Evaluating the Costs of Pro-Growth Policies Before Implementation

Are our national policies designed to promote growth? We certainly hope so.

Growth is essential for tackling the major issues we face – unemployment, poverty, and inequality.

When growth happens, businesses can invest, expand, hire more employees, and pay higher taxes.

Employment empowers individuals to enhance their lives and lessen their reliance on state assistance.

Increased tax contributions enable the government to improve social services, such as education and healthcare. In short, growth is the path to the society we aim to build.

Therefore, it’s vital to assess how each new policy proposal affects growth as our primary inquiry.

Unfortunately, this question often gets neglected. The draft preferential procurement regulations from last month highlight this issue.

An update to procurement regulations has been overdue since the courts nullified the previous guidelines in 2022.

The proposed regulations, which cover 102 pages, contain many commendable elements – enhanced transparency, better tools to combat procurement-related organized crime, and a focus on value for money that prioritizes quality and delivery capability over price.

Nonetheless, they also introduce a broad set-aside system to ensure that more procurement contracts are directed towards 100% black-owned businesses.

While transformation is undoubtedly a crucial aim, we must critically evaluate the effectiveness and implications of these regulations.

Regrettably, the Treasury has not provided any analysis to address these urgent queries.

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

For tenders between R20 million and R100 million, suppliers must demonstrate 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 directed to 100% black-owned firms.

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

In sectors with a diverse range of suppliers, the impact may be minimal.

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

What occurs when a municipality requests bids for a water treatment plant but lacks enough qualified 100% black-owned firms with the required technical skills?

Either the project halts, or costs escalate as the few qualifying suppliers realize their lack of competition.

Consider this situation:

A metropolitan area needs to upgrade 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 requires specialized skills and certifications.

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

The municipality then must choose between incurring inflated costs or foregoing crucial infrastructure improvements. Neither scenario supports growth or transformation.

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

There are more effective ways to drive transformation.

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

Setting ambitious transformation targets while allowing procurement officers the flexibility to adapt how those targets are met based on market conditions is essential.

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

The proposed regulations also assume an administrative capacity that is currently lacking. Smaller suppliers must not only form suitable ownership structures but also develop substantial administrative capabilities to navigate the complex compliance requirements.

This will lead to significantly higher public sector costs due to the bureaucracy required to implement and enforce these regulations.

The assumptions about data-driven procurement planning, contract monitoring, and ICT infrastructure are unrealistic, as most municipalities lack these resources.

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

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

Each month a project faces delays due to a lack of qualified suppliers leads to further infrastructure deterioration.

Every inflated contract price stemming from limited competition is funding that could have underpinned additional projects.

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

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

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

What implementation risks do municipalities face if they lack basic procurement systems?

What alternative transformation strategies could achieve better outcomes at a lower cost?

Luckily, there is an acknowledgment within the government that regulations must be evaluated through a pro-growth perspective.

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

He rightly pointed out that international research shows investors are sensitive to stability and functionality in regulatory frameworks.

He referenced the IMF’s view that South Africa presents one of the most restrictive business environments compared to its peers, marked by lengthy approval processes, convoluted licensing, and uncertainty regarding the application of rules.

This review has real potential if given the authority to propose significant changes.

Such changes should involve legislative amendments, not mere administrative tweaks. Otherwise, the process will merely identify problems without resolving them.

The key takeaway is clear: each new regulation and policy proposal must undergo rigorous assessment regarding its impact on growth.

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

BLSA will submit detailed feedback on the procurement regulations, highlighting specific sectors where set-asides may create implementation challenges and proposing alternative routes for transformation.

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

The government has committed to pursuing a pro-growth agenda.

These regulations will serve as a litmus test for whether that commitment translates into tangible policy implementation.

The stakes are too high for errors 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