Localisation isn’t a silver bullet for SA’s woes, says report

The government’s localisation drive — an important component of President Cyril Ramaphosa’s economic reconstruction and recovery plan — could raise costs, reduce SA’s competitiveness and strangle domestic competition according to a report from the Centre for Development and Enterprise. 

The report, released on Tuesday comes as localisation efforts were given a short in the arm in October, when the National Treasury issued a circular banning the use of imported cement on all government projects.

The move was hailed as a boon for the local cement and construction industries hard hit by the Covid-19 economic crash, boosting the share price of local producers such as PPC.

Minister of trade, industry and competition Ebrahim Patel has, through Nedlac, asked big business, labour and government to target a 20% reduction in SA’s non-petroleum imports over the next five years, to support local manufacturing. 

Government’s preferential procurement policy framework already allows the department to designate sectors for localisation and almost 30 products ranging from trains to wheelie bins have been listed.  

But CDE executive director Ann Bernstein said SA’s localisation policy is a “misguided strategy that will further constraint future development” and called on big business to interrogate the claims made regarding its benefits. 

“Organised business should not be seen to support a policy that reduces competition by strengthening incumbent firms at the expense of new entrants,” Bernstein said at a webinar.

The report written with contributions from David Kaplan, professor emeritus of Business Government Relations at the economics department at UCT, and Professor Lawrence Edwards, a research associate at the SA Labour and Development Research Unit and Policy Research at UCT, called for a more thorough interrogation of the direct and indirect costs associated with localisation. 

Though localisation has been promoted as a way to grow the economy, create jobs and reinvigorate SA’s industrial base, the report argues that the benefits of localisation are overstated while the costs are understated. 

SA currently imports about 25% of its GDP according to the DTIC’s calculations and is a reason it views SA as having an “over-propensity” to import goods. However the report argues that the figure — which it argues is closer to 31%, using World Bank data — is not out of the kilter with most other countries.

Take a closer look

The report also underscores the relationship between a country’s level of imports with its ability to export goods to global markets competitively

“Imports of intermediate and capital goods are crucial inputs in production and are associated with higher value added of SA firms,” it argues. “Since localisation will restrict access to competitively priced imports and result in higher production costs, the policy is, in effect, an anti-export strategy.” 

The report also criticises the DTIC’s sectoral masterplans that the department has been developing alongside businesses across various industries to help boost investment and job creation. The report warns there is a clear risk that these masterplans “protect incumbent firms from further competition”. 

But Roland Van Wijnen, CEO of PPC, who attended the webinar said it was “one step too far” to argue that any form of localisation amounted to protectionism and would result in local firms becoming “lazy”.  

The DTI’s chief economist, Stephen Hanival, who also gave input, said the DTIC was using the instruments available to it, such as designation “in as careful and nuanced a way as we can”. 

It did not designate in sectors where there was only one local supplier, but rather in areas where there were several local firms who compete, Hanival said. “What we are not doing is designating where a company is able to exploit its market power and push up prices too dramatically,” he said. 

The department recognised that SA required imports. But “we really think we should try to minimise import leakage where we have domestic firms that are both competitive and have the capacity to produce in the quantities required”, Hanival said. 

Kaplan acknowledged that these issues were complex and emphasised that the research was not advocating the abolition of all protections for local firms. Some forms of protections — such as those for infant industries — can be done, provided they are time bound and contain sunset clauses and their effectiveness is subject to independent evaluation, he said.

“If found to be ineffective government should have the capacity and strength to withdraw those protections,” Kaplan said. 

Ultimately, SA’s poor economic performance in recent years has little to do with its reliance on imports, the report argues. Instead it is due to “self-inflicted policy and governance injuries”. 

These include SA’s inability to keep the lights on, its decaying infrastructure, expensive and inefficient ports, the rising levels of lawlessness, and the “education systems’ inability to produce adequate numbers of skilled workers”. 

donnellyl@businesslive.co.za