Localisation, which was expected to be a ‘game changer’ when legislatively introduced seven years ago, has made an impact on South Africa, but not to the degree it is capable of thus far. There is significant room for improvement so localisation can be fully optimised for the benefit of the South African economy and all of its stakeholders.
The goal of localisation, and by extension public procurement, is to be a tool that addresses the cataclysmic legacy of apartheid in both an economic and social sense. This is why localisation and public procurement have been granted constitutional status. Data suggests the logic behind localisation’s potential impact is not misplaced.
The South African government spends approximately R842 billion on procurement annually, which represents 22% of the country’s total GDP. In 2017, imports contributed just under 30% of total GDP. Given its significant influence and scale, localisation, as a form of public procurement, was identified as the designated driver to raise aggregate domestic demand and support the domestic manufacturing sector.
Between 2015 and July 2017, approximately R59.95 billion was reported to the Department of Trade and Industry (dti) representing value for local content in public procurement. Despite these marginal successes, verifying the real achieved value remains a challenge as there has been little meaningful progress made toward socio-economic transformation. National unemployment is at a record high, the manufacturing sector has experienced marginal to negative growth since 2009 and is contributing less to national GDP than imported goods.
There are several reasons why localisation is yet to achieve critical mass in making the desired impact, with each reason underpinned by specific issues:
- No standardised national definition of localisation;
- High transaction & verification costs;
- Inadequate skills transfer framework;
- Poor monitoring, evaluation & reporting framework;
- Limited industrial capacity & capability;
Broadly, these issues include the lack of a standardised localisation definition, which leaves policy vulnerable to legal loopholes and open to interpretation and inconsistent application by state organs. The lack of a clear definition means effective KPIs are difficult to set and leads to poor synergy and integration across state organs as they execute their own localisation mandates.
From a transactions and verification perspective, localisation deters new market entrants, reduces local demand and is administratively onerous, pushing up costs. Skills and IP are not easily transferred across industry value chains, implementation is not standardised, remedial action is not instituted for non-compliance, while compliance is not incentivised. Other issues include localisation and skills transfer being difficult to measure and there being limited parts and component availability of local components across value chains.
To ensure localisation’s maximum impact, we believe there are five solutions that would make a significant difference to how it affects the South African economy and those it is meant to benefit most.
The first is standardising localisation’s national definition. Clearly developed, defined and standardised requirements would eliminate legal ambiguity and close current loopholes. At an executive level, government needs to prioritise localisation across all state organs and at a policy level, alignment needs to occur across preferential procurement policies to avoid an ad hoc approach.
The next step is to standardise the monitoring and reporting framework, which combined with improved KPIs, allows for informed decision making based on high quality information. Technological synergies across different sectors need to be identified and leveraged for increased efficiency and reduced transaction costs.
Administratively, eliminating and reducing the costs of local verification processes will make localisation an attractive prospect to potential investors. This should be done in conjunction with tax or related initiatives to promote local product competitiveness and increase local demand.
Lastly, centres of excellence in designated sectors need to be established for specific technologies and the skills transfer framework revised so skills requirements match current and future needs. KPIs also need to be re-drafted to guarantee skills transfer.
Localisation can have tremendous benefits for South Africa’s economy and the previously disadvantaged through reducing imports and building local capacity. However, a structured and methodical approach is required to move the dial on localisation from potential impact to the real world strategic asset it can be.