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Local content laws good but could be disastrous-new study

Rofofings Group steel factory in Namamve INDEPENDENT/JIMMY SIYA

The study could thwart implementation of BUBU like initiatives

Kampala, Uganda | ISAAC KHISA | Local firms that sell more of their products to government entities tend to perform better compared to their counterparts that do not, yet, passing laws that enforce local purchases could be disastrous.

This is based on research done by the International Growth Centre (IGC) in 19Sub-Saharan Africa countries including Uganda. The research was conducted in 6,700 companies, of which 812 were from Uganda.

The reportdubbed ‘African firm performance and public procurement participation,’ shows a 20 % difference in productivity levels on average between firms that sell some of their products to government entities compared to those that do not.

“The empirical analysis reveals that public procurement is a significant source of demand for many domestic firms in Sub Saharan Africa,” the research notes. “Government contracts account for a larger share of sales for domestic firms than foreign-owned ones, and are more important for larger and older firms.”

The research saysan increase in the share of production sold to the government by a 10 percentage point is associated witha four percentage point increase in productivity, with the performance more evident for smaller firms that have less than 20 employees.

It also states that the firm’s participation inthe sale of their products to government is also positively associated with other dimensions of firm performance such as the development of new products – an indicator of innovation.

Bernard Hoekman, a lead researcher from the European University Institute and co-author of the research said during the research dissemination workshop at the Uganda Bureau of Statistics (UBOS) in Kampala on March 14 that whereas sellingproducts to the government may help business firms to improve their performance, it also finds that this positive association is attained as the share of total sales to the government rises.

“The turning point is reached when two-thirds of total sales are to the government,” he said, adding that the results could be used as a useful tool to achieve industrial policy goals.Hoekman, however, cautioned that implementing buying local policies and laws could be costly to the economy.

“Supply constraints may impede effectiveness or competitiveness” he said,adding that local content policies may impede or undercut realization of broader regional integration goals such as the East African Community; Continental Free Trade Area– as well as induce emulation and at worst lead to retaliation.

The research findings come at the time when a legislator is threshing out a Local Content Bill 2017, which appears to support the Buy Uganda Build Uganda (BUBU) policy spearheaded by Amelia Kyambadde, the minister of Trade, Industry and Cooperatives.

The bill whichis currently before parliamentoutlines 19 goods and services which should be procured by government exclusively from Uganda and supplied by Ugandan companies and citizens.

These, among others,  include; security, food and beverages, hotel accommodation and catering, human resource management, stationery and office supplies, emergency response services, custom clearance, fuel supply, land surveying, clearing and forwarding and  locally manufactured or available construction materials. It is only after the local company is unable to supply the goods and services that a foreign company will be contracted but it will still have to partner with a local company.

Asuman Guloba,the manager policy research and innovation at the National Planning Authority (NPA), said while the findings of the research are interesting, they failed to explain the reasons behind the relationships.

“If local firms involved in public procurement are more productive, what are the reasons behind it? Does it mean that they are paid in time or that they have incentives that support productivity?”

He added: “For Uganda’s case…you realise that it is the contrary sometimes, there’s late payments…This implies that the relationshipmight be where only more successful firms are the ones that go for the public procurement.”

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