Local Procurement Accord; Competition Commission on Walmart, Pioneer Foods remedy, Monitoring merger conditions, Court cases

Economic Development

07 May 2012
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Economic Development Department explained how the new Local Procurement Accord would be implemented. After many years of disagreement about goals, a new consensus had been forged, and practical steps were now being taken in the public and private sectors to reorient supply chains to support an increase in local procurement. Details were given of how each of the four partners in the Accord – the Government, labour, business and the community – would participate in order to ensure more products and services were sourced locally, reducing imports and improving job opportunities in the process. The signatories had set a 75% target for the local purchase of goods and services. Members were excited at the progress made through the Accord.  They called for the Accord to be closely monitored and reported on in detail, so that those involved, and others, would be fully motivated.

The role of the Competition Commission was subjected to critical questioning after it submitted that although the Act required the Commission to promote competition in order to achieve various economic outcomes benefiting the country, it was not “the sharpest tool” available to Government to be directly involved in achieving the outcomes. The Competition Commission strongly rejected allegations that it was not concerned with the outcomes, and merely involved itself in the legal issues surrounding the complaints which it handled. The Committee decided to resolve the issue at the next meeting.

Earlier, the meeting heard that companies such as Sasol, and other firms that they were either state-owned, or previously state-owned, were “doing us in” in terms of the efforts to make the country internationally competitive through excessive pricing. When the Government was a shareholder in a firm, it should be advising the boards of these companies to do the right thing from a legal and developmental point of view.

The Commission gave details of Constitutional Court cases which would have an influence on the powers of the Commission to operate effectively. These cases had arisen after complaints from the business community that the Commission was a law unto itself, and did not respect procedure, and interpreted things too widely. This had resulted in court cases which attempted to make the Commission interpret things more narrowly, which the Commission felt was unreasonable, as it required complainants to be highly conversant with the law. There needed to be a balance between the rights of firms and complainants.

As a result of the Commission’s investigations into the bread cartel, Pioneer Foods had adjusted the prices of flour and bread during December 2010 and January 2011 to reduce its gross margin by R160m, and the question had been asked whether this had had any impact on the market, and resulted in the price of bread coming down. Many factors affected the bread price – world grain prices, electricity costs for ovens, and fuel for transport. However, it was noticeable that there were obvious signs of rivalry in supermarkets, where bread prices used to be uniform. There were now different prices for different brands, and a greater variety of products across the brands.

Meeting report

Local Procurement Accord: Economic Development Department (EDD) presentation
The Chairperson welcomed the EDD delegation, saying it was important for the Committee to understand how the Local Procurement Accord would be implemented, and what the expectations of the Department were, particularly as this was one of the main focus areas of the Ministry of Trade and Industry.

Mr Etienne Vlok, EDD Chief Director, said the Accord had been signed on October 31 last year after extensive dialogue between representatives of government, labour, business and community organisations.
The Accord stated that “social partners recognise the pivotal role that local procurement can play in national development and economic growth; and in combating inequality, poverty, unemployment and rural under-development. They commit to work cooperatively, through this Accord, to expand local industrial capacity and to prevent further de-industrialisation and its accompanying social reversals”.

The signatories were the government (represented by the Ministers of Trade and Industry, Finance, Energy, Economic Development and Public Enterprises), labour (comprising Cosatu, Fedusa and Nactu), organised business (represented by BUSA, NAFCOC, FABCOS and Business Leadership SA), and community constituents at NEDLAC (organisations of women, civic structures, youth, people with disabilities and cooperatives).

The New Growth Path (NGP), with its aim of creating five million new jobs by 2020, was committed to a reform of procurement practices so that local suppliers could be supported. For its part, the Accord aimed to mobilise business, unions, communities and government in a partnership to promote local procurement running into billions of rands. The signatories had set a 75% target for the local purchase of goods and services.
The government and public utilities would use public procurement to support productive sectors which could supply their service delivery departments, infrastructure programmes, and economic, social and criminal justice functions. Organised business, labour and the community had made commitments to support localisation through their own procurement interventions.

One of the government’s major commitments had been to identify designated products for local procurement in the new Preferential Procurement Regulations, which came into effect on 7 December, 2011. The list currently comprises bus bodies, power pylons, rolling stock, canned vegetables, clothing, textiles, footwear, leather, set-top boxes (for digital TV) and oral solid pharmaceuticals. Research was being carried into the addition of further products to the list. Other government measures included establishing standards to measure local content, using its procurement infrastructure to promote localisation by companies which supplied to government entities, and training government procurement units on the designated products.

The business sector, including 85 of the largest corporations, had made commitments to improve levels of local procurement by analysing their supply chains for imported goods, setting targets for increased local purchasing and measuring progress, identifying further opportunities, and reporting annually on progress. A supplier diversity council would be established to help provide access to black-owned suppliers, as well as to assist emerging black-owned suppliers, to link into supply chains. Business was expected to increase its investment in opportunities arising from government’s designation, and to eliminate collusive and unethical practices – including when supplying government. BUSA and other business organisations, as well as the trade unions and community organisations in the partnership, were committed to buying office furniture, stationery, caps, T-shirts, jackets and tracksuits locally.

Labour had also undertaken to set up a procurement desk to help business and the community to source local goods and services, while its pension and provident funds had been directed to promote local procurement through its investments.

The community constituency would strengthen cooperatives and link them into established supply chains, while “Proudly South African” would run a campaign on the benefits of buying local products. Education programmes on “labels of origin” would be run, and a database of local manufacturers would be developed.

Mr Vlok said a high-level committee would meet every six months to monitor implementation, with the first meeting scheduled for June 2012. The committee would receive reports from each constituency on the implementation and its impact, and consider creative ways to develop any additional measures that might be required. The various constituencies would develop a programme of action which addressed prioritisation, sequencing, actioning and monitoring.

The EDD had embarked on a capacity-building programme to build awareness and sensitise government departments and social partners at provincial level about the key commitments contained in the Accord. So far, eight provincial workshops had been conducted, with a ninth scheduled for later in May. Business, labour, community and government leaders attended the workshops.

To spread awareness of the Procurement Regulations, the government had held a conference late in 2011 to inform all its procurement units about the designation, and working with industry and the SA Bureau of Standards (SABS), had developed a standard to measure and calculate local content for use in tenders.

Mr Vlok said it was significant that after many years of disagreement about goals, a new consensus had been forged, and practical steps were now being taken in the public and private sectors to reorient supply chains to support an increase in local procurement.

Discussion
Mr Z Ntuli (ANC) asked if it would be possible to name some of the 85 large companies participating in the Accord, to check their corporate social responsibility programmes, as the activities of big business in assisting to capacitate small, medium and micro enterprises (SMMEs) and to uplift cooperatives, would go a long way in the fight against poverty and unemployment.

Mr H Hoosen (ID) said the monitoring of imports needed to be tightened up. There was always a public uproar when its was found that government departments were buying T-shirts from overseas. He asked what percentage of government purchases were from local suppliers at present, and suggested that “Proudly South African” should do more to promote demand among consumers.

Mr K Mubu (DA) expressed concern that the Department of Rural Development and Land Reform had been involved in the adoption of the Accord, but was not one of the signatories. Could this be to the detriment of rural communities? He also raised issues regarding fronting, the awarding of tenders to local suppliers who lacked capacity and imported the products they supplied, and additional measures need to counter corruption.

Ms S van der Merwe (ANC) also referred to collusion between buyers and supplier, which needed to be eliminated, and said there needed to be a “watchdog” to ensure “labels of origin” were genuine. It should be mandatory for all South African national teams to wear SA-made clothing.

Mr S Ngonyama (COPE) said he shared Members’ excitement at the progress which had been made through the Accord. He called for the Accord to be closely monitored and reported on in detail, so that those involved, and others, would be fully motivated. He pointed out that competitiveness was an important issue, as consumer buying decisions were based on quality in relation to price, and this would influence whether purchases were made locally or overseas – even of T-shirts! For this reason, there needed to be a mechanism for making comparisons between local and overseas prices. This would ensure consumers were not given a “raw deal” by having to buy a local product to their detriment. He also sought confirmation that there were no legal barriers to union pension funds being directed to invest locally.

Mr N Gcwabaza (ANC) asked whether it was intended to extend the T-shirt situation to clothing in general, as the textile industry was in a very “fragile” state and while the efforts of the EDD had helped to stabilise it, more needed to be done. This included assisting the sector to produce its own fabric, by intensifying the campaign against illegal imports, and by educating the public of the benefits of local quality He also asked why solar water heaters, which were one of the “focus areas”, had been left out of the designated list of products.

Responding to this range of questions, Mr Vlok said he could supply the Committee with a list of the major companies, who had become signatories through their membership of organisations such as BUSA, which had signed on their behalf. He assured members that all the major banks, insurance companies, mining houses, food and beverage companies, and so on, formed part of the Accord.

Large companies would be able to assist cooperatives and SMMEs through the activities of the supplier diversity council, which was being set up to help them move away from big traditional suppliers towards black-owned businesses and small emerging entrepreneurs. A conference and fair was being organised for June at which this initiative would be publicised.

Mr Vlok said he could not respond to the question about the percentage of government purchases that were made locally. In the past, designation had taken place in different sectors, such as the clothing industry, and while this had been implemented at a national level, the same had not been the case at the provincial and municipal level. What was now certain was that 100% of designated products would be bought locally

When the Chairperson asked how this would be done, he replied that the regulations stipulated that tenders had to specify local supply, and this had to be recorded in detail in the tender documents. This enabled the process to be monitored by the various monitoring entities. As far as T-shirts were concerned, these had to be sourced locally, by all government entities, business and trade unions.

Answering criticism that “Proudly South African” had not done enough to stimulate demand for local products, Mr Vlok said the organisation had now committed to focus almost exclusively on the demand side. It would be educating consumers on the benefits of buying local goods, and what this would do for job creation. Another campaign would educated consumers about the “label of origin.”

The new regulations were not only intended to promote local purchasing, but also to tighten up control on “fronting” and corruption in the tendering process.

During the past two years, the Department of Trade and Industries (DTI) and other departments had introduced programmes to deal with competitiveness. These included new incentives and preferential loans by the IDC to strengthen the competitiveness of the broader manufacturing sector.

The Government had the power to fine companies that removed and replaced labels of origin, and the National Consumer Commission would monitor this.

Regarding the issue of pension and provident funds investments, he said the commitments had come from the unions themselves, and they would have been aware of any constraints. They were comfortable with the matter.

The Acting EDD Director General, Mr Saleem Mowzer, said although the Accord had been signed only by departments led by Economic Development and others, the Ministers designated to sign it had done so on behalf of Government, so all departments were committed to the Accord. This included the Department of Rural Development and Land Reform, and the EDD would come back to the Committee to advise how its activities would impact on the rural community.

He said the DTI was leading the campaign to deal with illegal imports, with the support of the EDD, National Treasury and other departments.

Solar water heaters had not been included in the designated list of products, but would be included among “renewable energy products” when the next additions were made to the list.

The Chairperson closed the discussion by commenting that the Accord called on all South Africans to give it their support to ensure it succeeded.

Competition Commission Presentation
The Chairperson welcomed the Competition Commission (CC) delegation, and said the Committee was interested to understand how it would be monitoring and evaluating the impact of its programmes, and also how they would influence local procurement issues. The Committee was looking for achievement in areas such as growth, development, job-creation and poverty alleviation.

Mr Shan Ramburuth, Competition Commissioner, said the presentation would deal with four issues:
           The Competition Appeal Court (CAC) ruling on Walmart/Massmart
            Constitutional Court Cases
           Pioneer Foods price reduction remedy
            Monitoring and evaluation of merger conditions.

Walmart/Massmart
Mr Ramburuth said this had been a very controversial matter, with both the Government and unions having participated in the Tribunal hearings, and not being very happy with the Commission supporting the merger, which it had done because there were no competition issues giving it grounds to oppose it. The parties raised public interest issues which they wanted to be taken into account, and the matter went to the Competition Appeal Court (CAC), which upheld in part the appeal by the SACCAWU union against the order of the Tribunal.

The CAC upheld the Tribunal ruling that the merged entity may not retrench workers for a period of two years. However, where the Tribunal had ruled that 503 workers retrenched during June 2010 be offered preferential employment opportunities, the CAC ruled that they should be reinstated, on the basis that the retrenchments had been “merger specific” – related to the merger which was going to take place. The Tribunal’s stipulation that the merged entity should honour existing labour agreements and not challenge SACCAWU’s role as the collective bargaining union for at least the next three years, was amended by the CAC to read that the entity should not challenge SACCAWU’s “position as the largest representative union with the merged entity, to represent the bargaining units, for at least three years”. The final element of the Tribunal’s ruling was a R100m fund to be set up to support local suppliers and small businesses, as well as provide training to SA suppliers on how to do business with the merged entity. However, the CAC felt that not enough information had been provided on this issue, and ordered that a study should be conducted to examine the best means by which local SMME suppliers could participate in Walmart’s global value chain. Three experts appointed by SACCAWU, the Minister and the merging parties would conduct the study, which the Committee heard would be completed early in June. The merger had been approved.

The big issue had been the debate around the potential of Walmart, with its sophisticated supply chain management, to source cheap products overseas, thereby undermining South African manufacturers and affecting job-creation efforts. However, when the Commission investigated pre-merger and post-merger procurement practices, it found the pre-merger level of imports by retailers were very high, and that the impact of the Walmart/Massmart merger would not have supported grounds on which to base a refusal. Of bigger concern was the Commission’s finding that SA manufacturers were not internationally competitive, and while many countries would propose protecting their manufacturers until they could “get on their feet” and become competitive, there were no policy makers that would suggest keeping competition away offered a permanent solution.

Mr Ramburuth referred to a “monopoly pricing” case involving Sasol in the polyurethane market, a polymer used in the production of plastic buckets, rulers, pencil cases, lunch boxes, and so on. Sasol is the dominant supplier of polyurethane, and local manufacturers have complained they cannot produce these products at competitive prices because the raw material supplied by Sasol is priced too high, although it is understood Sasol has a rebate on the input to combat the import of finished products. If retailers were compelled to buy these products from local manufacturers, they would essentially be subsidising Sasol, rather than benefiting the consumer. That was why the Commission had to ensure that monopolistic firms did not set prices which resulted in high input costs for manufacturers.

Constitutional Court cases
Mr Ramburuth explained the legal processes involved in competition enforcement, which could begin with the complaint and an investigation, and could then move to the Tribunal (the court of first instance), and on appeal to the Competition Appeal Court, or the Supreme Court of Appeal (SCA), or ultimately even to the Constitutional Court. It was a very “legal intensive” process, and four appeal court hearings involving the Commission, dealt with this process. The important concept was that in every step of the process, there had to be symmetry, which meant that the Commission could investigate only the complaint and the entity being complained about. He then provided the Committee with details of the cases, and how they affected the Commission.

           The Supreme Court of Appeal’s Woodlands Dairy decision.
In September 2010, the SCA had handed down a decision in terms of which it set out the requirements for a valid initiation of a complaint, the effect of which was to restrict the Commission’s powers to initiate, investigate and ultimately prosecute complaints. Procedural powers were restrictively interpreted because administrative penalties were held to resemble criminal penalties, the Commission had to have reasonable suspicion to initiate against specific players in a particular market and could not initiate against an industry, the complaint defined the scope of the investigation and the scope of referral, and the Commission had to amend a complaint or initiate another complaint with new information. As a result of this decision, a number of applications were filed by respondent firms, challenging the Commission’s jurisdiction to investigate and prosecute them.

           The Competition Appeal Court’s Yara decision.
Sasol provided Yara and Omnia, two competitors, with ammonia used in the manufacture of fertiliser. A third competitor, Nutriflo, complained to the Commission that the ammonia was excessively priced. Investigations revealed that Sasol was organised in a cartel with Yara and Omnia in order to restrict imports. Sasol confirmed the existence of the cartel, and paid a fine to the Commission. Yara and Omnia then pointed out that Nutriflo’s complaint related only to excessive pricing, not to the existence of a cartel. This view was upheld by the Competition Appeal Court, which ruled that the Commission’s powers of investigation were restricted to the excessive pricing issue.

           The Competition Appeal Court’s Loungefoam decision
This case involved foam used in the manufacture of mattresses. The CAC again ruled that the Commission could not investigate conduct that had not been complained of, but unlike the Woodlands Dairy decision, it also ruled that the Commission was not allowed to amend its complaint referral. This case, and the Yara decision, had resulted in the Commission applying to the Constitutional Court to obtain clarity on the proper scope and ambit for the Commission to initiate, investigate and refer complaints. A decision was still awaited.

           The Constitutional Court’s Senwes decision
This case related to the powers of the Tribunal to make findings on issues which had not been referred to it. Senwes operates silos to store grain, and is also a grain trader. It charged customers who simply stored grain a different price to that charged to customers whose grain they traded. The Commission initiated a case of “exclusionary conduct and price discrimination” under section 8 (c) of the Act. During the Tribunal hearing, the concept of “margin squeeze” was introduced, and this became the guilty finding, which was upheld by the CAC. However, the SCA set the decision aside, because “margin squeeze” had not been mentioned in the initiation. This was reversed by the Constitutional Court, who ruled that semantics should not override practical considerations, and affirmed the approach of the Commission This meant that legislation could be interpreted against objectives, rather than narrowly interpreting procedural points, and procedural errors could be fixed without causing unfairness to any party.

Pioneer Foods price reduction remedy
Mr Ramburuth said this matter began with the exposure of a bread cartel, and resulted in Pioneer Foods losing an appeal in the CAC. The Tribunal imposed a settlement order, in terms of which Pioneer Foods was required to stop infringing the Act, to pay a R500m fine – of which half would be used to create an Agro-processing Competitiveness Fund to be administered by the Industrial Development Corporation (IDC) – to adjust the prices of certain products to reduce its gross profit by R160m, and to maintain its capital expenditure and increase it by R150m.

Pioneer had adjusted the prices of flour and bread during December 2010 and January 2011 to reduce its gross margin by R160m, and the question had been asked whether this had had any impact on the market, and resulted in the price of bread coming down. Mr Ramburuth said many factors affected the bread price – world grain prices, electricity costs for ovens, fuel for transport, so it was difficult to answer. However, it was noticeable that there were obvious signs of rivalry in supermarkets, where bread prices used to be uniform. There were now different prices for different brands, and a greater variety of products across the brands.

Monitoring and evaluation of merger conditions
Monitoring and evaluating required merger conditions to be designed to remedy merger-specific concerns – issues which were causing anti-competitive harm and in the public interest. Structural remedies included divestiture, and the prohibition of cross-sharing and cross-directorships. Behavioural remedies were supply conditions, non-discriminatory pricing, investment commitments and a cap on retrenchments.

Because a Tribunal order had to carry the weight of a legal document, it was essential that the order had legal clarity and was time-bound. Other elements of the order would include appointing a trustee to oversee the process, reporting requirements and a compliance programme.

The monitoring process involved the merging parties providing audited reports to the Commission on compliance, and the trustees providing compliance reports if, for instance, there was divestiture. Mr Ramburuth pointed out that company directors and auditors carried a corporate governance responsibility in relation to compliance, and non-compliance resulted in severe penalties.

The Commission took the impact of its work very seriously, although extraneous influencing factors made it difficult to measure how long it took for the interventions to take effect. The focus had been on the impact of breaking up cartels, as this was where most of the wastage of resources occurred.

Discussion
Mr Ngonyama asked whether the final element of the Tribunal’s ruling in the Walmart/Massmart case -- a R100m fund to be set up to support local suppliers and small businesses, as well as to provide training to SA suppliers on how to do business with the merged entity – was dependent on the findings of the study group.

Mr Tembinkosi Bonakele, Deputy Commissioner, said the need for a fund had been accepted in principle, but was pending a decision on how it should be designed.

Mr Ngonyama said the issue of “symmetry” had been significant, and asked whether the Constitutional Court had managed to deal with all the contradictions connected to the Senwes case. He felt that some of the views raised by the SCA in this matter were quite valid, and one had to be certain that institutions like the Commission were beyond reproach in their dealings with the market and competitive issues.

Mr Ramburuth said there were two other cases pending, so all the symmetry issues had not yet been resolved. The Senwes case had only ruled on whether the Tribunal could make an order on something, other than what had been complained of.

He accepted the comment that the Commission needed to be seen as fair in its dealings, as there had been complaints from the business community that it was a law unto itself, and did not respect procedure, and interpreted things too widely. This had resulted in the court cases which attempted to make the Commission interpret things more narrowly, which the Commission felt was unreasonable, as it required complainants to be highly conversant with the law. There needed to be a balance between the rights of firms and complainants.

Mr Ngonyama said Sasol was a South African company, and it was not in the country’s interest to make it “go down”. Whatever interventions were made, it must be allowed to thrive. He asked whether there might be a case for political intervention to resolve the situation with small producers and create a “win-win” situation.

Mr Ramburuth said part of the problem with Sasol, and other firms such as ArcelorMittal, forestry and some telecoms companies, was that they were either state-owned, or previously state-owned. The justification for owning them related to “nationalistic pride” issues, but these were the very firms which through excessive pricing, were “doing us in” in terms of the efforts to make the country internationally competitive. He could not deal with the question of political intervention directly, but stated that when the Government was a shareholder in a firm, it should be advising their boards to do the right thing from a legal and developmental point of view.

Mr Ntuli and Mr Mubu asked additional questions regarding the retrenched workers at Walmart-Massmart, the current level of imports, why it is considered expensive to do business in South Africa, whether the Walmart-Massmart merger had resulted in higher import levels, and whether Sasol’s rebates could be removed if they charged excessive prices. These questions could not be dealt with owing to time constraints.

The Chairperson said she did not know why the Commission said it was not its role to monitor the implementation of decisions handed down at the various judicial levels. The purpose of the Act was for the Commission to promote competition in order to advance the efficiency and development of the economy, to provide consumers with competitive prices and product choices, and to promote employment and social welfare, expand participation in world markets, support small businesses and expand transformation. This mandate meant that the Commission’s role was direct, not indirect, and it should be concerned with outcomes, not merely legal issues. If it was not the responsibility of the Commission to achieve these outcomes, whose was it?

Mr Ramburuth said it was very clear that the Act required the Commission to promote competition in order to achieve the outcomes listed, but it was not the role of the Commission itself to be responsible for the outcomes. The Commission was not the sharp policy instrument needed to achieve the outcomes. The Government had much sharper instruments in its tool box to deal with the policy objectives listed in the Act.

The Chairperson interrupted, saying she had been provoked by this response, which she had heard before, and which indicated the Commission was looking broadly at competition issues, but was not concerned with the outcomes. What did this mean?

Mr Ramburuth responded that there were many pieces of legislation for different departments which included the preamble of seeking to achieve a non-sexist and non-racial society. The implication is that in achieving their objectives, the departments were contributing to a non-sexist and non-racial society. Aspirational aspects should not be confused with the main focus of the Act.

The Chairperson asked what the main focus points of the Commission were.

Mr Ramburuth said the Act made it very clear what the Commission could and could not do.

Mr Bonakele said the exchange suggested the Commission and the Committee were miles apart, but this was not the case. No one would suggested that in the current economic climate, an agency such as the Commission had no role to play in resolving some of the societal problems. The Commission’s premise, in working on its strategy, was always on what it wanted to achieve. All governments faced the problem of integrating their policy instruments, and in this context, one had to ask whether the Commission was the best instrument to promote employment, when in fact this would involve talking about SMMEs, finance bodies for funding, and market development. The Commission could not pigeon-hole itself and say it had no role at all, and at the same time could not create unrealistic expectations as to what it could achieve. A balanced view was needed.

Mr Ngonyama said there were realities imposed by the Act, and as this was a complex issue, he proposed it should be resolved at the next meeting of the Committee with the Commission.

The Chairperson said the meeting would need to establish whether the problem related to the Act, or to policy, and find ways to remove any blockages.

The meeting was closed.


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