A few weeks ago the National Treasury injected life into the share prices of PPC and Sephaku Cement through a directive indicating that the government would now procure cement exclusively from SA companies. This was seen by many as a positive sign that the government would now actively participate in promoting localisation.
However, a few key questions remained unanswered. The first is what effect such a directive would have on the companies in the cement sector. If the state had a confirmed pipeline of projects that would use large volumes of cement in the medium term, then the value of the directive would be easy to crystallise.
Unfortunately, there is no indication of what the government plans to build and when it plans to build it. That is a problem for the companies themselves, which cannot establish whether what they produce will be sufficient to meet state-driven demand in future, and what the implications might be for other clients already on their order books.
The mooted benefit of localisation, as articulated by the department of trade, industry & competition, is that it will drive industrialisation. In a country where so many industries have been collapsed by a combination of shifting tastes and cheaper imports, the idea of using state muscle to facilitate reindustrialisation is to be welcomed. However, the challenge is that little data seems to be in place to articulate the benefits and effects of this move.
In the Intellidex report produced for Business Leadership SA and Business Unity SA, the risk of pursuing industrialisation without building capacity was highlighted as a major red flag. In the absence of capacity, Intellidex estimated that rather than promote local industries we could actually see prices rising by up to 20%.
The key driver of such regressive outcomes is the sense of inefficiency that creeps in when a market is guaranteed and competition kept at bay. In an age where businesses distinguish themselves through innovation and efficiencies, any business that operates with the sense of comfort associated with guaranteed market access and exclusivity in state contracts is going to eventually fall behind in the innovation and pricing curve.
A secondary question that emerged was how the government settled on the cement industry as the sector that required such an intervention. The possible answer is that rather than the directive being the result of economywide considerations and assessment of trade-offs, the cement industry simply lobbied better than other industries.
Such an approach borders on arbitrary policymaking that has little effect on the economy at large and the issues the government purports to be trying to address. As it turns out, part of the problem is a simple matter of where one goes for answers.
While the cement directive came from the Treasury, it is at trade, industry & competition where we find the actual list of 30 products earmarked for local procurement. The problem with that list is that it includes items that either cannot be produced at scale in SA or are intermediate in nature, which means the overall price of the finished goods will now involve protected and unprotected components — with implications for consumers.
Earlier in the week, the Centre for Development Enterprise released a report highlighting that rather than localisation being the solution, the manner in which it is being pursued in SA is self-defeating and economically untenable. It states that localisation raises costs, lowers quality and increases delays, which specifically affect producers for export — where consumer choice is much wider and there is no scope for tolerating the additional costs associated with SA goods.
In a time where the inefficiencies of an unstable energy grid are already increasing costs, it is difficult to argue with that.
• Sithole (@coruscakhaya) is an accountant, academic and activist.
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