125 companies within South Africa on their views about localisation. From the report, it emerged that while the business sector broadly supports the idea of localisation, it feels South Africa is not ready for it. The overarching feeling from business is that if the government succeeds with its intentions for localisation, prices in the short and medium term will be pushed up by up to 20%.
What is localisation vs. designation?
Since 2011, the South African government has been pursuing localisation via a policy of designation. Designation is the idea that when government issues a tender for the supplier of a particular product or service, that product or service must be produced locally, and the raw materials needed to make up that product must also be locally sourced.
It also involves certain percentage requirements for the local component, for example a 65% local content requirement means that this proportion of the product’s value must come from local raw materials.
What does the law say?
The designation policy arises from the Local Procurement Accord of 2011, as part of an economic policy that that sought to create 5 million jobs by 2020. In this accord, the government clarifies which products should be designated. So far there are 28 products, including clothing, textiles, footwear, leather, pharmaceuticals, cement, bus bodies, solar water heaters, pylons, plastic pipes and railway rolling stock. However, it is unclear whether these are sectors, sub-sectors, industries or actual products. So, if one were to actually count the products for designation, they number closer to 100.
Section 217 of the South African constitution also says that tenders can be preferentially awarded to local suppliers, who must then produce the products or services locally. This section of the constitution is given effect by the Professional Procurement Policy Framework Act (PPPFA) legislation of 2017.
How are we doing?
As per the Local Procurement Accord, government committed to having a public process where they would consult with business to decide which products should be designated. They would also seek to measure the impact of designation on competitiveness of the industry via annual reports. Neither of these are currently being done.
From the Industrial Policy Action Plan (IPAP), government admits that it’s not currently able to carry out the function of designation effectively, saying that it is “currently too uncoordinated, fragmented and instructionally weak to carry out the function of adequately monitoring compliance on localisation”.
So why is this the case? There are currently several key problems with designation as we see it:
- Transparency: The relevant industry is never really aware that a product is being considered for designation. Furthermore, while treasury sends out a circular once a product has been designated, many players in that industry may not know that this is the case.
- Procedural fairness: Government previously committed to consulting widely with business about whether a product will be designated, and that there would be measurement done every year. But as of now, that is not being done and no data is forthcoming. This then has an impact on rationality: what evidence does government have when they decide on designation?
- Arbitrariness: We don’t know whether designation is good or bad, as the process is not transparent, rational or fair.
How do we fix it going forward?
We believe the issues with designation can be addressed in the following ways
- Create a separate set of regulations: Since designation is in effect a trade policy, we believe it should be a specific set of regulations that sits separately out of the PPPFA.
- Administration should be done by ITAC: ITAC is the primary administrative body that deals with trade issues in South Africa, and we believe it is currently the most qualified body to deal with the designation process.
- Align the regulations with PAJA: The designation regulations should be aligned with the Promotion of Administrative Justice Act (PAJA). In this way there would be procedural fairness and lawfulness, and a right to reasons as to why a product has been designated. There would also be investigation reports as to why certain products have been designated.
- Local companies should be compensated: Because designation drives up input costs, there should be a mechanism that compensates organs of state for the increased costs of acquiring products locally.
Under the right conditions localisation makes sense, and it’s clear that business supports it. However, the way in which it is currently being done is causing issues in terms of things like transparency and procedural fairness. If it were to be forced upon industry with the wrong conditions in place for sustainable local production, it would simply upset the balance between price, quality and capacity. Going forward, the success of designation will therefore depend improving the process, so that the correct products are created locally in a way that makes economic sense.