Scrap metal and the price of good intentions: How the PPS turned incentives on their head

I QUITE like reading through policy documents, which I know is a little odd, but we are about to publish our third scrap metal report in July, and I got stuck into some of the documents which preceded the implementation of the Price Preference System (PPS) in 2013.

- DONALD MACKAY

The goals were so noble, yet the outcomes have been so perverse. It reminds me that once the government opens that free money tap, it is very hard to ever close.

A reason South Africa’s industrial policy has yielded such poor economic returns since the first Industrial Policy Action Plan (IPAP) was published in 2007, is that no one wants to think about trade-offs.

There is an assumption that once we identify a problem, whatever is implemented will solve the problem (PPS and export duties in this case), only to keep this problem “solved’, the money will have to flow forever.

The PPS is particularly sticky because rather than the government disbursing subsidies out of the National Revenue Fund, the law forces scrap generators (manufacturers and state-owned enterprises mainly) to give money to scrap consumers by way of low prices.

This makes it feel free when of course, it is anything but. The thing with free stuff is that demand rises very fast and supply never follows at the same pace, and we see this with the mini-mills.

Awkwardly, the Industrial Development Corporations’s book of R14 billion to the scrap consumers is underpinned by PPS and the export duties and so walking this back is complicated and expensive. The beneficiaries are folding like wet cardboard, but the money never stops flowing.

The objective of PPS was to “save” local steelmaking and it has instead distorted markets, almost closed the Newcastle mill of ArcelorMittal South Africa (Amsa), and delivered few of the promised benefits. A small number of people made a lot of money though, which is the way of these things.