Famously, you can’t actually cross the same river twice — the river may look unchanged, but the actual water has moved on. The same is true of designations for local procurement under the new Public Procurement Act. These measures seek to promote industrialisation by requiring government agencies to procure some goods from local manufacturers. The new act empowers the National Treasury to issue designations, but introduces major new hurdles. Crossing this river has become a lot more difficult.
The new act’s regulations have not yet been gazetted, so some requirements remain fuzzy. Still, its provisions go a long way to limiting designations without much improving their outcomes.
The act requires the trade, industry & competition department to identify at least three local producers for any designation. It does not specify if it means actual or potential suppliers. For more capital-intensive products, with large economies of scale relative to domestic demand, either interpretation would be hard to meet. In flat steel, for instance, SA has just two local manufacturers. It is not clear how far the regulations can go to soften the impact of this provision.
The act also requires designations to take into account the implications for distributors of foreign goods and, separately, the “economic impact on imported goods”, whatever that means. Yet designations are explicitly supposed to promote the interests of manufacturers and their workers over those of importers. Again, we can only hope the regulations clarify how to weight these trade-offs.
Compliance has long been a central weak point in the designations process. According to the Zondo commission, Transnet’s huge procurement of locomotives, the largest single designation in the 2010s, was largely ignored by the main supplier. The new act makes it even harder to ensure compliance. It allows an agency to drop local content requirements if it cannot obtain sufficient locally produced goods, as long as it informs the department. Of course, market economies rarely generate actual shortages at any price. Still, absent the regulations, it is not clear if inadequate supply will be measured only through some kind of physical shortfall, or in terms of excessive prices or poor quality.
More broadly, the minister of finance can exempt any agency from any provision in the act if she or he finds it “uneconomical” to comply. Again, “uneconomical” is not defined. So how much of a price premium will be justified to support local production? To drive the point home, the act also empowers the national procurement officer to let agencies off the hook for any requirement in the act if it is “impractical” to comply or if “market conditions or behaviour do not allow effective application of the instruction”. Finally, regulations under the act, presumably including designations, will apply only to municipalities that adopt them as bylaws.
In practice, past designations have not been particularly effective in promoting industrialisation, and the new act seems unlikely to help. To start with, designations historically applied to only a handful of products, focused mostly on heavy industry. As a result, they did little to support employment growth or small business. Moreover, government agencies sometimes include unnecessarily restrictive tender specifications, including foreign trademarks. They also often face a choice between black-owned importers and less empowered local producers. The new act does nothing to help with this trade-off.
The act leaves local producers without effective appeals routes where tender specifications or decisions unfairly shut them out. And it does not address the extraordinary secrecy surrounding most tender decisions, which makes it impossible to monitor the implementation of designations as well as opening the door to corruption.
• Makgetla is a senior researcher with Trade & Industrial Policy Strategies.
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