Industrial Policy Action Plan implementation: Department on local procurement; Cooperatives Amendment Bills adopted

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Trade and Industry

08 November 2012
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Department of Trade and Industry (dti) briefed the Committee on industrial procurement and designation of sectors. The economic challenges had led to a decline in manufacturing, manufacturing value-add and exports from the trade and industry sector, whilst manufacturing imports were increasing. In relation to the trade deficit, agriculture, forestry, fishing and mining were above the zero line, while manufacturing was below zero and worsening. The reason for designating certain industries was to try to leverage public procurement, in line with New Growth Path and Industrial Policy Action Plan. This was an instrument used in other countries. Three instruments were used – namely, designations by dti and National Treasury, the Competitive Supplier Development Programme, and the National Industrial Participation Programme. The tools used to assess and designate the sectors were outlined, and it was stressed that local government should not assume that tenders would be awarded regardless of standards, quality of production and competitiveness. Supply capacity and local content determination at product level remained a challenge. The methods for designation were also described, although at the moment South Africa was not applying any premiums on local procurement. The various stages of the procurement process, from bid to award, were described, each of which involved declaration and consideration of local content. Technical specifications were set by South African Bureau of Standards, with dti and National Treasury becoming involved at other stages. Designated sectors, at the moment, included buses, textiles and set-top boxes, and the progress in each was outlined. Other sectors were also being considered for designation, such as solar water heaters, electrical and telecommunication cables, and school and office furniture, whilst there was ongoing work in areas of transformers, valves, pipes, rail infrastructure, green industries and components of renewable energy, and construction materials. Dti had assisted metros of Cape Town, Johannesburg and Tshwane to put together local content requirements for procurement of buses, and there was management of other requirements in the other sectors. Preconditions for procurement also included the giving of medium to long term contracts, commitment to make investments to modern techniques, industry upgrades and jobs, and skills and technology transfers. Price competitiveness was another requirement. Government could un-designate in certain circumstances. Other areas under consideration were the Procurement Accord led by the Department of Economic Development and “Buy Local” campaigns. National coordination and governance was needed, with monitoring and evaluation across a number of departments, as well as improvement in the depth of procurement data and analysis systems.

Members wondered if there would be sufficient capacity in the local manufacturers to supply, and cautioned that it would be problematic if the demand and supply was not correctly addressed and planned. The Committee would be seeking confirmation from the Department of Public Enterprises about an apparent procurement by Transnet of locomotives from China. Members questioned the education and training that could ensure more productivity,
asked why the figures for 2010 had dropped, and what the comparative shortcomings and advantages were. 

Members adopted the Cooperatives Amendment Bill, subject to minor amendments being effected to some numbering, and the Committee Report. They also adopted minutes of meetings on 9, 11 and 17 October 2012.

Meeting report

Industrial Policy Action Plan hearings: Industrial Procurement and Designation of Sectors: Department of Trade and Industry presentation
Mr Garth Strachan, Acting Deputy Director General, Department of Trade and Industry, reported to the Committee on the industrial procurement and designation of sectors.

He noted that, as a result of the economic challenges, manufacturing exports from the trade and industry sector were going through a decline, while manufacturing imports were on the increase. Manufacturing value added was also declining, which was of concern. In relation to the trade deficit, he said that agriculture, forestry, fishing and mining were above the zero line, while manufacturing was below the line and worsening.

Mr Strachan said that the rationale for the designation of industries for local production was the need to leverage public procurement through the New Growth Path and Industrial Policy Action Plan (IPAP), since there had been, in the past, a massive leakage from the economy due to massive procurement done by the public sector. Many of the sectors now targeted by IPAP would depend on leveraging public expenditure for future industrial growth.

Mr Strachan said that public procurement included three policy instruments. These were designations by the Department of Trade and Industry (dti) and National Treasury (NT), the Competitive Supplier Development Programme (CSDP), and the new National Industrial Participation Programme (NIPP). Public procurement was a strategic instrument widely deployed by developed and developing countries to enhance and smooth out certainty of demand over the years, promote competitive and strategic industrial capabilities with high employment and growth multipliers, diversify the economy towards more employment-intensive and value-adding activities, and to ensure value for money for the fiscus and the society.

Mr Strachan said that the designation of sectors in the Public Sector preferential procurement system was informed by in-depth research analysis on both the demand and supply side. The critical variables assessed included:
- the magnitude of public sector demand for the product, as reflected by government expenditure data
- the need to understand local industry capacity and capabilities, both current and projected
- a value chain analysis
- information obtained from engagement with key procuring entities, which was aimed at understanding their procurement plans
-local content achieved on previous similar contents and engagements with the original equipment manufacturers (OEMs) and local industry on firm co-commitments.

He cautioned that it was important to ensure that local companies should not assume that government tenders would be given to them, regardless of standards, quality of production and competitiveness. He added that supply capacity and local content determination at product level remained a challenge, as the public expenditure at product level was not well known.

Mr Strachan said that the methodology for designation took into consideration the following: 
-security of supply, since, for instance a 100% designation on pharmaceuticals would not be ideal if local manufacturing could not meet the supply required

-significance of the sector/subsector/industry
-government expenditure and the departments/entities involved in procurement
-industry structure and the level of competition. He pointed out that government would be unlikely to designate an industry where there was a monopoly
-level of employment in the sector
-export/import trends, which required working closely with customs
-and various modalities put in place, with the assistance of the National Treasury, to limit price premiums, such as price benchmarking, deeming of certain primary intermediate inputs as local, and direct procurement from manufacturers where possible. He added that Brazil applied a 20% premium for local procurement, but South Africa was not applying any percentage at the moment.

Mr Strachan said that the procurement process involved several processes. The bid invitation and conditions of contract would be issued. At that stage, bidders were required to specify local content requirements in the bid documents, and submit a local content declaration certificate. The bid evaluation and award involved consideration of local content and functionality as a first stage, whilst Broad-Based Black Economic Empowerment (B-BBEE) and price considerations were the second stage. Here, non submission of local content declaration, or a failure to meet the local content, would lead to a disqualification of a bidder. The final stage of the procurement process was the verification and record keeping stage. Section 9.3 of the Preferential Procurement Policy Framework Act (PPPFA) provided for public entities to procure locally manufactured products that were not designated.

Mr Strachan explained that the technical specifications on the measurement and verification of local content were located at the
South African Bureau of Standards (SABS), while templates and annexures on the calculation of local content were with dti. The standard bidding documents, together with instruction notes for each designated sector, were with the National Treasury.

Mr Strachan highlighted some of the designated sectors with minimum threshold for local content such as buses, where the bus body was required to be sourced 80% locally, whilst in the textile, clothing, leather and footwear industries there was 100% local content. For the Digital Terrestrial Television set-top boxes, the local content was set at 30%.

Mr Strachan then outlined the progress in the designated sectors. The Passenger Rail Agency of South Africa (PRASA) had, in March 2012, announced a passenger coach renewal programme in which 7 224 coaches were to be procured over the next 20 years, valued at more than R123 billion. This would include 65% local content requirement. Transnet had advertised a request for proposal (RFP) for the procurement of 1 064 locomotives, as part of its R300 billion capital investment programme over seven years, which included a 65% local content requirement. 73% of the contract volume of the Oral Solid Dosage and Transdermal Patches tender was awarded to domestic manufacturers. He added that preference would be given to local manufacturers for the 2012-2014 Antiretroviral Tender. Negotiations were still ongoing with the National Treasury, to determine what the final threshold would be.

The dti had assisted the cities of Cape Town, Johannesburg and Tshwane in putting together local content requirements for procurement of buses for the new phases of the Rapid Bus Transit routes. The Request for Proposals for digital set-boxes had been issued with a stipulated minimum threshold for local production set at 30%. All transversal contracts managed by National Treasury in the textiles, leather and footwear sector were in compliance with the 100% local production designation. SABS had been officially appointed as the Verification Agency for Local Content.

Mr Strachan said that some of preconditions for procurement were set. Preferred bidders such as original equipment manufacturers should give medium to long-term contracts to the local suppliers. There must be a commitment from local industry to make necessary investments towards modern manufacturing techniques and industry upgrading, job retention and creation of new job opportunities. Commitment was also sought from the OEMs to effect skills and technology transfer to the local manufacturers. There should be price competitiveness from the industry, a commitment from the industry towards being internationally competitive, and the retention by Government of the right to ‘undesignate.’

Mr Strachan said that other areas under consideration were the Procurement Accord in terms of the government, business and labour commitments, led by the Economic Development Department working together with dti, the non-designated sectors and procurement falling outside of CSDP, and the revitalised national “Buy Local” campaign that was to be launched at an executive level.

Mr Strachan outlined what further work was still required. There was a need for national co-ordination and governance of large infrastructure and strategic government expenditure, and multi-departmental monitoring and evaluation of the impact of procurement instruments. Far greater coordination of strategic procurement, and greater participation by departments in transversal contracts managed by the National Treasury was required. There was also a need for substantial improvement in the depth of procurement data and analysis systems.

Mr Strachan said that other sectors were being considered for designation, such as solar water heaters, electrical and telecommunication cables, and school and office furniture. Other work was also in progress in the areas of transformers, valves, pipes, rail infrastructure, green industries and components of renewable energy, and construction materials.

Discussion
Ms S van der Merwe (ANC) said that the dti was moving in the right direction. However, she noted that  manufacturing exports were dropping, and wondered if there would be sufficient capacity amongst local manufacturers to supply.

Ms Catherine Matidza, Director: Fleet Procurement, dti, responded that designation was done after an investigation into capacity. For instance, textiles had been designated since 2002, so that now it was a requirement that there be 100% local content.

Mr X Mabasa (ANC) needed more clarity on the graphs setting out declining manufacturing exports and the manufacturing value added. He added that if there was inaccurate management of demand and supply, this would pose a problem for the country, especially for government bodies that were carrying out major procurements. There was a need to plan ahead, for instance, by informing manufacturers of the need for a particular product, to give them time to assess their capacity to supply the goods at the time required.

Mr Strachan agreed that the economy was facing multiple shocks, due to the global economy and financial crisis that was affected by inflation, subsidies, distortion of the market, and the domestic problem of electricity charges.  These had brought about stiff competition, which explained the decline in exports.

Mr N Gcwabaza (ANC) referred to an article in one of the local newspapers, which claimed that  Transnet had awarded a tender to a Chinese company for locomotives. He wanted to know if this was an investment into that country, and what it meant in terms of local content.

Mr Strachan said that this would be addressed by the Department of Public Enterprises (DPE).

The Chairperson added that the Committee would write to the DPE asking for clarification on this issue.

Mr C Huang (COPE) noted that China had the advantage of cheap labour. He therefore asked if there were any plans to develop manufacturing through educating and training managers to get more productivity from the workers. He added that price considerations were definitely a factor.

Mr Strachan said that the Chinese decided to promote manufacturing growth, a decision that it then backed up with relevant policies to ensure that growth materialised.

The Chairperson referred to slides 3 and 4, dealing with declining manufacturing exports and manufacturing value added. She said that there were differences apparent between 2002 and 2010 figures, and said it seemed that there was more discussion but less action. She also needed clarification on the Brazilian situation.

Mr Strachan attributed the decline in 2010 to the global financial crisis, and the value and volatility of the local currency. A R6 billion Distress Fund had been set up by the Industrial Development Corporation (IDC) to try to stabilise the economy, and other instruments were deployed in 2010. In relation to the Brazilian situation on premiums, he said that this was an economic debate on which the dti was unable to comment.

Mr Strachan added that designation would not be carried out for time immemorial. Un-designation would be done in instances where deemed necessary because of capacity, global competitiveness and no more market failures.

Mr Mabasa asked what South Africa’s comparative advantages were, and what were the manufacturing shortcomings.

Ms Matidza said that the rigorous procurement process, which was shifting the focus to local content requirement for bidders in designated areas, would be able to address some of the shortcomings. SABS and dti would work closely in this regard.

Cooperatives Amendment Bill: Formal Consideration
The Chairperson asked Members to consider the Cooperatives Amendment Bill, which was the result of the request to consolidate the Cooperatives Amendment Bills B17 and B18 of 2012. The correct procedure was followed to go through the Bill.

Members adopted the Bill, with minor corrections in regard to numbering.

Members then adopted the Committee’s Draft Report on the Bill, with no amendments.

The Chairperson thanked Members and the Parliamentary Legal Advisors for their input, and noted that some good ideas were incorporated from Kenya.

Adoption of Minutes
The Committee considered and adopted Minutes of meetings dated 9, 11 and 17 October 2012, with no amendments.


The meeting was adjourned.

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