Thank you for this insightful piece. The set-aside is by-product of a lack of state capacity. Or a state incapable of supporting black firms to meaningfully participate in the economy. I always likened this to how transformation targets were introduced into cricket around 2013. The system didn’t want to organically transform. Hence, the introduction of targets.
Now the same thing is happening within state procurement because there are no active agents of transformation. Politicians resort to more regulation rather than less…
I suspect the laws, regulations and rules that work 'best' or to hedge 'more effectively' in the world incentivise rather than disincentivise certain types of behaviour and outcomes.
South Africa's policy manadarins should be asking themselves a few key questions pertaining to the new procurement regulations like:
1. What outcomes and impact are we trying to achieve with these procurement changes? Could the outcomes and impact we seek be achieved using alternative tools in the policy-makers tool kit rather than resorting to force fitting every problem to be a nail and new regulations and their associated costs as the solution hammer.
2. How will these changes result in black producers that are more efficient and effective in ways that can be tangibly measured? Set asides with no market-based feedback or disciplining mechanism is not going to produce businesses that are are globally relevant or competitive.
3. Given the potential for various types of capture inherent in procurement functions and more so especially in state procurement given the value of procurement value pools, the legislation says very little on how to track impact for each procurement rand spent. Basic and commodity products and services can easily be indexed and range bound in a database. Complex products and services should have an extra level of care placed on them by developing bespoke measures that can show the outcomes and impact of acquiring a given product, service or solution proposition that is trackable in terms of outcomes and impact created.
“...three findings stand out. Practice predicts outcomes. Laws predict practice. But laws, on their own, do not predict outcomes....” and “...Almost all of the deterioration is concentrated in complex contracts...”, encapsulate a real question unanswered by many powerful leaders in this modern world who are fed by the labour of the vast world-population who may not have the cognitive skillsets and capacity to change current outcomes, or similar trajectories for their offspring’s future.
In similar notion to the spirit of the article, “The Procurement Trap”, I read a most intriguing and well-written article by the Mercatus Center at George Mason University (USA)* on the costly consequences of regulatory accumulation to an economy—i.e. the workers, consumers, and job creators who drive economic growth and prosperity. Excerpts are directly quoted:
◦ “...had the amount of regulation remained at its 1949 level, 2011 GDP (USDA) would have been about $39 trillion—or 3.5 times—higher than it was..”
◦ “...by distorting the investment choices that lead to innovation, regulation creates a considerable drag on the economy...”
◦ “...an increase in regulatory burdens can translate into billions of dollars in lost GDP growth in less than a decade, depending on the size of the economy...”
(2) CONSUMER PRICES INCREASE WHILE THE POOR PAY ,
◦ “...regulations often address small risks that concern a targeted group, but impose the costs on everyone. A Mercatus study finds that these rules cost as much as six to eight times more as a share of income for low-income households than for high-income households....”
◦ “...increases in the total volume of regulations—that is, regulatory accumulation—are strongly associated with higher prices. This effect hits low-income households harder than high-income households because low-income households spend a larger share of their income on basic goods....”
(3) THE LABOR MARKET IS DISTORTED AND WORKERS ARE HARMED BY REGULATORY ACCUMULATION,
◦ “....regulation adds to costs, increasing prices for regulated goods and services and reducing the final amounts of these goods and services being bought and sold. As production declines, so does the demand for workers engaged in production. This shrinkage in the size of the market can decrease employment, not only in regulated industries but also in industries downstream that use the now-more-expensive goods and services...”
◦ “...more regulation also leads to a shift of workers from production to regulatory compliance jobs, which reduces overall economic efficiency...”,
(4) BURDENSOME REGULATIONS CAN INCREASE INEQUALITY ,
◦ “...an increase in the effective federal regulatory burden upon a state is associated with an increase in the poverty rate....”
◦ “...countries requiring a higher number of procedures to start a new business tend to experience higher levels of income inequality...”
◦ “...an increase in the number of steps necessary to legally open a business is associated with an increase in the inequality of income distribution...”
(5) ENTREPRENEURS FACE DIFFICULTY STARTING NEW BUSINESSES AND COMPETING ,
◦ “...regulatory accumulation has a compounding effect, suggesting that regulatory accumulation disproportionately burdens small businesses at an increasing rate. Small businesses tend to be more common in low-income areas and provide important opportunities for economic advancement. Choking off small businesses diminishes economic mobility for the poor....”
◦ “...it also shows that as complication in regulation grew, there was a decline in the number of new firms...”
◦ “...increase in regulation is associated with a decrease in hiring among all firms, including small firms...”
* POLICY BRIEF / Regulatory Accumulation and Its Costs: An Overview by Patrick A. McLaughlin, Nita Ghei, and Michael Wilt, November 2018
Patrick A. McLaughlin - director of Policy Analytics and a senior research fellow at the Mercatus Center at George Mason University; authored more than a dozen peer reviewed studies in diverse areas, including regulatory economics, administrative law, industrial organization, and international trade.
Nita Ghei - director of Policy Editing for the Mercatus Center at George Mason University. Previously at the Cato Institute + Faculty of George Mason University School of Law and Northwestern University Law School+ working at the World Bank in Washington, DC.
Michael Wilt - former a senior policy writer and editor at the Mercatus Center at George Mason University.
Thank you for this insightful piece. The set-aside is by-product of a lack of state capacity. Or a state incapable of supporting black firms to meaningfully participate in the economy. I always likened this to how transformation targets were introduced into cricket around 2013. The system didn’t want to organically transform. Hence, the introduction of targets.
Now the same thing is happening within state procurement because there are no active agents of transformation. Politicians resort to more regulation rather than less…
I suspect the laws, regulations and rules that work 'best' or to hedge 'more effectively' in the world incentivise rather than disincentivise certain types of behaviour and outcomes.
South Africa's policy manadarins should be asking themselves a few key questions pertaining to the new procurement regulations like:
1. What outcomes and impact are we trying to achieve with these procurement changes? Could the outcomes and impact we seek be achieved using alternative tools in the policy-makers tool kit rather than resorting to force fitting every problem to be a nail and new regulations and their associated costs as the solution hammer.
2. How will these changes result in black producers that are more efficient and effective in ways that can be tangibly measured? Set asides with no market-based feedback or disciplining mechanism is not going to produce businesses that are are globally relevant or competitive.
3. Given the potential for various types of capture inherent in procurement functions and more so especially in state procurement given the value of procurement value pools, the legislation says very little on how to track impact for each procurement rand spent. Basic and commodity products and services can easily be indexed and range bound in a database. Complex products and services should have an extra level of care placed on them by developing bespoke measures that can show the outcomes and impact of acquiring a given product, service or solution proposition that is trackable in terms of outcomes and impact created.
An outstanding article.
“...three findings stand out. Practice predicts outcomes. Laws predict practice. But laws, on their own, do not predict outcomes....” and “...Almost all of the deterioration is concentrated in complex contracts...”, encapsulate a real question unanswered by many powerful leaders in this modern world who are fed by the labour of the vast world-population who may not have the cognitive skillsets and capacity to change current outcomes, or similar trajectories for their offspring’s future.
In similar notion to the spirit of the article, “The Procurement Trap”, I read a most intriguing and well-written article by the Mercatus Center at George Mason University (USA)* on the costly consequences of regulatory accumulation to an economy—i.e. the workers, consumers, and job creators who drive economic growth and prosperity. Excerpts are directly quoted:
[https://www.mercatus.org/research/policy-briefs/regulatory-accumulation-and-its-costs-0]
(1) REGULATORY ACCUMULATION DETERS ECONOMIC GROWTH,
◦ “...had the amount of regulation remained at its 1949 level, 2011 GDP (USDA) would have been about $39 trillion—or 3.5 times—higher than it was..”
◦ “...by distorting the investment choices that lead to innovation, regulation creates a considerable drag on the economy...”
◦ “...an increase in regulatory burdens can translate into billions of dollars in lost GDP growth in less than a decade, depending on the size of the economy...”
(2) CONSUMER PRICES INCREASE WHILE THE POOR PAY ,
◦ “...regulations often address small risks that concern a targeted group, but impose the costs on everyone. A Mercatus study finds that these rules cost as much as six to eight times more as a share of income for low-income households than for high-income households....”
◦ “...increases in the total volume of regulations—that is, regulatory accumulation—are strongly associated with higher prices. This effect hits low-income households harder than high-income households because low-income households spend a larger share of their income on basic goods....”
(3) THE LABOR MARKET IS DISTORTED AND WORKERS ARE HARMED BY REGULATORY ACCUMULATION,
◦ “....regulation adds to costs, increasing prices for regulated goods and services and reducing the final amounts of these goods and services being bought and sold. As production declines, so does the demand for workers engaged in production. This shrinkage in the size of the market can decrease employment, not only in regulated industries but also in industries downstream that use the now-more-expensive goods and services...”
◦ “...more regulation also leads to a shift of workers from production to regulatory compliance jobs, which reduces overall economic efficiency...”,
(4) BURDENSOME REGULATIONS CAN INCREASE INEQUALITY ,
◦ “...an increase in the effective federal regulatory burden upon a state is associated with an increase in the poverty rate....”
◦ “...countries requiring a higher number of procedures to start a new business tend to experience higher levels of income inequality...”
◦ “...an increase in the number of steps necessary to legally open a business is associated with an increase in the inequality of income distribution...”
(5) ENTREPRENEURS FACE DIFFICULTY STARTING NEW BUSINESSES AND COMPETING ,
◦ “...regulatory accumulation has a compounding effect, suggesting that regulatory accumulation disproportionately burdens small businesses at an increasing rate. Small businesses tend to be more common in low-income areas and provide important opportunities for economic advancement. Choking off small businesses diminishes economic mobility for the poor....”
◦ “...it also shows that as complication in regulation grew, there was a decline in the number of new firms...”
◦ “...increase in regulation is associated with a decrease in hiring among all firms, including small firms...”
* POLICY BRIEF / Regulatory Accumulation and Its Costs: An Overview by Patrick A. McLaughlin, Nita Ghei, and Michael Wilt, November 2018
Patrick A. McLaughlin - director of Policy Analytics and a senior research fellow at the Mercatus Center at George Mason University; authored more than a dozen peer reviewed studies in diverse areas, including regulatory economics, administrative law, industrial organization, and international trade.
Nita Ghei - director of Policy Editing for the Mercatus Center at George Mason University. Previously at the Cato Institute + Faculty of George Mason University School of Law and Northwestern University Law School+ working at the World Bank in Washington, DC.
Michael Wilt - former a senior policy writer and editor at the Mercatus Center at George Mason University.