Donald MacKay

The International Trade Administration Commission (Itac) has just accepted comments on the Price Preference System (PPS), the set of rules that force scrap metal generators and recyclers to sell their scrap metal at a discount to local consumers.

Only if these consumers don’t want the product are they allowed to export the scrap. Itac will review the submissions and arrive at a conclusion, which they will publish in a report. This is good process even if I sometimes disagree with their conclusions.

One of the responses filed is from five mini-mills (the buyers of scrap). Each person absolutely should have their say, but they take this a step further saying, “the SA Government needs to ensure that, for the public engagements to be fruitful and deliver outcomes representative of the consolidated ambitions of affected stakeholders, it gives priority to the opinions and inputs from entities that are either representative or directly affected by the steel value chain.”

They clarify this, noting, “the participation of the ferrous scrap recyclers should be limited to their input in the Ferrous [Technical Working Group] on the mechanics and guidelines of the trade of ferrous scrap within South Africa.

This desire to exclude a whole part of the value chain from commenting on a policy, which directly affects the viability of their businesses is not ok. I don’t believe Itac will do as requested, but these same scrap recyclers found themselves deliberately locked out of the steel master plan process despite a substantial part of the plan targeting them directly.

I am picking on the scrap metal sector, but over the past few years, this has become the de facto grift and the grifters are handsomely rewarded. Sceptical? Look at the clothing manufacturers and their master plan.

A small part of the clothing manufacturing sector receives hundreds of millions in duty rebates on imported textiles as signatories of the master plan. The others? Locked out. Because of the differential impact of the rebates between firms, there is no incentive to pass this benefit along to consumers. It simply becomes a rent that is funded by the consumer and the taxpayer.

It is good to see that the master plans are being reviewed. I am optimistic that we will see better outcomes as these processes open up and meaningful input is considered. Given that master plan oversight committees put competitors in a room, without minutes or recordings, you can well imagine the concern of the competitors who often didn’t even know there was a room to be in.

As Adam Smith noted, “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.

The preferential procurement process, an even more secretive tool for picking winners, has the ability to designate certain products or sectors to have a certain level of local content before government departments can buy them. Here whole sectors are investigated with no notification that the process is happening. Companies are selectively invited to provide input and for the rest of the sector, they will only find out what happened after the designation rules have been published.

And even then they won’t know who was ‘consulted’ as no reports recording the reasons for the decision are published. The new Preferential Procurement Act aims to remedy this, so hopefully we will see better decisions. As for the 28 sectors already designated? I guess we will never know what happened. That great engine of industrialisation and employment, wheelie bin manufacture, is one of the designated products.

Aside from the obvious corruption concerns, locking out a portion of the industry deprives the policymakers of the balanced information required to make good decisions. It reduces consultation to a meaningless performance.

Secret lobbying, even when it doesn’t involve bags of cash in the Saxonwold Shebeen, is a problem. Protectionism, for that is what this is, has winners and losers. But as noted by the Council for Economic Education, “[p]rotectionism is a politician's delight because it delivers visible benefits to the protected parties while imposing the costs as a hidden tax on the public.

PPS is not an unalloyed good for the country. It transfers R8 billion per year (roughly the budget of the Department of Public Works and Infrastructure) from upstream manufacturers, recyclers and waste pickers, to a handful of mini-mills and foundries.

Perhaps South Africa is better off by shifting this money from one part of its manufacturing sector to another, but this is not clear to me at all. Independent studies should be done. What is clear is that anyone banking the subsidies and arguing for why the people forfeiting their money should not have a voice, should be treated with extreme suspicion.

Donald MacKay is founder and chief executive of XA Global Trade Advisors. MacKay has been advising local and foreign companies on global trade issues for more than two decades. X handle: XA_advisors; email: donald@ xagta.com; website: xagta.com. The views in this column are independent of Business Report and Independent Media.

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Concerns over South Africa's price preference system for scrap metal