Local public procurement: Auditor-General input; DTI on its 4 Quarter 2015/16 performance

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Trade and Industry

30 August 2016
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Committee was briefed on the Department of Trade and Industry’s (DTI’s) performance for the fourth quarter of the 2015/2016 financial year, which provided an outline of South Africa’s economic context, the DTI’s strategic goals and objectives, key achievements and financial performance.

As part of the DTI’s strategic imperatives, its objectives were to grow the manufacturing sector by promoting industrial development, job creation, investments and exports. It had placed emphasis on facilitating transformation of the economy to promote industrial development, competitiveness and employment creation. It also wanted to build mutually beneficial regional and global relations in order to advance SA’s trade, industrial policy and economic objectives. To achieve inclusive growth, it was set to facilitate broad-based economic participation through targeted interventions. The DTI wanted SA to be a dynamic industrial economy that was globally competitive, characterised by inclusive growth and development, decent employment and equity, and built on the full potential of all citizens.

Globally, there had been a slowdown in growth and there had been a decline in mineral commodity prices from 2012. The steel industry had experienced a fall in demand and prices, and currently there was a glut of steel in the global economy. SA had had to deal with the impact of the drought, which had led to interest rates increasing and inflation rising, as well as the agriculture sector’s decline. The SA economy had been saved by the manufacturing sector’s growth, which continued to cushion the economy against a possible technical recession.

There had been business confidence in SA, as Germany had opened the first German reserve bank on the African continent in SA. The biggest investment had come from China, which had just invested about R11 billion at Coega. The South Africa-Saudi Arabia Joint Commission had seen SA receiving a major investment from Saudi Arabia. The DTI had introduced programmes which would enable smaller companies to enter the export market.

The performance of the rand against the US dollar had impacted negatively on the manufacturing sector, as the weak rand had meant that production costs were higher. Production capability had also been constrained from 2013 as a result of power supply outages which compelled manufacturers to reduce production, given the insecurity of power availability. SA exports to the world were rising and had increased to R294 billion in the second quarter of 2016. There had been a revival in manufactured exports, and in the second quarter, SA had registered a trade surplus of R23 billion.

The DTI had achieved great success in its goal to move SA towards greater industrialisation. Under Operation Phakisa, it was now building vessels and the first of these were tugboats for Transnet. It was also reviving industrial parks, and was currently focused on ten in the initial stages, though it intended to revive all the industrial parks in SA. The clothing and textiles industry was also being revived, with about 26 new factories now opened. Through the DTI’s incentive schemes, more jobs had been created, though per capita growth was stagnant. The DTI was also involved in the film and TV industry, with the approval of 24 productions to receive incentives. The DTI could proudly count the South African black female produced production, ‘Happiness is a four letter word,’ as one of the productions that had received its support.

As part of the DTI’s targeted interventions, the Minister had hosted a black industrialists’ policy breakfast, the Special Economic Zone regulations had been gazetted in February 2016, and the draft Broad-based Black Economic Empowerment (B-BBEE) regulations had been published for public comments in January.

The DTI was also briefed by the Auditor General on its audit of local procurement. The government’s commitment was to leverage public procurement by expanding the value of goods and services procured from SA producers through the Preferential Procurement Policy Framework Act (PPPFA) and regulations, the establishment of standards for measurement and verification of local content, and lastly to roll-out infrastructure procurement. In terms of the impact of supply chain management processes in determining the requirement or need, departments had to consider whether a product fell within the designated sectors. The bid specifications must specify the local content requirements, and such requirements must comply with the local content thresholds as prescribed in the relevant Treasury instruction. Bidders had to submit bids that complied with the specified requirements. The evaluation committee had to evaluate the compliance with local content thresholds, based on the information submitted by the bidders. The bids that did not comply with the requirements would be considered non-responsive and disqualified.

Research to enhance the audit approach had been conducted to deepen the understanding of the local content programme, to assess the effectiveness of government role-players and to identify weaknesses in the value chain. The non-compliance by organs of state, the lack of consequences for the non-compliance and the lack of effective monitoring of implementation were some of the risk issues to be addressed. AGSA was engaging with stakeholders to deepen the understanding of the local procurement programme.

Members urged that stern action be taken to ensure compliance with local content requirements. One said that the Olympics -- and the outrage over what had been dubbed the ‘Ninja Turtle tracksuits’ -- was a great example of how one thing was said about local procurement, and the government departments did another. Until such time as this became an audit outcome or finding, they would continue unabated. Audit findings on supply chain adherence needed to be written into law, otherwise it would continue to be flouted.

Meeting report

DTI performance: Fourth quarter 2015-16

Mr Lionel October, Director-General: DTI, said an objective of the DTI was to grow the manufacturing sector so it could promote industrial development, job creation, investment and exports. The DTI’s goals were to facilitate the transformation of the economy to promote industrial development, investment, competitiveness and employment creation. The DTI also wanted to build relations which would be mutually beneficial in helping SA advance her trade, industrial policy and economic objectives both regionally and globally. The DTI would also like to facilitate broad-based economic participation through targeted interventions, to achieve more inclusive growth. As its vision, the DTI wanted SA to be a dynamic industrial, globally competitive economy, characterised by inclusive growth and development, decent employment and equity, and built on the full potential of all citizens.

There had been a decline in mineral commodity prices from 2012, though the gold price was turning around. Globally there was an oversupply of steel and a drop in demand, which had caused the prices to drop. Growth had slowed down and a weaker growth was expected globally, with countries like Brazil and Nigeria’s growth forecast at a negative, while SA was at 0.1%. SA had seen inflation and interest rates hike as a result of the drought, and the manufacturing sector’s growth was the pillar of the SA economy right now.

In terms of the gross domestic product (GDP), the manufacturing sector continued to cushion the SA economy against a possible technical recession. The agricultural sector was performing badly at -6.5% because of the negative impacts of the El Nino-induced drought conditions which had started in 2013.

Manufacturing production and sales had been affected as a result of the rand depreciation against the US dollar, which results in the cost of production increasing and inevitably translates into higher sales prices. Power supply outages constrained domestic production from 2013, which had compelled manufacturers to reduce production, given the insecurity of power availability.

On a positive note, SA had registered a trade surplus in quarter two of 2016, which was the first time in a very long time. SA exports to the world had increased to R294 billion in the quarter, and SA had seen a revival in terms of manufacturing exports.

The DTI had launched incentive schemes to promote industrial development and job creation in SA. It had also approved incentives for a total of 24 film and TV productions, as SA had become a major attraction with productions like ‘Happiness is a four letter word,’ having benefited from its incentives.

Under trade, investment and exports, the legal scrubbing of the Economic Partnership Agreement (EPA) had been finalised, thus facilitating signature and ratification of the Agreement with Europe, which was SA’s major trading partner. The Protocol on the World Trade organisation (WTO) Trade Facilitation Agreement had been submitted for ratification. The protocol had been ratified by the National Assembly and was awaiting concurrence by the National Council of Provinces (NCOP). The South African Customs Union (SACU)-Mercosur agreement had been ratified by all countries, providing new market access opportunities for South African products. The SA-Saudi Arabia Joint Commission had been held, to provide a stronger platform for export and investment initiatives with Saudi Arabia, and this had resulted in a major investment by Saudi Arabia. The DTI was helping small companies to be able to export through initiatives like the Global Exporter Passport Programme (GEPP) which saw 155 companies benefiting from Phase 4 of the programme.

Lastly, the Department had spent almost 100% of its allocated budget during the 2015/16 financial year, with incentive schemes to the private sector accounting for 76% of the allocated budget of R9.5 billion.

Discussion

The Chairperson referred to the development of ships for the navy, and stated asked for details on the initiative, as it was known this that had been SA’s goal.

Mr A Williams (ANC) referred to the R7 billion that was being given to the private sector, and asked if SA was getting value for the money, as it was quite a large proportion of the DTI budget going to the private sector. Was the private sector was really creating the amount of jobs that government thought was going to be created with the money? He asked why the money was not given to the private sector in the form of the government buying shares so that it could have some control, as currently not much could be done if the private sector did not meet targets.

Mr October responded that the incentives were always a matter which the DTI must assess, as it had to have a smart industrial policy and smart incentives. Currently the approach the DTI had adopted was to use the incentives to help companies to purchase machinery and equipment, as the DTI’s strategic objective was to expand the production base, and having the machinery and equipment was a country’s industrial engine which added value to raw materials. He agreed that Mr Williams did have a point.

Mr G Hill-Lewis (DA) said that on a per capita basis, SA was already in a recession. GDP on per capita basis was negative, and added to that, in the 2015 financial year foreign direct investment had dropped. The real picture of the economy was different to that painted by the DTI. He asked if the DG was able to give the Committee updated figures on how foreign direct investment had performed in the first nine months in this financial year -- whether they were up from the 2014 numbers, or whether they had deteriorated further. Considering the figures on industrial growth in particular, did the DG think that the intervention programmes that the DTI had at its disposal now were sufficient to effect a moving of the needle in a country that was moving negative on a per capita basis?

Mr October agreed with Mr Hill-Lewis that SA’s growth was not keeping up with the population.  GDP per capita growth was not growing as expected. He added that the DTI should try and expand its programmes, as this was the only thing that was standing between SA and a recession. He thought that the incentives were vital to the health of SA’s manufacturing sector, and the DTI must within a limited budget constantly make the DTI’s programmes more effective.

Mr N Koornhof (ANC) referred to the benefit to SA of film and TV productions, and asked if there was any indication of the language breakdown of the 24 films. He mentioned that the biggest benefactor of the industry seemed to be M-net. M-net ran a ‘Silwerskerm’ festival in Cape Town, and he wanted to know if the DTI was happy to get the necessary recognition with regard to this -- what had been the DTI’s interaction, and had the DTI been invited to this festival? The DTI’s recognition had been brief in these movies, and he thought it DTI should have received more recognition.

Mr October said he would look at the language breakdown, and agreed that the DTI had not been acknowledged for its role in the industry it had created. The main thing, and more important than seeing the DTI’s name, was to see that SA had a strong and robust manufacturing sector.

Mr D Macpherson (DA) said he would touch on the incentive programmes, in particular the Manufacturing Competitive Enhancement Programme (MCEP). The MCEP seemed to have stalled and there was no more movement there. He was concerned about the lack of clarity on what had happened with all the funds. It seemed that a lot had not been allocated, or were still waiting to be allocated. He was aware of a number of people who had qualified for funding, but later it had been withdrawn. He felt there was a quite mess that existed in the MCEP, although it had the potential to be a great programme. It had run out of steam because of funding issues. The Committee had also been told of discussions between departments and Treasury to find more money, and had repeatedly asked for the status of those discussions, but had never been told. He asked what the status of the Black industrialist programme was.  He was concerned about the lack of clarity about jobs that existed around this programme. All other incentives were job specific, except for this programme. His last concern was the National Regulator for Compulsory Specifications (NRCS) and the backlog of thousands of Letters of Authority (LOAs), and how businesses were closing down. An urgent intervention was needed, as the entity was on the verge of collapse, in his opinion.  He asked what the DG’s view of the NRCS and its performance to date was.

Mr October responded that the DTI was actively paying over a billion rands, and payment was made over three payments so that companies had to be careful how they managed it. In order for the DTI to obtain a clean audit, it must never over-commit when it did not have the money, and approvals were made subject to the availability of finance. The NRCS was at the cutting edge of a major flood of imports, many illegal and sub-standard, and was SA’s only barrier against that problem. There was a global over-production, and everyone wanted to dump their products in SA, and there had to be these measures to ensure there were proper checks and systems. The NRCS did not just rush to allow imports into the country

The Chairperson said it would useful to know where the DTI intended locating the planned industrial parks.

Mr October responded that Botshabelo industrial park was located 60kms outside Bloemfontein, and that 10 000 people worked there. The DTI had also revived the Seshego industrial park. The DTI’s goal was to have ten industrial parks in places like Garankuwa and Isithebe, and to revive all the industrial parks in SA. The industrial parks were labour intensive.

Ms Malebo Mabitje-Thompson, Deputy Director General: Incentive Development and Administration Division (IDAD), DTI, said that the language breakdown in local content productions was first English, followed by Afrikaans, and then a mix of other languages. She thought the producers did that in order to expand the market base. The DTI was now engaging with companies supported by the incentives, like M-net and the SABC. The issue was who owned the product after the production had been completed, and the DTI was engaging with the relevant stakeholders to ensure that there was some level of co-ownership with the producers, so producers could make more profit selling their products. She added that there was an ongoing battle, where recognition of government participation or developmental impact was met with reluctance in some circles. With regard to the MCEP, the DTI’s sense was that it was on schedule as far as payments were concerned and that there had not been any company that had been approved for payment and rejected without any particular reason. On the black industrialist programme, the DTI considered jobs with all their incentives.

Ms P Mantashe (ANC) said that she took great interest in what the DG had alluded to, especially regarding the 10 000 jobs created by Botshabelo.

Mr October responded that the DTI would do a full presentation on the industrial parks. It had developed the first ten in the initial phase.

Mr Macpherson said he had been to all the parks except the one in the North West, and almost 70% of the buildings were vacant and derelict. The industrial parks were not being used for what they had been intended. He said that he had been talking about the MCEP  in situations where the applications were granted for approval, but were then withdrawn because of funding constraints, as it put businesses in an awkward position.

Mr October agreed with Mr Macpherson that the parks were in a dire state because they had not received funding for the past 30 years, but that was precisely why they needed to be revitalised.

Mr Williams referred to the financial performance and wanted to know what had happened to the money that had been allocated for higher education institutions, as it had not been spent. He also wanted to know why the DTI had spent 189% of the allocated budget under households.

The Chairperson asked for clarification on the point about shipping made by the DG. She asked Ms Jodi Scholtz, Group Chief Operating Officer at the DTI, what accounted for the over-expenditure in the allocated budget. She sought clarity on the parks -- how many parks was the DTI talking about, and where were they actually located? Had a senior member of the DTI visited those parks to ascertain what the actual status of the parks was?

Mr Shabeer Khan, Chief Financial Officer, DTI, said that the DTI had done well with regard to overall expenditure, as it had spent almost all the budget from the previous financial year. He referred to the budget for households, and said this had been a payment to officials who had left the Department. Regarding the higher education institutions, the DTI interacted with the institutions on an annual basis to see if they had sufficient budget to train or carry on for the financial year.

Mr Macpherson said his concerns were about the ten parks identified, as he personally could not see where the money had been spent.  No-one had been able to tell him what the business model was. He was not here to criticise it, but to make it work. He was concerned that the money was not being spent the way it should be.

Ms P Mantashe (ANC) said that the ANC appreciated the strides the Department was making, as the main focus was on job creation and job retention, and it was critical that those parks were industrialised. She added that some people had not tasted poverty, so they did not appreciate the importance of revitalising those industrial parks.

Mr Koornhof referred to the finance report, and said that departments hardly ever came to say they had saved money. He asked if the DTI went through a process where they identified that a programme was not good, and then decided to rather add the money to another programme that would make a difference in the end.

Mr F Shivambu (EFF) said his broad concern about the whole industrial policy that was unfolding, and was now predominantly incentivising, was that it was not adequately labour absorptive. He thought the government was spending a lot more money than was being reflected in the number of jobs that were coming out. There should be a closer examination of the kind of jobs that were being created as a result of the processes that the government was engaged in. Lastly, the Department must develop a set of guidelines on what the role of municipalities should be in industrialisation. He was broadly concerned about the labour absorptive capacity of the industries the government was currently subsidising.

Mr October responded that if SA industrialised, then it needed to create a fully diversified industrialised economy and have more value-added sectors, and that if you could not produce automobiles, then SA was not industrialised properly. SA did not have a big enough auto industry -- it was nowhere near what it was supposed to be, and SA needed it to double. SA had been focussed on mining, and the emphasis was on agriculture and agro-processing, as they were labour intensive.

Mr Koornhof said there had been a brief mention of Trade Investment South Africa (TISA) and foreign officers had asked how many of the Department’s officials were currently deployed outside SA, whether the DTI intended to increase it, and in what countries they were effective.

Mr L October said that the DTI had spent 99% of its budget, and the only area it could save in was goods and services, as failure to spend on industrialisation hurt the SA economy.

Ms J Scholtz supplemented the DG’s response, saying that the foreign economic programme officials got posted every four years, and the DTI’s recruitment was fine-tuned to the skills set it required.

The Chairperson raised a question on trade and investment, and said she was pleased that the DTI was allocating more funds in that area.

Mr October said that the DTI was currently expanding. It had 23 offices on the continent and was following the footprint of the Department of International Relations and Cooperation (DIRCO). On the trade front, the manufacturing sector had been saved from the downturn in Europe, and Africa had been SA’s growth front. The DTI had launched two initiatives, and wanted to follow an investment-led approach.

Under Operation Phakisa, SA would be building ships for Transnet and the SA Navy, who were the major buyers. The DTI had issued a designation and the first ships rolling off the line were the Transnet tugboats. Shipyards in Durban and Cape Town were building some of these vessels.

With regard to the industrial parks, the DTI had decided to get the project moving and was currently busy with the first of four phases. He admitted that there was no business model yet, and no agreement with municipalities, but the DTI was trying to get the provinces and municipalities to take this programme seriously. There was a full-time team working on this matter, and the DTI would provide the Committee with a substantial report.

Engagement with Office of Auditor-General: colloquium on local public procurement

Mr Fhumulani Rabonda, Senior Technical Manager: Auditor General of SA (AGSA) said that the Auditor-General had a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, existed to strengthen the country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

In terms of the local procurement accord overview, business, government, organised labour and community constituents fell within the Department of Economic Development, the Department of Trade and the National Treasury. Government was committed to leveraging public procurement by expanding the value of goods and services procured from SA producers through the Preferential Procurement Policy Framework Act (PPPFA) and regulations. Government was also committed to the establishment of standards and the measurement and verification of local content.

Under the impact of Supply Chain Management processes and in determining the requirement or need, organs had to consider whether a product fell within the designated sectors. Bid specifications were required to specify the local content, and such requirements had to comply with the local content thresholds as prescribed in the relevant Treasury instruction. The bids submitted by bidders must comply with the specified requirements and the evaluation committee must evaluate compliance with local content thresholds based on information submitted by the bidders. Bids that did not comply with the requirements were disqualified, as they were considered non-responsive.

Local content was audited under the procurement and contract management focus area. The main objectives were for the organs of state to comply with the requirements for local production and content, as prescribed by the preferential procurement regulations. When testing the key requirements, the following were considered:

  • Bid specifications were to specify the minimum threshold for local production and content, which was not less than the threshold prescribed in the relevant National Treasury Instruction Notes;
  • The winning provider had furnished the auditee with the declaration on local production and content; and
  • The winning service provider met the minimum threshold for local production and content.

The weaknesses in this approach had been identified as focussing on the individual procuring institutions, as that did not effectively assess the entire value chain to identify weaknesses. Research to enhance the audit approach had been undertaken to deepen the understanding of the local content programme, to assess the effectiveness of government role-players and to identify weaknesses in the value chain.

There was still non-compliance by state organs and a lack of consequences for non-compliance. There was a lack of effective monitoring of implementation, which was compounded by inadequate training and awareness, as well as weaknesses in the coordination of the programme. There were also issues with the availability of data to assess progress.

Engagement with stakeholders like ProudlySA, the Department of Trade and Industry, the National Treasury and the Department of Economic Development was necessary to deepen understanding of the local procurement programme.

Discussion

The Chairperson asked Mr Rabonda to share with the Committee what the general findings in terms of compliance by government departments had been. Secondly, did the AG provide recommendations to departments on how to improve their tender systems, and what about the follow up process?

Mr Rabonda responded that the general findings were that the AG to a certain extent was not get to the core of the problem. The AG could see that there was an element of non-compliance, but in the samples it was selecting, it was not getting to the problem. In the instances where non-compliance had been identified, the AG had given recommendations to the management of the auditee.

The Chairperson thanked Mr Rabonda for the AG having introduced more proactive means in trying to address the issue of non-compliance.

Mr Macpherson wanted to know what engagements had taken place with local government, because they were surely one of the biggest procurers of goods and services in SA, yet repeatedly they were seen to do what they wanted in the supply chain management process buying, from whoever was the cheapest, nearest and dearest, and that was problematic. He said that the Olympics -- and the outrage over what had been dubbed the ‘Ninja Turtle tracksuits’ -- was a great example of how one thing is said about local procurement, and government departments do another. Until such time as this became an audit outcome or finding, they would continue unabated. He believed that audit findings on supply chain adherence needed to be written into law, otherwise they would continue flouting it. What was the AG’s view on an audit outcome for departments, and how achievable was it? When did the AG think something like that could be put on the table?

Mr Williams said the lack of consequences for non-compliance was shocking.  He supported Mr Macpherson’s proposal for it to be an audit outcome. He wanted to know what the cost implications would be. Was the cost of verification was being challenged by those involved, and would it be exorbitantly expensive to make this an audit outcome for the AG?

Ms P Mantashe (ANC) asked who, in the view of the AG, was meant to bear the costs of verification of the local content in the procurement system, and what consequences would the AG propose for such non-compliance?

Mr Koornhof said that the problem with the AG was that they focused on the past and told the Committee what had happened in the past. When the AG did the audit for the next year and saw there was non-compliance, how would the AG prevent it from happening again?

Mr A Alberts (FF+) said that the AG had indicated that it was difficult to ascertain all of the broad scope of procurement taking place. He asked if the AG had liaised with the Chief Procurement Officer in the Treasury, and if that person would not be able to assist the AG to get a broader scope of all the procurement taking place in SA, so the AG could monitor comprehensively and not just on an ad hoc basis?

The Chairperson mentioned that one of the issues that had come up had been the cost, and the challeneges faced by the small businesses. She asked what could be done from the AG’s perspectives. Certainly, the bigger businesses could bear the cost, but it would be burdensome for the small business to carry. She asked what the role played by the SABS was in this particular regard. Did the AG have any suggestions for the Committee that would achieve the verification process without placing the burden on the smaller businesses?

Mr Rabonda responded that whichever view the AG prescribed, the government would at the end of the day pay the price, even if they factored it into the tender. He said that each winning bidder should instead bear the cost of SABS verification. Government needed to prioritise and not require all bids to be subject to verification. It should depend on the size of the contract.  Maybe it should be compulsory for the big contracts and on an ad hoc basis for smaller ones.

Mr October supported the proposal by Mr Williams and Mr Macpherson, and said that the cost would have to be borne by the entity which won the contract. It was up to the purchasing entity to monitor compliance. The AG should include in all the audits they did, whether there had been compliance. Every purchasing department had to say how they were complying with the 50% local content. He felt that the burden had been unduly placed on SABS. He lastly asked the AG to accept the recommendations made by Parliament.

Mr Macpherson said that it did not have to be a complicated process. One needed to get people to comply and as a deterrent, if a contractor lied, they should be banned from bidding for government contracts again. He agreed with the DG that that there should be a guideline for local government, as this would be beneficial for SA. He asked for guidance from the Chairperson on the way forward.

The Chairperson said her concern was the issue of coordination. In the bigger municipalities there were competent individuals, but in the smaller municipalities, the fiscus was small and there was lack of competence. A guideline was needed that was user friendly, which could assist even the smaller municipalities to comply. She also raised the issue of bid specifications not being clear, and insisted on clarity in bids’ specifications, submission and evaluation.

Mr Rabonda, in his closing comment, gave the Committee some comfort, saying that the AG had been auditing from a compliance point of view, and if the AG finds there had been material non- compliance, it hits the audit report and that organ of state would not get a clean audit.  If a tender had been finalised that was not compliant, it became irregular expenditure. The question was, what more could be done by the AG to make it a relevant audit office? He added that the AG was willing to walk this journey with government.

The meeting was adjourned.

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