Pro-Growth Policies: Understanding the Costs Before Taking Action

Are our national policies geared towards fostering growth? We would certainly hope so.

Growth is the key to addressing the significant challenges we face – unemployment, poverty, and inequality.

When growth occurs, businesses can invest, expand, hire more employees, and contribute higher taxes.

Employment provides individuals the means to improve their lives and reduce dependency on state support.

Increased tax revenue allows the government to enhance social services, including education and healthcare. In summary, growth is the avenue to the nation we aspire to create.

Thus, it’s crucial to evaluate how each new policy proposal influences growth as our first question.

Unfortunately, this question is often overlooked. The draft preferential procurement regulations from last month illustrate this point.

An update to procurement regulations has been necessary since the courts invalidated the prior guidelines in 2022.

The proposed regulations, spanning 102 pages, include many positive aspects – increased transparency, improved tools to combat organized crime in procurement, and a focus on value for money that considers quality and delivery capability instead of price alone.

However, they also introduce an extensive set-aside system to ensure that more procurement contracts are directed towards 100% black-owned businesses.

While transformation is indeed an important objective, we must critically assess the effectiveness and costs of these regulations.

Regrettably, Treasury has not provided any analysis to answer these pressing questions.

According to the proposed regulations, all tenders under R20 million will be exclusively reserved for 100% black-owned suppliers.

For tenders ranging from R20 million to R100 million, suppliers need to prove that they source 40% of their inputs from 51% black-owned businesses or 30% from 100% black-owned ones.

For tenders exceeding R100 million, 25% of subcontracted work must be allocated to 100% black-owned firms.

Additional targets will be set for enterprises owned by black women, women-owned businesses, and other categories.

In sectors with a wide array of suppliers, the impact may be minimal.

However, in specialized fields – such as wastewater treatment, high-voltage electrical infrastructure, advanced engineering systems, and enterprise IT – the pool of eligible suppliers is quite limited.

What happens when a municipality seeks bids for a water treatment plant but lacks sufficient qualified 100% black-owned firms with the necessary technical expertise?

Either the project stalls, or costs skyrocket as the few qualifying suppliers recognize their lack of competition.

Consider this scenario:

A metro area needs to modernize its electricity distribution network, a project costing R150 million.

Under these regulations, R37.5 million of the subcontracts must be awarded to 100% black-owned businesses.

However, the installation of high-voltage switchgear, protective relay systems, and network control infrastructure demands specialized skills and certifications.

If only two or three firms qualify, they can dictate their pricing.

The municipality faces the choice of either paying inflated costs or forgoing essential infrastructure upgrades. Neither outcome supports growth or transformation.

My concern lies not in transformation itself but in the cumulative effects of a rigid, tiered, percentage-based procurement system on efficiency, costs, and the limited supplier pool across the economy.

More effective methods for driving transformation exist.

We should create incentives for established firms to partner with black-owned joint ventures.

Setting ambitious transformation targets while permitting procurement officers the flexibility to adapt how those targets are achieved based on market conditions is vital.

Moreover, ensuring that black-owned firms can access both domestic and international markets is essential.

The proposed regulations also presume an administrative capacity that is currently lacking. Smaller suppliers must not only establish suitable ownership structures but also develop significant administrative capabilities to navigate the intricate compliance requirements.

This will lead to substantially higher costs for the public sector due to the bureaucracy needed to implement and enforce these regulations.

The assumptions about data-driven procurement planning, contract monitoring, and ICT infrastructure are unrealistic, as most municipalities do not possess these resources.

We cannot craft regulations for the public sector based on an idealized version of reality.

Transaction costs are crucial for growth. Every rand that goes toward compliance bureaucracy is a rand not invested in service delivery.

Every month a project faces delays due to a lack of qualifying suppliers results in further infrastructure decay.

Every inflated contract price stemming from restricted competition is funding that could have supported additional projects.

Before finalizing these regulations, Treasury must conduct a comprehensive economic impact assessment.

What will the compliance costs be for both public and private sectors?

How will restricted supplier pools influence the costs of infrastructure projects?

What are the implementation risks for municipalities that lack basic procurement systems?

What alternative transformation strategies could yield better results at a lower cost?

Fortunately, there is recognition within the government that regulations must be viewed through a pro-growth lens.

The spokesperson for the Competition Commission, Siyabulela Makunga, highlighted last weekend the need for a regulatory review aimed at eliminating unnecessary rules and restrictions.

He rightfully noted that international research indicates investors are sensitive to stability and functionality in regulatory frameworks.

He referred to the IMF’s perspective that South Africa offers one of the most restrictive business environments in comparison to its peers, characterized by lengthy approval processes, complex licensing, and uncertainty regarding rule applications.

This review holds real promise if granted the authority to recommend substantial changes.

Such changes should include legislative amendments, not just minor administrative adjustments. Otherwise, the process will merely identify issues without addressing them.

The overarching lesson is clear: every new regulation and policy proposal must undergo rigorous scrutiny regarding its impact on growth.

We must consider not only if it meets its explicit aims – in this case, transformation – but also if it does so in a manner that promotes, rather than hampers, economic growth.

BLSA will submit detailed comments on the procurement regulations, emphasizing specific sectors where set-asides may pose implementation challenges and suggesting alternative pathways for transformation.

We will equally engage with the Competition Commission’s regulatory review, providing concrete examples of how uncertainty and complexity deter investment.

The government has pledged to pursue a pro-growth agenda.

These regulations will be a litmus test for whether that commitment translates into actual policy implementation.

The stakes are too high for mistakes in this regard.

*This column was originally published in the Business Leadership South Africa (BLSA) weekly newsletter. The author, Busisiwe “Busi” Mavuso, serves as the CEO of BLSA.

*The opinions Busi Mavuso expresses in this column do not necessarily reflect those of The Bulrushes