The impact of local content policies on EU exports and investment, and economic transformation in South Africa

Summary of Research Report

Disclaimer: This report was commissioned by the EU-funded “EU-South Africa Partners for Growth” Project.  The findings represent the views of the authors and do not necessarily reflect the position of either the European Union or of the EU Delegation to South Africa. 

The South African government has applied a wide range of localisation policies since the 1990s, largely through state-owned entities.  Currently, procurement by almost all government institutions is administered through the Preferential Procurement Policy Framework Act (PPPFA) 2017, which adopts a sectoral approach to local content.[1] The only exception to this Policy Framework is the Renewable Energy Independent Power Producer Procurement Programme (REI4P), launched in 2011, which outlines distinct minimum local content thresholds for different renewable energy technologies.[2]  These two policies formed the focus of the research paper, a summary of which is provided here.

EU companies have invested significant capital and expertise into the South African economy. Since the inception of the (REI4P), EU business have invested close to R42 billion in SA’s renewable energy sector, accounting for 50% of the total foreign investment in this sector[3]. EU businesses have also invested in establishing local manufacturing and/or assembling facilities. Together, these investments have attracted complementary investments across the economy and encouraged local sourcing.

Evidence from the 14 companies interviewed as part of this study demonstrates that skills development and technology transfers are taking place, further enhancing the domestic knowledge and skills base, and foreign technology is being adapted and designed for the local industry. Such skills and technology transfer opportunities are especially evident in the nascent renewable energy (RE) sector, where local companies can leverage the experience and know-how of EU investors to learn about new technologies. South Africa’s exports into the Sub-Saharan market are also increasing through the resulting expansion in domestic capacity. The introduction of localisation policies has however increased the cost of production for these investors, though the impact differs by sector and instrument.   Through the PPPFA, local content requirements increased costs for 3 of the 5 companies interviewed. Moreover, the lack of a strong and competitive industrial base limits options for localisation. For example, low levels of competition in the local steel and chemical (for plastics) industries, increases the cost of sourcing local raw materials.

The ability of companies to meet localisation requirements in the RE sector is particularly difficult  due to the significant costs of establishing production facilities, skills development, and investing in a RE industrial base.  In REI4P bid window 4, most bidders were unable to achieve the Government’s targets. This situation is exacerbated by the recent decline in public infrastructure investment, and delays in the IPP bid process, which has destroyed some of the local capacity that was developed.  The results suggest that LCRs have increased the cost of production in South Africa’s RE sector by at least 10%. This impacts on the overall attractiveness and sustainability of the sector.

EU companies have also raised questions about the design and implementation of LCRs in South Africa. For EU investors in the renewable sector, the imposition of multiple non-price criteria in the REI4P process complicates procurement and investment decisions, ultimately leading to inflated costs. Similarly, the justification for product designations in the PPPFA is sometimes unclear and there are some LCRs that appear to be unattainable. The Department of Trade, Industry and Competition exemption process works well and the outcomes from this system might provide for a better indication as to the extent to which local manufacturers have the capacity to meet the content requirements specified in the existing framework.



[3] IPP Project 2019 Report, IPP Office

The report The impact of local content policies on EU exports and investment, and economic transformation in South Africa (Kaziboni L., Stern M.,  July 2020) has been prepared with the financial assistance of the European Commission and was conducted through the GFA Consulting Group GmbH in partnership with DNA Economics, ECDPM (European Centre for Development Policy Management) and Eurochambres.

The results of the research paper were presented during the Local Content Requirements in South Africa media exchange webinar (10/21/2020).