STUART THEOBALD: Input myopia clouds BEE and other policies

Posted in: Economics, i-Blog, South Africa on May 11, 2021


Input myopia clouds BEE and other policies. By shunning outcomes, normal market mechanisms are turned on their head.


This column was first published in Business Day.

It is hard to identify and analyse a feature of our national psyche and how it affects our ability to conceive of and implement effective policy. But I want to make the case for a feature of the public discourse that is doing SA no favours — the obsession with inputs rather than outcomes.

It is seen in many areas. BEE requires companies to spend money (inputs) on specific areas such as enterprise development and staff skills development. What is measured is the amounts spent against targets to get points on scorecards to receive various levels of BEE recognition.

This process ignores outputs, such as the number of jobs created for black people, or particular skills that black people are able to acquire. In fact, as almost no monitoring and evaluation of BEE spending is done, the value for money delivered in terms of real transformation of the economy is simply not considered.

By focusing on inputs instead of outcomes, normal market mechanisms are turned on their head. Instead of maximising the quantity and quality received for our money, we seek only to maximise the amount spent to reach a target. Given the spending itself has transaction costs, companies will meet the target in the cheapest way possible. For example, it is costly for a company to monitor a diverse and complex enterprise development programme, when it could instead spend all its target on a simple programme requiring only one cheque to be written in which the outcomes frankly don’t matter.

Imagine what BEE would look like if targets are instead set for the numbers of jobs companies should create, or skill levels that should be reached. Market forces could then find ways to deliver these efficiently. The economy could transform faster at lower cost.

The inputs myopia clouds many other areas of public policy. Consider the push to drive infrastructure investment. This is often cast in terms of the investment amounts themselves with the government celebrating numbers in the billions as an achievement (inputs) rather than the economic impact of the infrastructure (outputs).

Global competitiveness

There is talk about the amounts spent on local suppliers and jobs created during construction, instead of the jobs facilitated by the economic activity that new infrastructure supports. The input view is invariant to whether you are digging holes and filling them up again, or whether you are building a bridge that will catalyse significant new economic activity. By not focusing on outputs, poor decisions are made on which infrastructure to invest in.

Another area dominated by input thinking is the debate about localisation. There is a focus on the inclusion of more locally produced goods and services into supply chains (inputs) instead of the global competitiveness of the end products of those supply chains (outputs). So, there is a risk of damaging competitiveness, forcing companies to source higher-priced lower-quality goods locally, leading to increased costs for their outputs, reducing overall competitiveness and leaving SA worse off overall.

SA Airways and the Post Office provide two more of many examples. There is a focus on inputs instead of the desired outputs of a competitive airline industry that delivers low-cost services to consumers, or a logistics system that facilitates trade by efficiently getting packages countrywide. The focus instead is the microstructure of that industry and who in particular delivers it, with the government as a key input.

Competitive markets

The input view is not baked into policy directly. In fact, most policy documents emphasise the importance of competitive markets and maximising consumer choice, such as white papers on the transport industry or energy supply. Of course, it is not always the case that markets deliver the best outputs. Sometimes it is important that the government is a robust input, in areas such as health care. But the way to determine whether it is is to focus on the outcomes. Yet in practice, regarding how policy is implemented, there is a reversion to focusing on inputs.

Why? Part of the reason is that inputs are easier and cheaper to control. You can easily check if a company has spent X on enterprise development. Monitoring and evaluating outputs is hard. But the desire for control goes deeper than this — by controlling inputs who benefits is controlled too.

There are some good reasons to want to control things. Given the racial legacy of the economy, an output focus might mean those with the capital to rapidly respond to opportunity can do so (such as if the energy market is opened to whoever can produce the cheapest).

An output focus therefore can be regressive for transformation. But this is a two-edged sword — the inefficiencies that arise from input affect black people too. Indeed, if BEE had more focus on evaluating outputs rather than inputs, transformation could be advanced more effectively. Control can also have a more nefarious purpose of dispensing patronage.

Ultimately the input culture is to SA’s detriment. Refocusing the way we think about policy on outcomes would make the country far better off, even if it would need to consciously ensure that those outcomes meet its transformation objectives. Let us become obsessed about maximising outcomes, not inputs.

Theobald is chair of consulting firm Intellidex.

 

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