Shocking trade deficit reminds us why local content has been designated in certain industries

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A deficit of R21.2-billion was recorded on South Africa’s trade account in October‚ following a R13.8-billion deficit in September‚ according to SARS trade figures released in November.

The deficit, at its worst level in several years, reminds us why the public sector took the decision to increase the utilisation of local content in manufactured products for certain industries.

Manufacturing and the current account deficit

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The last decade has seen a decline in manufacturing outputs, Dr Tebogo Makube, Chief Director of Industrial Procurement at the DTI, told delegates at the Smart Procurement World conference in November.

In 2002 manufacturing outputs were growing at more than 60 per cent a year; in 2010 growth had declined to just more than 45 per cent. In the same period manufacturing imports declined at a lesser rate: from 70 per cent to only 65 per cent, said Makube.

Importing more and exporting less (manufacturing less) increases the current account deficit as money flows out of the country.

The trade account has been in deficit since the beginning of this year‚ showing the extent to which exports are being affected by the slowdown in global demand and South Africa’s main trading partners.

The slowdown combined with the historically declining outputs from the manufacturing sector necessitates that demand for South Africa’s manufactured goods will need to originate from somewhere else – the public sector.

Designating industries for local production

The New Growth Path (NGP) and the Industrial Policy Action Plan (IPAP) identified that local manufacturing can be bolstered through leveraging public procurement. In fact, said Makube, the industrial development of many sectors targeted in the IPAP depends on leveraging public expenditure.

“Public procurement is a strategic instrument widely deployed by developed and developing countries to (among other things) diversify the economy towards more employment-intensive and value-adding activities; and ensure value for money for the fiscus and society,” he said.

To that end designating local procurement for certain industries aims at increasing utilisation of local content in manufacturing products, said Makube.

And it may be South Africa’s saving grace – its trade performance is expected to remain weak in the coming months on the back of the unfavourable global and local economic environment, said Nedbank Economist Busisiwe Radebe.

Progress in the designated sectors

1. Rolling Stock (requires 65 per cent local content)

PRASA: Fleet Renewal Programme
In March 2012, PRASA announced its Passenger Coach Renewal Programme (7 224 coaches to be procured over the next 20 years, valued at more than R123-billion).  The RFP includes 65 per cent local content requirement but is not specific on components.

TRANSNET: Fleet Renewal Programme
In July 2012, Transnet Freight Rail advertised an RFP for the procurement of 1 064 locomotives as part of the R300-billion capital investment programme over seven years.  The RFP includes 65 per cent local content requirement.

2. Pharmaceutical Products (requires 73 per cent local content)

73% of the contract volume of the Oral Solid Dosage and Transdermal patches tender was awarded to domestic manufacturers. The RFP for the 2012-2014 Antiretroviral Tender has been issued and preference will be given to local manufacturers.

3. Bus Bodies (requires 80 per cent local content)

The DTI interacted with and assisted the Cities of Cape Town, Johannesburg and Tshwane with putting together local content requirements for the procurement of busses for new phases of the rapid bus transit routes.

4. Set-top boxes for TV Digital Migration (requires 30 per cent local content)

The RFP for digital set-top boxes has been issued and the stipulated minimum threshold for local production is 30 per cent. This includes the PC board, connecting cables, enclosures and assembling (which must be 100 per cent locally manufactured and produced).

[ The South African Bureau of Standards (SABS) has been officially appointed as the verification agency for local content. ]

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