EDITORIAL: One way to make SA’s economic problems worse is to push localisation

Trade, industry and competition minister Ebrahim Patel will probably always be remembered for the wrong reasons, not least for doggedly pushing for localisation despite overwhelming evidence that such a policy is dangerous and undesirable for a developing economy like ours.

Localisation, which in simple terms is a form of protectionism, dominated debates on our pages throughout the year.  It calls for the use of locally made inputs for manufacturing processes, with the government setting a target of 20% of nonpetroleum imports for local replacement within five years as part of measures to revive struggling local industries such as sugar, poultry and steel. The government has also banned the use of imported cement on all government projects, boosting local firms such as PPC.

In a country where the record unemployment rate risks a repeat of the unrest in July, when protests over the jailing of former president Jacob Zuma morphed into wider outpouring of anger over poverty, it is easy to be seduced by the idea behind reviving local manufacturing industries amid worsening global protectionist trends.  

“Even though the rollout of effective vaccines in late 2020 and early 2021 may loosen the grip of Covid-19 on the global economy, ongoing protectionist and geopolitical trends suggest that the world is unlikely to see a return to business as usual,” according the OECD. 

But one doesn’t need to be an economist to understand that such measures will have dire unintended consequences. To begin with, there’s a chance that they will reduce competition and thus drive up input costs, hold back innovation and ultimately weigh down economic growth. Growth is a must to alleviate the unemployment and poverty crisis.

Another worrying issue is that the localisation drive has forced firms that cannot directly source inputs locally, to procure them through local middlemen. The middlemen, who are ostensibly regarded as “local producers”, then import the goods and add their own mark-up, consequently making the products more expensive than they should be — it’s absurd and also highlights the government’s failure to consider the bigger picture and take into account the specific needs of local industry.  

This doesn’t benefit economy in any way, and only serves to enrich a few. It’s also not unreasonable to suspect that these middlemen are probably politically connected.

Last week, Popo Molefe, the board chair of state-owned freight, rail and logistics group Transnet, offered a glimpse into the destruction wrought by localisation on parastatals — many of which remain unprofitable and are regarded as a threat to SA’s finances.

Molefe, a respected leader in business and politics, referred to some of the local content rules that state-owned entities have to abide by as a “constraint” and a threat to Transnet’s budget.

According to Molefe local content requirements initially meant that parastatals would procure products that were manufactured in SA. “But in its application, local content requirements now compel state-owned companies to procure things that are not manufactured in SA but are procured from outside SA.”

“We are compelled to procure them through middle-persons who then put up their own mark-up —  so even before you acquire your equipment you have already lost a significant percentage of your budget for that particular equipment,” Molefe told legislators, adding that the company was in talks with Patel’s department and his counterparts from the Treasury and the department of public enterprises.

While Transnet later issued a letter and a statement pointing out that Molefe’s concerns did not necessarily mean the company did not support localisation and that “Transnet is not in any way opposed to the government’s localisation policy”, it’s obvious that the policy, as it stands, is hurting the company, many other firms and the broader economy.

As a recent report by the Centre for Development and Enterprise, highlighted, “Localisation will not solve SA’s economic challenges, but will deepen them.” And the benefits of localisation policies are concentrated among a few firms, but the costs are borne by many: consumers, downstream users and taxpayers.

We could not agree more. 

If the government is serious about reviving SA’s ailing economy, job creation and eradicating poverty and inequality, an urgent review of localisation should be on the cards.