Local verification processes and awarding of first local content verification certificates: South African Bureau of Standards briefing, with Minister present

Meeting report

Opening Remarks
The Chairperson said that she had received an apology from Dr Z Luyenge (ANC) and Adv A Alberts (FF+), who would be late. She welcomed the Minister of Trade and Industry, and invited him to make an introductory overview.

Introductory remarks by Minister
Dr Rob Davies, Minister: Department of Trade and Industry (DTI), introduced Dr Boni Mehlomakulu, Chief Executive Officer: South African Bureau of Standards (SABS), and said that two companies would be awarded the first local content verification certificates. In 2011, the regulations to the Preferential Procurement Policy Framework Act, 2005 had been passed. They allowed the designation of specific sectors for local content verification in respect of the state entities. The state entities had to procure locally manufactured goods which met SABS standards.  SABS had been appointed by the DTI as a Local Content Verification Agency in September 2012.  Local procurement was no longer an option, as companies were obliged to support local manufacturers. It was a legal requirement. In 2010, during the World Cup, all the buses had been procured outside South Africa. Since 2012, some designations had been made, including the designation of bus bodies. They had included the City of Johannesburg tender on buses for Rea Vaya Bus Rapid Transit. The companies that verified their local content would be awarded certificates.

The Minister noted that some entities were not aware of what was required of them. The Auditor General’s office was working towards a determination of whether entities and state-owned companies were conforming, or whether they were not complying with the applicable legislation. Local content verifications were conducted with regard to solar water heaters, communication cables, buses, and national lotteries. He concluded by stating that the government was determined to ensure that the Public Procurement Policy was complied with.

Briefing by SABS
Dr Mehlomakulu took the Committee through the presentation. She focused on the SABS’s history, services, service delivery and procurement, the inflow of low quality products, consumer safety, stimulating the economy, localisation, innovation chasm realities, and local content. She said standardisation activities in South Africa dated back to the early 1900s. The services of SABS included local content verification (LCV). The LCV had a dedicated strategic focus with the SABS, covering a range of companies. The LCV programme had teams of both technical and financial auditors at factories located across a number of provinces.

In terms of services delivery and procurement, she noted that procurement of poor quality materials hampered service delivery. In tender advertisements, quality specifications were not paid attention to and, as a result, the citizens paid a price for shoddy work – sometimes with their lives. Municipalities tended to procure products that were not up to the standards.

Dr Mehlomakulu noted that low quality materials on the roads caused losses. These products were imported. They were costing the state, because the state could end up paying three or four times for materials that should have been paid for once and used for a period of ten years. The state should insist on standardised materials. The inflow of low quality materials was unfair competition to local industry, leading to a loss of jobs in the economy. That problem could be cured by ensuring stringent enforcement of customs and the regulatory regime, compulsory testing, and public education about the impact of non-standardised products.

Ninety percent of products came from elsewhere. Most South African companies just assembled products and claimed that their products were made in South Africa. These products were, in many cases, not quality checked and assured by the SABS.

Dr Mehlomakulu noted that the new nuclear plant would be developed on the basis of intellectual property agreements. However, South Africa should learn from the contractor how to develop a similar plant. She emphasised that localisation needed a technological foundation. Technological transfer was mostly responsible for economic growth in countries like China and India.

Mr Desmond Govender, General Manager: Local Content, took the Committee through local content implementation. He noted that the Industrial Policy Action Plan (IPAP)’s industrial localisation took firm root when the amended regulations to the Preferential Policy Framework Act, 2000 were promulgated and became effective in 2011. At the helm of the IPAP implementation, the Minister of the DTI acquired the power with these regulations to designate specific sectors for local content. The DTI had set up the machinery to ensure implementation of the designations.

Mr Govender said that the economic objective of the IPAP intervention was for local manufacturers to receive a substantial share of government business. The verification and certification of the SABS was designed to give the state proof that it was local manufacturers who were benefiting from the local content requirement, as legislated. The winning bidders in state departments, state-owned companies and other public entity tenders were required to have their local content declarations verified to ensure there was no misrepresentation.

Mr Govender explained the local content process, methodology and verification, and described the LCV conducted, including the LCV lessons learnt.  The organs of the state needed to support the LCV by refraining from buying imported manufactured products. A baseline assessment would be involved to ascertain whether organs of the state were supporting the LCV. The target was 75% local content support in state procurement. The major challenge that had been identified was the fact that the state organs and state-owned companies were not complying with the Public Procurement Policy.

Dr Mehlomakulu said the presentation was a snapshot of the report requested by the Committee on what the SABS had been doing.  She reiterated that the governmental department and entities procured on daily basis, but an absence of meeting the requirements remained a challenge. Enforcement in the procurement area was needed. Standardised locally-manufactured products would contribute to economic growth. The state could not talk about economy, and leave out quality and standards of the products. The state could not afford having unhappy people due to the provision of under or sub-standard services. For example, in the case of housing, people were devastated by municipalities procuring building materials and solar water heaters outside of the standards. Quality assurance was crucial. Furthermore, consumers were being devastated and stressed when they realised that they had purchased products outside of standards.
 
Discussion
Mr D Macpherson (DA) said he was a fan of localisation, as it would stimulate South Africa’s economy. The state was a good purchaser and should get localisation correct. He was so glad that the Minister accepted that some state departments were not complying with the Public Procurement Policy. He asked the Minister if he was engaging the National Treasury so as to resolve the matter. He suggested that there should be a score card to determine how sectors were doing and that there should be sanctions against non-compliance. He gave an example of a tender in Tswane Municipality to procure the plastics, which had been awarded to a company from Ghana instead of a locally based company.

Mr G Hill-Lewis (DA) said that he was also a fan of LCV, as this would create jobs and increase local competitiveness. Localisation would not result in products being expensive. He sought clarity from the Minister on whether localisation could be given full support without wasting money. What process was followed in the designation of products and why were designations not occurring quickly? Why was the government garage not procuring locally?

Mr B Mkongi (ANC) commented that he was surprised at how the government could adopt a policy which it could not adhere to itself. He sought clarity on the challenges in conforming to the Public Procurement Policy. The government should lead by example if it wanted the private companies to comply with the policy. He could not buy the arguments of SABS and the DTI that South Africa lacked capacity and skills in respect of technology transfer. Why were they not recruiting new graduates? Education had been the main focus since the ANC came to power. What was happening to those students who were graduating from universities?

Dr Luyenge apologised for coming late. He seconded Mr Mkongi on the issue of skills. The DTI should ensure that LCV was used in all corners of South Africa, but this should not undermine the quality and standard that was needed. The DTI should collaborate with higher learning institutions to ensure the training of people in critical fields. South Africa had to reap what it sowed. Education would lead the country to the realisation of localisation.

Ms P Mantashe (ANC) said she was happy that the Minister had opened up on the localisation process and challenges. It would be difficult to get where the government wanted to go if the state was the main non-compliant organisation.  On the skills issue raised by Mr Mkongi, she said that she knew of one municipality that employed an old person who could have retired five years ago. She suggested that the DTI should focus on recruiting young graduates.

The Chairperson said that the disturbing problem was awarding tenders to foreign companies. Basic products such as globes, tubes, and solar heaters were procured outside South Africa. She suggested that the SABS should brief the Committee on the gaps in the awarding of tenders, and on how such gaps could be closed.

Minister’s response
With reference to localisation, the Minister replied that the designation of certain sectors was aimed at promoting LCV. The issue of designation required and involved a lot of technical work, including consultations. The underlying issue was based on which sector, or sectors, could be designated without costing the state, and thus contribute to South Africa’s economy. There were some investors who came to South Africa and manufactured their products in South Africa and were willing to compete with the local industries. Public procurement could not be therefore be used as minimum, but as a support to local industrialisation. Localisation was all about showing that South Africa could do better.

The DTI would deploy a procurement officer in the National Treasury to ensure that the LCV was complied with. The legal mechanism was also needed to ensure the promotion of LCV. Some state entities were abusing the BEE system by procuring products outside of the standards, in the promotion of BEE. The Minister cited one municipality that had awarded a tender to supply imported cables to a BEE company, which had supplied sub-standard products. That had cost a thousand jobs.

The Minister explained where the 75% figure came from, and what the tools for localisation were. The DTI was involved in the negotiation of a social accord on localisation, business, and labour. It came from social partners, that the 75% target should be set. The Minister referred the Committee to the clause of transparency of the World Trade Organisation which the DTI had been supposed to sign, but had not. If the clause had been signed, it would have had a negative impact on local procurement. The DTI could not compel private companies to buy locally manufactured products, for example, mining equipment.  The government and public sector should promote localisation. The DTI would have to ask the private sector to match this, and they could buy in terms of designation.

With regard to the public sector, the Minister said that the DTI had a mechanism in place for public procurement. The DTI had noticed an increase in public procurement. It had developed the competitive supply programme and designation mechanisms. In terms of the competitive supply programme, there would be few exemptions. In terms of designation, the DTI was sending a message that public procurement was no longer an option. It ought to be implemented. The challenges of non-compliance were deriving from the corruption problem, or the fact that the system was not understood, or because it was not clear whether the products were locally manufactured. The fact that a company was South African based did not necessarily mean that it met the localisation requirement.

On the issue of standards and the quality of products, the Minister said that it was difficult to determine whether a company was conforming. That was why the SABS was coming in. It had a technical team to check and assure whether a product met the set standards. However, the Consumer Protection Act also required companies to sell products that met the standards.

Dr Mehlomakulu stated that technology transfer would not happen if there was no connectedness between the buyer and the generator of the products. There was a need to train people about procurement and the companies to compete fairly. She drew the Committee’s attention to the issue of competitiveness between foreign and local companies and on the consumers’ perception that local products cost more, which was not true. Rather, foreign products which were outside standards cost the country more. Companies were being awarded tenders without checking whether their products were SABS standardised.

The Chairperson noted that the issue of Parliament buying products which were not quality assured had been raised four years ago. She asked the Members to check whether water and cold drinks that were served were bearing the SABS approval sign.

Adv Alberts asked the Minister why building materials, especially electrical materials, were not designated.

Mr Hill-Lewis asked why the state was not procuring vehicles locally.

Mr Macpherson sought clarity on technology transfer with respect to the nuclear plant, and on how that was related to LCV. Why were Ministers’ vehicles not procured locally?

The Chairperson asked whether gambling machines and ATMs were SABS quality assured.

The Minister replied that the designation of construction and electrical materials was under discussion. With regards to the nuclear plant, its construction was not a tender matter, as it had been based on agreement. However, the companies that were working on its development were encouraged to use local products. On the issue of vehicles, the Minister agreed with Mr Hill-Lewis that it would be in the country’s interests if Ministers drove locally manufactured vehicles. He was driving a locally manufactured vehicle, and whether Ministers should drive locally manufactured vehicles was a matter to be looked at. On the issue of gambling machines and ATMs, the Minister replied that the gambling legislation covered the issue raised, but he was not sure about the ATM machines -- whether their qualities were checked and assured. The DTI would encourage the award of tenders to companies using local products for manufacture.

Mr Hill-Lewis sought clarity on the calculation of 75% per cent.

With reference to the ATM and gambling machines, Dr Mehlomakulu replied that they were not SABS quality assured, because these sectors were self-regulated to meet the standards. She asked the Chairperson if they could move on to the awarding of certification.

The Chairperson agreed. She further remarked that ATMs and gambling machines should be checked because, for example, ATMs were disappointing customers who wanted to withdraw their money.

Dr Mehlomakuru asked the Chairperson for an opportunity to hand out the first local content verification certificates to Sandown Motors and Marcopolo. These two companies had been awarded tenders by the City of the Johannesburg. The certificates were presented by the Minister, together with the Chairperson.

Adoption of minutes and Committee matters
The minutes of 14, 17, 22, 24 and 28 October 2014, and 4 November, were considered and adopted without change.

The Chairperson stated that the issue of the oversight visit should be reconsidered and planned.

Mr Macpherson sought clarity on whether the issue of leave could be finalised.

The Chairperson agreed and stated that leave-related issues should be communicated to the Committee’s secretary.

After a debate, the Chairperson stated that all other meetings had been cancelled. A meeting would be held on 25 November 2014.

Mr Koornholf (ANC) and Ms Mantashe indicated that they would not be available, due to other commitments.

The Chairperson asked the Members to consider adopting the amended programme that would end in March.

Mr Mkongi and Mr Koornholf supported it, and there were no objections.

The meeting was adjourned.