After the Bell: The tyranny of designation

Last year, the then CEO of Transnet, Portia Derby, resigned for reasons that have yet to be clearly explained. What we know is that there was pressure from the Durban Chamber of Commerce and Industry and the Minerals Council SA because of the group’s worsening operational and financial performance.

But this is South Africa and things aren’t always what they seem. Transnet was increasingly in trouble, but it’s an open question whether that was Derby’s fault or the rampaging looters who preceded her.

One interesting call Derby made during her term (and the suspicious part of me wonders if this wasn’t a reason for her departure), was for procurement rules for state-owned enterprises (SOEs) to be eased so that public entities could procure goods and services speedily.

This was an extremely bold request. No CEO of any SOE has dared make a similar appeal. How many toes did that statement step on? Quite a few, I suspect. What was she talking about? Ostensibly, the Public Finance Management Act prevents SOEs from entering into long-term agreements with suppliers or manufacturers without providing evidence of funds. But it wasn’t only this. Derby was clearly astounded by the hoops that SOEs have to jump through to do what, in the private sector, would be considered very simple things.

In any event, despite her departure, Derby has won a victory of sorts, because one aspect of the new Public Procurement Act (and there are others more worrying) completely revises “designation”. (The new Act is not yet in force). The process of designation essentially insists that public companies can only procure goods in certain categories from local producers. It’s a local production requirement and it’s no trivial matter; procurement from SOEs and government departments amounts to about R1.4-trillion a year.

About 80 sectors and product lines are “designated”, ranging from the trivial (wheelie bins) to the significant (textiles, clothing, leather and footwear) that were slammed in holus-bolus. Most of the sectors and product lines require 100% local production. I am not making this up. You immediately ask yourself, what if, for example, an SOE wants to buy a specialised boot for firefighters that is not made locally? There is an exemption process, but really? Do you want to go there?

All of these sectors and product lines are being reconsidered and presumably, one of the reasons is that this is impossible to monitor, implement and manage. Let me put it more plainly: it’s nuts. It’s typical of the aggressive interventionism so loved by former trade and industry ministers Rob Davies and Ebrahim Patel. The enthusiasm with which it was introduced is a prime example of government hubris, stemming from 2011 when the Local Procurement Accord set a lofty target of 75% for goods and services and the creation of five million jobs by 2020. Well, that didn’t happen. Obvs.

In presentations on the new legislation, Clive Vinti, the head of research at XA Global Trade Advisors, makes the point that we have no idea how these items came to be “designated”, what effect their designation has had, and how much is involved financially. It was left to the private sector to examine this and Business Unity South Africa conducted a study which found — surprise! — that SA is not ready to localise most of the “designated” products and that localisation increases product prices.

How does the new Act deal with this? Vinti is upbeat: “There are now specific criteria for designation where the minister of trade, industry and competition is required to assess whether there are sufficient local manufacturers in the country who are capable to compete for the provision of goods designated for local production and content before a product can be designated.”

In other words, nothing can be designated if SA can’t or isn’t already producing it.

The positives do not stop here. Designation applies for a limited period and automatically lapses, after which the department has to examine whether it’s been working. Big change there. Plenty of power is handed to the procuring organisations. If they want something waived, there is now an open procedure to be followed. Now this blows my mind: if the department doesn’t respond within 30 days(!), the procuring organisation can assume the waiver has been granted. There is of course more.

The ANC has just had a big lekgotla about why the economy has not grown and three notable ANC stalwarts expounded at length about the reasons. I honestly can’t make sense of the little that has been made public about these discussions, but what I can do is assert my own prejudice: as far as I can see, the ANC still just doesn’t get it. In that, they are not alone in SA; right across the political spectrum there is, I would guess, broad support for aggressive industrial interventionism.

But industrial policy should be about playing to your strengths, not trying to manipulate and fantasise about what you imagine the country should manufacture. Trade works when you are doing what you do best, not when you are trying to do something others transparently do better.

Of course, there are places and ways the government can and should push the boundaries forward. But generally, governments make more mistakes in their industrial interventionism than the problems they solve — and you can see that now with all the Covid-19 procurement cases that have gone wildly awry.

It’s honestly that simple. When the Department of Trade, Industry and Competition does reexamine the products and sectors that are designated in terms of the new Act, let’s hope a new realism is realised. DM