In May 2021, the Department of Trade and Industry proposed a policy that would compel all South African businesses to replace 20% of their imported goods with locally-produced substitutes within five years. The motivation for this policy was to kickstart local manufacturing and production capacity, which had taken a battering during the COVID-19 pandemic.
The policy was cautiously welcomed by role players and economists. However, there were reservations. The majority of warnings concerned government capacity to free up business to operate optimally. It was felt that it would be counter-productive to set limits on businesses without reducing red tape and regulatory speed bumps.
In summary, the plan was first announced during Minister Ebrahim Patels’ Departmental Budget Speech to Parliament in May. It was based on an agreement reached at the National Economic Development and Labour Council, which had taken place shortly before. In that Council, 30 CEOs of the country’s largest businesses had undertaken to source products from local producers instead of importing them. They had agreed on a goal of reducing imports on a range of 42 products over five years. This list of products was not released, but it is likely to include a range of goods across the automotive, manufacturing, agricultural and consumer-goods sectors. It is estimated that this localisation drive could unlock R200 billion for our local economy.
The implications for the poultry industry are potentially significant. At the moment, the poultry industry in South Africa depends on imports for a number of products that are currently not being produced locally. Apart from the actual chicken meat itself (which makes up 7% of agricultural imports), items such as feed, anti-biotics, machinery and fuel for transport are still being imported.
Therefore there are two elements to this proposal that would affect the poultry industry:
Replacing imports of chicken meat
Replacing imports of the goods required by the poultry industry.
Most economists agree that the plan is unfeasible in the short term but could have long-term benefits. However, it would require a considerable effort from government to free up restrictions to business. Dr Martin Cameron, director and international trade expert from Trade Research Advisory (a spin-out company of the North West University) points out that while localisation policies looks good on paper, they usually failed on implementation, due to the fact that it is the ‘wrong medicine’.
“History has shown us again and again for various economies in the world that localisation causes a negative outcome because prices are sure to rise, and it is the consumer who pays. Most historical localisation drives inevitably led to an incentive for protected companies not to be efficient. An economy is not an island and by trying to make all goods locally the inevitable result is that prices will go up. That is why localisation as a policy instrument has lost its appeal in general as far back as the 1960s.”
Intellidex, a leading South African capital markets and financial services research house, estimates that, if localisation was imposed, prices of goods could rise by approximately 20%.
In the poultry sector (and in most similar sectors in South Africa), the state of the country’s economic infrastructure is one of the key factors impeding production. Producers face setbacks such as e.g.:
Water and electricity shortages due to poor government service delivery.
Transport is hampered by potholed roads.
Security is expensive due to the high crime rate.
Labour costs are not competitive.
Small poultry farmers are hamstrung by restricted access to markets and a lack of logistical support.
Instead of focusing on rectifying the fundamental underlying issues, the localisation ‘plaster’ focuses on covering symptoms rather than fixing the underlying causes. E.g. Replacing certain imported materials, such as particular antibiotics, with a locally-produced product would require significant investment from the government. Only if done correctly, with the aim of not only localising, but localising with the purpose of ultimately being export competitive within a short space of time, such an endeavour will place the industry at risk (of supply shortages) in the short term, and potentially at further risk of uncompetitive and unproductive suppliers in the medium to longer term.