A “new dawn” of industrial policy in South Africa? The proposed ‘designation’ framework under the Public Procurement Bill sent to the President for assent

If the President signs the new Public Procurement Bill, we may finally, we may see the light of an industrial policy which works in South Africa. Designation scores a few notable victories here and we’re going to claim some of these victories, because all of the important changes made, were recommendations we sent to the DTIC in 2020. We sent more, but those sadly, were ignored.

What is industrial policy?

Industrial policy is generally seen as government choosing the winners and losers, either by sector (masterplans) or in some cases, even by company (signatories to some of the masterplans). To borrow from Professor Dani Rodrik, one of the main protagonists in this area, industrial policy should be regarded as a “process” of “economic self-discovery” which follows a consultative process between the government and the relevant industry. It normally consists of subsidies to assist industries seen as worthy of protection or rescuing and/or increased import duties to benefit these sectors. Sometimes it manifests as export duties, such as we have on scrap metal. As Rodrik notes, a ‘good’ industrial policy must:

• • • allow for open and ongoing consultations with the relevant industry and thus it must be seen as a process;
    • have set time limits;
    • be able to let losers go;
    • have clear benchmarks for success and failure;
    • target activities (new ones) not sectors, which activities must have spillover effects; and
    • be vigilantly monitored.

The idea is that these principles help to overcome the information asymmetry and coordination failures caused by government bureaucrats choosing winners and losers in the market. It is with these considerations in mind that I took a look at our impending designation framework under the Public Procurement Bill that is now before the President for assent.

A bit of history

The Department of Trade, Industry and Competition (DTIC) is no fan of imports because apparently we have an ‘over propensity’ to buy them when we can locally produce the same goods. In their view, localisation (import replacement) is a key lever to address the triad of evil – poverty, unemployment and inequality. It bears mention here that localisation, while possibly noble goal in principle, is not without its detractors and quite justifiably so. A study by Business Unity South Africa (BUSA) and Business Leadership South Africa (BLSA) found that South Africa is not ready to localise most of the products earmarked for localisation and predictably, localisation increases product prices. Localisation as a government policy was mooted in the 2011 Local Procurement Accord which set a lofty target of 75% for goods and services and the promise of creating 5 million jobs by 2020. This didn’t happen. Government committed in the Accord to publish a report each year on the impact of designation on jobs, investment and additional public spending on the economy. The first report was due June 2012 and 12 years on, no report has ever been published. The Accord was then translated into a real mechanism in the 2011 Preferential Procurement Regulations under the Preferential Procurement Policy Framework Act 5 of 2000 (PPPFA) where government was allowed to require local production and local content in government tenders. The 2017 Preferential Procurement Regulations (PPR) confirmed that goods and services can still be designated for local production and content. This was done by the DTIC, in consultation with National Treasury, but designation suffered its demise through the Constitutional Court decision in Minister of Finance v Afribusiness NPC [2022] ZACC 4 when it was deemed fruit of the poisoned tree as a consequence of the unconstitutionality of the pre-qualification criteria, which rendered the whole set of regulations under the PPR as unconstitutional. In any event, designation already suffered from a myriad of problems. Designation in the PPR did not have an administrative process. There was no notice of an investigation being initiated, no timelines to respond, no information available for interested parties to comment on, and no investigation report providing reasons for the decision once it was taken. Some companies were given access to the designation process, to lobby for their position, but their competitors, sometimes other local manufacturers, didn’t even know there was an investigation underway affecting them. Designation was never linked to the Harmonised System (another recommendation of ours), so circumvention was likely. In short, the process was opaque, biased, indefinite and devoid of policy goals. There was no way to assess whether the policy had succeeded or met any of its goals because no data was ever provided and the only goals we have are those stated in the Accord. Few, if any, of these were achieved. Despite their apparent zeal for it, the DTIC itself was not crazy about how designation was unfolding, as noted in the Industrial Policy Action Plan (IPAP) 2018-2021. According to the IPAP,  there were problems with compliance with advertisements of tenders with local content requirements, declaration of correct minimum thresholds for local production by tenders, proper assessment of bids as per local content requirements and comprehension of local content requirements and industrial policy goals by both Bid Evaluation and Adjudication Committees.

The new bill

Enter the new Public Procurement Bill sent to the President for assent. Designation is provided for in section 20 of the Bill and is binding on all procuring government institutions. It now sits under the expanded Chapter 4 of the Procurement Bill which in previous iterations only had one section. The new iteration before the first citizen has significant changes which are commendable. Designation is still defined as comprising both local production and use of local content, but designation is now time-bound and no longer perpetual. This is a significant first victory for industrial policy in South Africa which may signify a shift as called for by Dani Rodrik (and us). The Minister of Trade, Industry and Competition remains the decider of whether designation must occur but now, this decision is tied to a specific period. Secondly, the designation process is now procedurally fair in that the “proposed designation” must be published in the Government Gazette and on the DTIC’s website. If we understand this properly, this would be the equivalent of the International Trade Administration Commission (ITAC) publishing a gazette when they initiate an investigation into a possible import duty change. We had actually proposed that designation be handed over to ITAC for investigation, because they already have the structures in place to handle investigations. This recommendation of ours was ignored, but we still think this is a good idea. This allows for a public comment process for designation which we have been calling for, for years now. The Minister is required to review all comments and responses submitted in a schedule setting out such. This introduces, openness, accountability and transparency, long missing from designation. It is a requirement that the Minister must “update” the proposed designation after considering the comments and proposals of interested parties. In other words, the era of blanket confidentiality in designation, as was the norm, is banished. The Minister of Trade, Industry and Competition must submit an “updated proposed designation” to the Minister of Finance and must consider the comments of the Minister of Finance. Section 20 sets out specific criteria for designation outside of the industry specific and/or other comments from the public. It is required that the Minister of Trade consider whether there is sufficient capacity in the country, who are capable to compete, for the provision of goods designated for local production and content by determining:

• • • the number of existing manufacturers available in the country;
    • security of supply or capability to supply or the period that the designation is to be in effect;
    • the contribution of other role-players in the supply chain of the commodity or product including distributors and product agents;
    • the effect of local production and content on employment; and
    • the economic impact on imported goods.

This represents the first official recorded criteria for designation. So now, the Minister can only designate a product if we can produce the product locally.  It is now a binding obligation to ensure that the security of supply of a product is not compromised by designation. Importantly, the impact of designation on employment and imported goods are also factors to be considered. Designation is now iterative and an open process. The victories do not stop here. There is now a clear waiver mechanism absent in the PPPFA and the PPR. Now, the Minister of Trade can grant a waiver on the local content requirements, but must give reasons for granting the waiver. This introduces a right to reasons and one presumes here these reasons must be clear, intelligible and in writing and not mere regurgitation of legal provisions as is required by the Promotion of Administrative Justice Act (PAJA). An even more potent change is that if the Minister does not give an answer within the allotted 30 days, this is deemed an approval of the waiver contrary to the usual practice that a no response is deemed a denial. There is also now a novel blanket or general waiver where the need for individual applications for a waiver can be dispensed with by the Minister of Trade who can determine by notice in the Gazette and on its website that, until further notice, procuring institutions are granted a waiver from procuring at the stipulated minimum thresholds for local production and content.  This cuts out the red tape and saves much needed money and administrative resources. The innovation does not stop there. Perhaps controversially, the procuring institution can now overrule the Minister on a request for a waiver if the Minister rejects their request. This is done when the procuring institution has sufficient evidence that the quantity of goods required cannot be wholly sourced from local manufacturers or at the designated local content threshold for the period of the designation, or both. The procuring institution may then advertise the invitation to bid without a specific condition that only locally produced goods or locally manufactured goods, meeting the stipulated minimum threshold for local production and content will be considered and must within 14 days after the advertisement, inform the responsible Minister accordingly. Furthermore, the Minister now has a monitoring and evaluation responsibility we have long called for under section 20(9). This section provides that the Minister must monitor the impact of a designation. Three years after the designation, the Minister must publish a report on its impact on the website of the department of that Minister. The success or failure of the designation will now be measured and reported on. This is in keeping with the openness and transparency of the project and good industrial policy as envisaged by Rodrik (and us!) Finally, to emphasize that designation is no longer perpetual, the designation is now subject to an interim review requirement similar to other trade policy instruments such as anti-dumping and countervailing measures. Under subsection 9 of section 20, the designation may be reviewed by the Minister to assess its appropriateness, threshold and period, and if the outcome of the review so requires, amend or withdraw the designation and its threshold and period. At least 12 months must pass after that report is published, before such a review can take place. In other words, after a year of designation, gauging its impact on presumably, unemployment, imports, security of supply and other factors as this subsection does not seem exhaustive, it can be amended or withdrawn but crucially, not extended. So now we can now let losers go! The days of the evergreen trough are gone and maybe indeed a “new dawn” of industrial policy may be upon us. Designation as conceived in the Bill will have a sunset clause, is consultative, subject to review and monitoring and evaluation of successes or failures and can be expunged if not appropriate. Maybe, the likes of Dani Rodrik who are part of the President’s economic advisors are finally being heard albeit at the end of the incumbent’s first tenure.