Localisation and public procurement drive briefing

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Trade, Industry and Competition

02 March 2016
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Chief Director: Industrial Procurement at the Department of Trade and Industry (DTI) briefed the Committee on the designation of industries, sectors and products for local procurement in the public sector. The Chief Executive for the South African Bureau of Standards (SABS) briefed the Committee on the benefits, process and challenges of local content verification in both the public and private sector.

The DTI said it was currently reviewing the technical specifications of local content in response to the challenges that had been experienced since 2012. In the same vein, capacity building in local content had to be considered, as supply chain practitioners required training at the local government level. This had been introduced, and enhanced linkages between various procurement levers had been encouraged, such as National Infrastructure Protection Plan (NIPP) to ensure that the country benefited as much as possible even in the event that some commodities had to be sourced from outside the country.

The SABS spoke mainly about its auditing function, specifically content verification as it related to the Preferential Procurement Policy Framework Act (PPPFA). It provided the Committee with a breakdown of the percentage threshold verification of the designated areas, and familiarised the Committee as to the verification process flow, speaking largely of the challenges of the process given the low compliance by entities, especially where the issues of financing the cost of verification due to ambiguity on the matter in the bill, and the lack of support from government was concerned.

In discussion, it was mentioned that legislation would not be finalised before the recess. Members sought to clarify matters of misrepresentation of the minimum local content thresholds in some designated industries, logistical matters where verification was concerned, the conditions and timelines in applications for verification exemptions from the DTI, funding constraints, preferential procurement, liaison difficulties between the DTI and Treasury, and penalty suggestions for non-compliant bureaucrats.

The Committee finalised its discussions by agreeing to hold a colloquium where the top 20 procurers in the state would be invited to provide input on the draft legislation.

Meeting report

Briefing by Department of Trade and Industry

Dr Tebogo Makube, Chief Director: Industrial Procurement, Department of Trade and Industry (DTI) spoke about the background of the Preferential Procurement Policy Framework Act (PPPFA) and local content. Attention was focussed specifically on Section 9 of the Act which deals with local production and content, where tenders issued for specific industries can prescribe that only locally manufactured products with a prescribed minimum threshold for local production and content will be considered. Clarifying that, in keeping with international laws and treaties, the state designates these stipulations for the public sector only.

 

Dr Makube broke down the work flow of the process between his offices, as supply chain custodians, theTreasury and the Ministry, mentioning that his offices were involved from the outset of deliberations for products such as ensuring clarity in tender applications, influencing design, and ensuring international standards are adhered to (where applicable). Where procuring entities are unable to meet the standards, they can apply for exemption from the DTI. As such, where the DTI is primarily involved with the entire value chain, government is focused on the final product or service delivery. He listed the designated sectors, listing those that had been approved, outstanding and those not approved. His offices were coordinating with the Auditor General in the auditing of expenditure in the designated sectors. At present the Auditor General was involved with the sampling process of compliant and non-compliant entities – Broad-based Black Economic Empowerment (BBBEE) in particular and the black industrialists -- in the supply of development programmes.

He informed the Committee that the DTI was currently reviewing the technical specifications of local content in response to the challenges that had been experienced since 2012. In the same vein, capacity building in local content had to be considered, as supply chain practitioners required training at the local government level. This had been introduced, and enhanced linkages between various procurement levers had been encouraged, such as National Infrastructure Protection Plan (NIPP) to ensure that the country benefited as much as possible even in the event that some commodities had to be sourced from outside the country.

Mr Garth Strachan, Deputy Director-General: Industrial Development, DTI, stressed the importance of reciprocity between government and supply chain entities so as to ensure timely, competitive and quality service. The best measure of this would be if locally produced goods could be sold on the international market.

Dr Boni Mehlomakulu, Chief Executive Officer, South African Bureau of Standards (SABS), spoke mainly about the auditing function carried out by her offices, specifically content verification as it related to the PPPFA. She provided the Committee with a breakdown of the percentage threshold verification of the designated areas, and familiarised the Committee as to the verification process flow, speaking largely of the challenges of the process given the low compliance by entities, especially where the issues of financing the cost of verification due to ambiguity on the matter in the bill and the lack of support from government was concerned.

Discussion

The Chairperson asked for clarity on the verification process, wanting a clearer understanding on the precise time the SABS became involved in the tendering process, after the DTI and Treasury had fulfilled their mandate.

 

Dr Mehlomakulu responded, saying that her offices were involved if, during the tendering process, the entity self-declared that they had met, and in some cases surpassed, the verification level. This was where the entities were awarded the tenders on the basis of their self-declaration of compliance, and therefore did not see the need to utilise the state-mandated instrument to verify this after the fact. It was also mentioned that some entities would purposefully omit local content information, making engagement even harder for verification to occur after the tender had been awarded. Among the reasons listed for non-compliance were that entities were reluctant to engage as they felt the verification process was intrusive and disingenuous, as the issue of payment was not mentioned at the beginning of the process. While she did acknowledge that smaller firms might face cash flow constraints, she mentioned that payment support mechanisms were being explored. She explained that the tendering documents should be clear in mentioning that the company awarded the tender should pay for the verification process.

Mr G Hill-Lewis (DA) sought clarity from the DTI on the specifications in the pharmaceutical industry, giving the example of an Indian company which had been awarded a tender while it not meeting the minimum requirements of the NIPP. He did not understand the review of the instruction note on steel, and while he appreciated the argument he was having a hard time believing it, as some companies were planning on increasing prices. He requested a satisfactory response as to why motor vehicles were not included among the designated sectors. While he appreciated the position of the SABS, he thought that verification should happen only after a tender had been awarded, given the lengthy time lines involved. He enquired as to the turnaround time when companies requested exemption letters from the DTI, mentioning that he had received complaints in that area and that the response time was either 48 or 72 hours.

Mr M Kalako (ANC) said that it was problematic that the mandate given to the SABS was not funded by the DTI. He asked the DTI about preferential procurement and whether it received cooperation from departments within both national and local government. He commended the two organisations in the face of the challenges mentioned. He could not understand why some of the challenges between the DTI and Treasury could not be resolved internally. He also asked if entities engaging them complained about the process being very lengthy, and if there were penalties in place for bureaucrats in non-compliant public offices.

Mr J Esterhuizen (DA) thought that the industrial action policy plan was a good initiative in that it had been brought in to bring about significant structural changes to the economy. However, growth had been led more by the consumption sector than the production sector. He enquired whether the private sector could be incentivised to participate in localisation through the advertisement of tax incentives, or if it were specified in the manufacturing process that the percentage of local content must be indicated in the labelling of products or materials. He was also concerned about the lack of funding for the SABS. He said that contractors utilised sub-contractors who would import their goods from the most affordable sources.

Mr B Mkongi (ANC) asked why funding had not been provided for the SABS. What could Parliament do to alleviate that situation, and whose responsibility was it to provide the money required for the process between the DTI and SABS so that the mandate could be placed with the appropriate offices and policy position? He said the public sector could not be incentivised due to World Trade Organisation (WTO) restrictions, and also because it would seem imbalanced if there was already a very high rate of non-compliance by government agencies and numerous State Owned Enterprises (SOEs).

The Chairperson cited the futility of the legislation if the implementing agencies were unable to carry out their mandates.

Mr Strachan clarified that the PPPFA and its accompanying regulations were National Treasury Acts and were therefore limited policy instruments, and gave examples of how the mining supply companies imported equipment win contracts on the basis of their BEE compliance. To curb the rate of non-compliance, he recommended that the procurement legislation which did not fall under the DTI required strengthening, and the right sanctions across government departments, spheres and SOEs should be secured. While private sector procurement was outside the scope of the Act, a procurement agreement had been signed with EBB to enhance localisation. Such actions would go a long way to bolstering the manufacturing sector. If verification became a compulsory component of the private sector, he thought it would present a problem and become open to abuse. The middle ground would be to allow for verification with spot testing, where entities found to be falsely declaring were subject to legal action. He emphasised that the regulation should be supportive of industrialisation and not act as a barrier to free enterprise.

With regards to pharmaceuticals, he said that pharmaceuticals were purchased outside of South Africa only under special circumstances, to avoid national health crises.

Referring to labelling, he said that the DTI was working with the clothing and textiles cluster to develop an electronic system to allow traceability of the individual components, but he did not know of any labelling requirement in the Consumer Protection Act.

With respect to steel, there was no agreement between the primary steel producers and government. The package of measures was yet to be agreed upon and would include agreements on pricing which would spill over into the allied sectors.

Where motor vehicles were concerned, policy coherence was important as the designation of many products into the designated sector would result in even more cases of non-compliance. The preferred way would be to raise the competitiveness of South African commodities first.

Dr Makube clarified matters relating to verification, as legally bidders were not compelled to pay for verification until the tender had been awarded. The verification phase required review. With respect to pharmaceuticals, there was no minimum threshold due to intellectual property matters and as such, tenders were reviewed on a tender by tender basis. The ideal time to respond to emails requesting exemptions was 24 hours, and any untimely responses might be due to a failure to send the email to the appropriate office, or due to the high volume of requests received. The time to acknowledge receipt was 24 hours, but if the matter required industry consultations, the period would be longer.

He said that the DTI was responsible only for BBBEE and local content verification -- anything outside this scope was under the Treasury. The 75% local procurement threshold desired by the government in the manufacturing sector with local content was clear, and anything outside this would be evaluated on the basis of price and BBBEE compliance. A different instrument was therefore required in non-manufacturing sectors to ensure local procurement of non-designated sectors.

Dr Mehlomakulu, responded to the funding mandate, clarified that when the project began, it was to be self-funding. This had proved ineffective when the issue of non-compliance emerged, due to the lack of enforcement. In the case that enforcement became active, the SABS would create redistributive pricing models which would cater to smaller firms. She stressed that local content verification and quality assurance were to be taken as one package, as separately the ability of local companies to remain competitive would be negatively affected. The opportunity cost involved in conducting a verification process after the fact and finding the entity guilty of false declaration in stating its position should include penalties beyond withdrawal of the tender.

Mr Mzwandile Masina, Deputy Minister, DTI, was of the opinion that the industrial instruments had been taken away from the DTI, hampering effective policy coordination. A mechanism to clarify that the costs associated with the verification were the onus of the winning bidder, was the indication on the appropriate tender documents advising that caution be taking in that regard in order to respect the mandates of the requisite offices and authorities. Capacity building at the SABS to enhance enforcement should be looked at, and penalties should be in place, with special consideration for the effects on service delivery. He suggested that industry players should be involved in information sessions to highlight the importance and raise the profile of the issue of local content verification.

The Chairperson said the full extent of the difficulties experienced in the implementation had previously not been realised. She asked if the state was willing to pay a premium to ensure local content verification was being actualised. It appeared that there was no real penalty, as the non- compliant companies were still awarded tenders. She suggested that a balance should be struck.

Mr Hill-Lewis agreed with both Mr. Strachan regarding maintaining export competitiveness and Mr Masina regarding policy coordination. He asked that the Committee write to Treasury to ask for a response as to why the Yellow Metal deal had not been confirmed as designated. While he appreciated the position of the SABS, he understood that there was no incentive for companies to comply with the verification mandate. He suggested that in the case of large tenders, the state should consider paying for the verification process.

Mr Esterhuizen maintained that companies should be incentivised through utilising the labour already available. He gave the example of a company which sold nuts being able to add much value to their products before they were purchased by larger firms.

Mr Mkongi enquired as to the amount of time involved in the verification process. He also encouraged that different avenues should be explored to source funding, especially for smaller firms, such as establishing which departments would be involved.

The Chairperson stressed that this was a policy instrument and therefore the government was obliged to enforce it. She requested that the DTI and SABS suggest suitable reforms within a two week period.

Mr Hill-Lewis asked for a firm response regarding the time taken to produce the letters of exemption from the time the emails were received by the DTI. He also asked if the Committee agreed to writing a letter to Treasury regarding Yellow Metal.

The Chairperson asked if the DTI could perhaps be ready with the document next Wednesday, 9 March, or on 15 March.

Mr Strachan said that the DTI position was that the other government departments ought to be examined, as the DTI had been requesting much stronger legislative policies to secure adherence. He also said that the DTI was not allowed to designate services. He stressed the importance of policy coherence, programme coordination and stronger instruments to enhance implementation.

The Chairperson suggested a colloquium to get participating stakeholders to recognise that the process would be slower.

Mr Hill-Lewis was in agreement regarding the colloquium and requested that the DTI provide a list of the top 20 largest procurers so that they could be invited to the colloquium as well.

The Chairperson advised that the Committee would be reconvening on 8 March to consider the strategic and performance plan of the DTI.

The meeting was adjourned.

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