Organised business is preparing to intensify engagements with government and labour over growing calls for higher levels of localisation and industrialisation, including in the country’s infrastructure roll-out, as well as in response to a “request” by Trade, Industry and Competition Minister Ebrahim Patel that an import-substitution target of 20% be set for non-petroleum imports.

Patel reportedly made this entreaty during a meeting of the National Economic Development and Labour Council (Nedlac) in late 2020 and, although he did not set a firm timeframe, business has interpreted it to be a five-year target.

Business Unity South Africa (Busa) CEO Cas Coovadia reports that import-substitution discussions have intensified partly as a result of the success of business in responding to the supply-chain challenges presented during the Covid-19 lockdown in 2020, when several enterprises stepped up their manufacture of personal protective equipment.

However, the priority being given to localisation in government’s Economic Reconstruction and Recovery Plan has since prompted Busa and Business Leadership South Africa (BLSA) to commission research into the issue, as well as to create a structure, comprising over 30 CEOs mostly from manufacturing enterprises, to advance bilateral discussions with government on the matter.

These talks would be broadened to labour in due course.

BLSA CEO Busi Mavuso says the research report, which has been compiled by Intellidex and includes survey results from 125 local companies, aims to ensure that the policy response is both evidence-based and supportive of employment creation and increased economic competitiveness.

Intellidex lead investigator Peter Attard Montalto says the research indicates that “localisation maximisation is possible but only under the right conditions”.

Should those conditions be absent, an overly aggressive import-substitution policy will have negative consequences for domestic prices and the country’s economic recovery.

“It will take time and investment to achieve the levels of onshore capacity, quality and appropriate price points – a timeline that cannot be forced through central dictate.

“It could, however, be encouraged with policy certainty, clear demand pipelines and a competitive export orientation,” Attard Montalto adds, noting that the initial demand certainty created around South Africa’s renewables procurement programme had been supportive of localisation.

A breakdown in that policy, which resulted in a seven-year procurement gap, triggered a closure of capacity, which now has to be re-established in light of local content featuring heavily as a qualifying criteria in the current bid documents.

However, the recent uneven application of exemptions from local content thresholds as part of the Risk Mitigation Independent Power Producer Procurement Programme, which saw power ships exempted but not photovoltaic panels, for instance, had created fresh uncertainty.

The report concludes that a 20% substitution target is most likely not realistic over a five-year horizon, but that domestic businesses seem positive and optimistic on the future potential for localisation, notwithstanding “deep scepticism about government’s understanding of business as well as pessimism about existing localisation policies”.

The companies surveyed highlighted the price risks associated with pushing ahead with localisation in the absence of sufficient capacity, warning that prices could rise by around 20% if such a move is undertaken too fast.

“Our quantitative study shows that under the right conditions, meeting localisation targets within the next five years is possible for a number of key manufacturing sectors including paper, wood, motor vehicles, ceramic products, glass, basic iron and steel, and food and beverages.

“[But] other manufacturing sectors are highly unlikely to meet localisation targets without significant policy support and macroeconomic tailwinds. These sectors include printing and publishing, textiles, clothing, footwear, rubber and machinery and electronic equipment,” the report states.

Attard Montalto argues that South Africa’s localisation policy, which currently focuses on creating jobs through producing inputs, should instead be governed by outputs, including cheaper energy, better infrastructure, improved competitiveness and consumer choice, as these would stimulate higher levels of employment overall.

“The arc of policies shows how government is steadily moving further down the path of local content and intertwining it more with broad-based black economic empowerment and supplier development.

“Government should be cautious about pushing too fast but rather lay the breadcrumbs that create certainty and demand in a faster growing economy.

“Business should also be cautious about over-committing where capacity is not available and lay out research and facts on capacity and realistic expansion paths,” the report avers.