Three new legislative threats to the economy now signed by the president 

26 July 2024

President Cyril Ramaphosa’s enactment on 23 July 2024 of three new pieces of legislation poses grave threats to the economic environment.

Once implementation by the multi-party government starts, the Public Procurement Act, National Small Enterprise Amendment Act, and Climate Change Act will increase the cost of doing business in South Africa while accelerating state failure.

Each is potentially harmful on its own and all add to an ominous series of legislative threats along with the recently signed NHI Act, employment equity regulations, and third-wave BEE directives. Businesses would do well to anticipate the effects of the attempted implementation on their operations as well as on implications for the stability of the multi-party government.

Below, we provide a brief outline of their salient features. 

1. The Public Procurement Act

The Public Procurement Act is a recipe for accelerated state failure. It seeks to  

·        compel all state entities to pay exorbitant premiums for procurement, based on a tendering party’s race, nationality, and other criteria, instead of prioritising value for money for the public; and 

·        centralise procurement policy under national government. 

The new Act will drive up procurement costs and degrade service delivery and state administration. Its complex array of preferential procurement prescriptions, including set-asides, pre-disqualification, sub-contracting conditions, local content requirements, and more will greatly diminish the pool of available suppliers, leading to spiralling costs and lower quality.

The complexity also forms the ideal cloak under which to conduct self-interested, corrupt, and politically connected procurement, instead of procurement in the public interest. The scope for wasteful expenditure is enormous.

The Act is intended to replace the Preferential Procurement Policy Framework Act, which had its drawbacks, but nevertheless limited the extent to which central government could prescribe non-value-adding preferential procurement. In part, the Act also represents an attempt at countering Sakeliga’s Constitutional Court judgment on procurement in 2022, in which we protected the choice of municipalities and other state entities to determine their own, value-for-money procurement policies.

The Act purports to achieve what the Minister was not lawfully able to achieve through regulations, yet it remains unconstitutional for similar reasons: Neither Parliament nor a Minister is empowered to bind an organ of state to specific preferential policies. Section 217 of the Constitution assigns this discretion to organs of state themselves, and even then, subject always to getting value for money.

Sakeliga will now scrutinise this Act to determine appropriate steps in countering it and retaining possibilities for normal, value-for-money procurement with taxpayer funds. 

2. National Small Enterprise Amendment Act

This Act purports to support small businesses but instead poses a considerable threat to them and to business in general.

It seeks to subject all private contracts between businesses - where one of the parties is a “small business” - to government review, in violation of long-held principles of contract law and freedom to trade.  

A key feature is the establishment of an Ombud Service for small enterprises with substantial powers to investigate complaints and arbitrarily defined “unfair” trading practices, refer matters to the minister (for a declaration), and impose administrative penalties. The Ombud will be added to a burgeoning web of agencies connected to the Department of Trade, Industry and Competition that already stifles commerce. The Act proposes giving the minister far-reaching powers to interfere in contracts and dealings with small businesses. 

The effect of the Act, if diligently implemented, would be to make dealing with small businesses much more costly and less attractive for medium, large, or other small businesses, harming the growth prospects of small and large businesses alike. 

3. The Climate Change Act

This convoluted Act envisages a mountain of new state planning, monitoring, and reporting bureaucracies. Its key enforcement mechanism is emissions limits per business, to be determined at sector and sub-sector industry level, with wide discretion for the minister to regulate production, impose penalties, and more.

The emissions limits themselves are to be determined by an opaque and complex mix of international commitments, imprecise emissions estimates and forecasts, and a host of political and socio-economic considerations. Businesses in affected sectors would be allocated a limit called a ‘carbon budget’ and would be required to submit and stick to a “greenhouse gas mitigation plan.”

Much of the Act’s practical impact depends on specific emissions limits, sectoral coverage, enforcement stringency, and voluntary compliance levels. Businesses are at risk of being saddled with high reporting costs and significant growth constraints. Restrictions and higher costs on coal energy risk keeping the country in a severe energy deficit that constrains economic growth and employment. Livestock farming could even come into the crosshairs of emissions limits.

As with all quota systems, at some point there will develop a shortage of available “carbon budgets” for a sector. Followed through to their conclusion, these sector emissions limits will then leave no room for allocating additional ‘carbon budgets’ to new business entrants, potentially having the perverse result of capping new business formation and entrenching established firms. The complexity of the entire framework also lends itself to corruption, distorted incentives, and considerable bureaucratic costs.

We will have more to say about the Climate Change Act in forthcoming analysis. For now, we caution that the Act’s approach trades substantial and direct economic and social harms for uncertain and highly contested benefits. Hindering economic development adds to tangible environmental risks such as deforestation and water pollution, and social risks like crime and political unrest – all of which are pertinent in South Africa. We regard the blunt centralised economic planning envisaged by the Act as unfit to address an issue of high scientific complexity with such widely divergent subjective risk and risk management appraisals and with a plethora of intricate and weighty social trade-offs.

Resisting a Centrally Planned Economy 

These three Acts and other recent policy threats are stark reminders that the state’s goal remains to have a say over every aspect of the economy and to control all economic activity either directly or through regulatory intervention.

This is a tried and tested recipe for stagnation, de-development, and social decay. These legislative trends also underscore the likelihood of persistent state failure in some very key areas.

We are reviewing options for resisting several recent legislative threats. Sakeliga remains committed to developing comprehensive public-interest litigation – utilising the judicial branch of the state as best as possible to enable reform – and building alternatives to failing state, municipal, security, and diplomatic structures where necessary. 

We will also continue to encourage maximum achievable non-compliance with harmful regulations in the interest of flourishing businesses and the communities they serve. 

Issued by Piet le Roux, CEO, Sakeliga, 26 July 2024