“Without active interventions to address the constraints on low levels of local content, local producers will be disadvantaged and not given the opportunity to improve their capabilities and capacity,” Multi award winning global entrepreneur and strategist, Prof Dr Tal Edgars, tells SmartProcurement. Here he highlights South Africa in the first of a two-part article which identifies the reasons for local procurement in Africa being at less than desired levels.

South Africa, through its Industrial Policy Action Plan (IPAP), identifies local content as a strategic industrial policy instrument, which can be used to leverage the power of public procurement; reduce the country’s trade deficit; address market failures; foster infant industries; and increase the governments’ tax base (the DTI, 2016). Although local content is a commonly used industrial policy lever, and much has been done in South Africa to use this policy instrument, several constraints hamper its effective use, including the lack of a common definition, procurement processes, effective monitoring and information sharing.

I would like to focus my argument on the modelling of the economic multipliers of local content and the maximum price premium the state should consider paying in evaluating the benefits of buying local versus buying imported products. I will also attempt to assess the key challenges and lessons of local content policies in South Africa and analyse the economic rationale driving the argument for the use of local content policies. I will highlight the reasons why local content policies are not resulting in the desired level of local procurement and suggest possible measures that could be implemented. 

Ineffective approaches to local content that do not achieve the desired level of procurement from local manufacturers result in less industrialisation and job creation. Without active interventions to address the constraints on low levels of local content, local producers will be disadvantaged and not given the opportunity to improve their capabilities and capacity.

The benefits of a local content framework are clear; for example, while local producers may not initially be able to compete against foreign suppliers on both quality and price, with an assurance of domestic demand and clear procurement timelines and standards, they would be able to increase, improve and modify their capacity and capabilities to suit specifications and compete more effectively. However, the current procurement regulations are not enabling local content as they provide no space for negotiations between procurers and suppliers, leading to non-compliance by many local suppliers or total exclusion from the process altogether. 

Moreover, for small batch runs, the transaction costs (of locally manufactured goods) are usually higher than mass-produced foreign-sourced goods, and this hinders the procurement of local products; local producers would require a signal to scale up production. However, even if the state does pay more for locally manufactured products, there are significant multiplier effects on the domestic economy. The relevant systems required to measure and monitor imports and compliance for local content and procurement are insufficient, compounding the monitoring and evaluation of the effectiveness of the policy.

My study to model the benefits and economic multipliers of local procurement revealed that there is no overarching cost and quality data on local content. As such, monitoring systems and information sharing programmes should be established that provide suppliers with timely information on specifications, price and quality, such that local producers can comply (with sufficient forewarning and upgrading support). The lack of systems to monitor imports and compliance needs to be addressed, and this includes a clear regulatory and legislative framework that provides a simple and concise definition of local content. Effective use of monitoring systems would allow the state to determine the price premium for which it is more beneficial to buy local than import.

Read more ….  see Part 2 in next month’s newsletter.

By H.E Prof Dr Ambassador Tal Edgars, Group Executive Chairman, GBSH Consult Group, Washington DC, USA, and Johannesburg, South Africa