Government’s decision to extend the price preference system (PPS), which forces a discount on the local sale of scrap metal, and still introduce an export duty that was supposed to replace the system, seems to have been done in bad faith.
From August 1 both restrictions will run parallel for two years. Industry and trade experts say it is unreasonable, irrational and arbitrary. The decision is legally changeable.
Caroline Rheeder, associate director of customs at Cova Advisory, says although imposing the PPS and export duties simultaneously are allowed in terms of the World Trade Organisation, subject to trade agreement obligations, it does feel like over-restriction. “It might well be challenged by the industry.”
The Department of Trade, Industry and Competition (dtic) on Wednesday announced that the PPS will be extended for another two years to “support” the export duty.
This in effect means that scrap metal dealers will be subjected to a 20% discount price on their products when sold locally, and if they are allowed to export they will be subjected to an export duty ranging between 10% and 20% depending on the country of destination.
Rheeder, who chairs the custom working group of the South African Institute of Taxation and is vice-chair of the American Chamber of Commerce’s regional trade forum, says some industry players will most likely be priced out of export markets. The price received in the local market could also make their business models less profitable.
According to Donald MacKay, founder and director of XA International Trade Advisors, the decision is “disastrous”.
The price of scrap will collapse. “This will take many of the smaller recyclers out of business.”
MacKay writes in his regular blog that the decision, announced on Wednesday, was based on a “severely compromised process”. He says dtic minister Ebrahim Patel was advised by a “working group”, which was formed as part of the Steel and Metal Fabrication Masterplan. However, the minister will not disclose the identities of the members of his working group.
MacKay questions this secrecy, saying they “presumably” stand to benefit from the decision.
The International Trade Administration Commission (ITAC), the import and export regulator, recommended that the PPS be replaced by export duties since it was ineffective in offering foundries and mills affordable, quality scrap metal.
The Customs and Excise Duty Act was amended to allow the minister of finance to impose export duties whenever he “deems it expedient in the public interest”.
But Patel was advised by “a working group” that it should be kept. And, at the end of June – five weeks before the implementation of the export tax replacing the PPS system – the minster said he was considering extending the PPS.
He gave industry players two weeks to comment.
Dtic director Umeesha Naidoo says it received feedback from “industry sources” that amendments to the PPS in October last year have been effective, therefore it should be kept.
The information it received was provided “on a confidential basis”. Questions about the demand for and supply of scrap metal in the local market from April this year (when the export tax was supposed to be introduced) to date were ignored by Naidoo.
Rheeder recommends that government publishes a report of its findings from the investigation on PPS and export duties, similar to the process when it finalises an anti-dumping or tariff change investigation. “It makes the process more structured and transparent. Why are there secret discussions with certain representatives?”
MacKay agrees and says industrial policy formulated in secret is a problem. “It is a compromised process that is more likely to lead to bad outcomes rather than good.
“If you are not alarmed at what happened here, you should be.”
The use of incorrect data
MacKay says the masterplan for growth and renewal of the steel and metal fabrication industry contains large, glaring errors relating to the recycling industry. For example, a company that is currently in business rescue and which is not producing, has been included in the demand calculation.
Rheeder also expressed concerns about the research and data used to calculate the demand for scrap metal in the local market. “It is important that decisions are based on facts and accurate information. We suggest consultation with the entire value chain to ensure government has a full understanding of the industry before policy decisions are made.”
She says having both programmes operating in parallel creates complexity for pricing in the scrap metal industry in the local and export market. “While prices in the local market may decrease in the short term, I would expect longer-term price increases as the export market shrinks because of uncompetitive pricing due to the export duty.”
This concern is brushed off the table by the dtic.
Naidoo says there is the potential to evade the export tax by exporting through free trade areas as well as “under-invoicing and misdeclarations”.
“Hence, the PPS will support the export tax to ensure compliance and the availability of affordable scrap metal for domestic consumers.”
The two provisions will “promote the availability of scrap metal for local beneficiation” and will not impose a double financial burden on a would-be exporter, she says.
Questions sent to the South African Revenue Service, which will be implementing the export duty through the Customs and Excise Act, were not answered. National Treasury, responsible for legislative tax changes, referred Moneyweb to the dtic.