A pins reindustrialisation hopes on new procurement rules, but constraints persist

Capacity Constrained
South African economics con- sultancy firm Econometrix director and chief economist Azar Jammine argues that a significant stumbling block is that South Africa does not have the capacity that is needed to manufacture certain products. “Either industries have disappeared or the country does not have the skills to manufacture the products that are demanded by government and the private sector.

“To this extent, I think it is dangerous to exaggerate the potential benefit that might come through the Act. One needs to see it more as a case of ‘at the margin there will be some instances of encouraging businesses to buy locally rather than from abroad’, but I would not see it has having a significant impact,” he states.

Jennings agrees that the private sector needs to invest. “But it will only invest if there is a securer scenario. There was significant investment in this country in the first seven years of this century through the private sector. However, because of economical turbulence and the current uncertain future, investors are thinking twice before investing at present.”

He adds that black economic empowerment should also be encouraged, particularly in entre- preneurial and enterprise develop- ment.

Business Unity South Africa (Busa) CEO Nomaxabiso Majokweni says it is important that government does not consider compliant black enterprises for insignificant contracts only, but for all contracts they qualify to service, in line with all relevant supply chain policy tests,.

Busa, as a partner to government, plays a role in ensuring that government creates a conducive environment that will allow business to thrive.

“As such, we will always play an active role in ensuring implementation of government policies. Preferential procurement forms part of Busa’s strategic economic transformation projects, alongside New Growth Path programmes, such as skills development, basic education and enterprise develop- ment. Busa will continuously measure the effect of these economic landscape-changing interventions, while monitoring and evaluating their implementation by both government and business,” she notes.

Majokweni adds that continuous reporting is important in monitoring compliance and the effect of the Act. “Just as there are standing reporting requirements for other key indicators, there should also be an obligatory requirement to report on prefer- ential procurement,” she says.

The Act and Policies
Trade and Industry Minister Rob Davies has reported that the minimum level of local content would differ between sectors and products.

The designations are not intended to take the place of other efforts by government institutions, particularly State-owned enterprises (SoEs), to encourage local procurement and supplier development, but rather to support these initiatives.

This includes ongoing mobilisation within SoEs to introduce localisation and supplier development into the procurement process under the direction of the Public Enterprises Minister.

Further, the new regulations enable all organs of State to include, as a “specific tendering” condition, that only locally produced services, works, goods or locally manufactured goods with a stipulated threshold for local production and content be procured, Davies said.

The amendments to the Act were among several interventions reflecting confidence in the future of the country’s manufactur- ing industry.

“We wish to reiterate that all procurement officers are under obligation to secure the most cost-competitive prices for products which fall in designated sectors,” Davies said.

However, government also retained the right to ‘undesignate’ sectors, where there is no progress in co-commitments by manu- facturers and/or where any anticompetitive behaviour takes place.

Davies warned industry to support and create jobs, and not seek “abnormal rates”.

Jammine warns that one cannot look at the Act as the panacea for all problems. “One must bear in mind that there is a danger that the legislation will breed inefficiencies in our economy, which, in the end, could even be counterproductive. If it enables local business to sit back and be lazy in the knowledge that they will just get the business, it will not help.”

However, Economic Develop-ment Minister Ebrahim Patel has argued that the designations sought to strengthen competitive pricing, eliminate collusive and unethical practices and to also extend value chains to other sectors, while the National Treasury issued a guideline and led workshops for all public insti- tutions on the clauses of the new regulations, and a two-stage process to evaluate the bids for designated sectors would apply.

Supporting the Act
In October, a Local Procurement Accord was signed that committed the main economic groupings in South Africa to work together to increase the levels of goods and services bought from local producers.

The accord set an aspirational target of 75% local procurement and identified a number of immediate steps that would be taken by the social partners towards achieving the goal as part of efforts to increase jobs and deepen industrialisation.

At the signing ceremony, Patel noted that the accord brought together the efforts of the public and private sectors and would direct billions of rands to local manu- facturers. “It must go together with other efforts to improve competiti- veness, skills development and better economic infrastructure in order to achieve our goal of five-million new jobs by 2020.

“This accord is one of a series of agreements in which social partners commit to work together to achieve the goals of the New Growth Path. South Africans are drawing together to achieve common national objectives.”

Business has committed to developing company-level procurement strategies that will analyse existing supply chains to identify opportunities to increase buying from local suppliers. The 84 largest companies have agreed to drive the effort in the private sector to improve localisation. These companies will report yearly on their targets and achievements.

Further, business has committed to using the newly created South African Supplier Diversity Council to support smaller local manu- facturers of goods and producers of agricultural products and related services, while supporting the setting of conditions for companies that benefit from State contracts, which will commit them to improving localisation of their own supply chains, investing in skills development and new technology and undertaking efforts to improve overall competitiveness and expand their markets.

Organised labour, including the Congress of South African Trade Unions, has committed to reviewing its own supply chain in the procurement of goods and services to identify products that can be sourced locally; to working with union investment vehicles and worker retirement funds to align their mandates to support local procurement strategies, including through the promotion of greater levels of investment in companies that will benefit from the State’s local procurement policies; to promoting better knowledge and education of labour trustees on retirement funds; and to supporting investment in development bonds that are issued by public entities that will promote infrastructure investment – and, in so doing, provide support for the localisation effort
The revised regulations became effective on December 7, 2011, and enable the Department of Trade and Industry to designate sectors and products for local procurement. The first designations, made that month, included power pylons, rolling stock, buses, canned vegetables, clothing, textiles, footwear, leather products and set-top boxes.

Government believes that, as a result of its immense procure- ment power, it will arrest and reverse industrial decline with, and in support of, the private sector.

“The designation instrument serves to strengthen public procurement in support of the multi- pliers derived from reducing the trade deficit, strengthening and diversifying South Africa’s industrial base, and to build up competitive value-adding exports to the rest of the continent, high-growth developing economies and traditional export markets,” the Trade and Industry and Economic Development departments said in a joint statement.

Each designation will stipulate a minimum level of local content for the relevant sector or set of products. Where relevant, the designations also set specific recommendations for ensuring competition amongst domestic producers and value for money for the State.

Challenging Environment
But Jennings says, while these changes could help boost demand, the industry’s biggest constraint relates to South Africa’s strong currency. Coupled with administrative price increases and the threat posed by Chinese exports, some of which receive significant aid, South African industry is hamstrung.

“One cannot keep adding cost to manufacturing, whether it is in the form of toll roads or electricity price increases. With an artificially strong rand, the bubble has got to burst and I would hope that the preferential procurement would start to make people more aware of South African products, resulting in buying more locally manu- factured products.

“The real issue now is for the private sector to support this. We need to hit the ground running and get the private sector to buy and support local products. However, this will prove difficult as everyone is looking at costs and savings but, if we want to sort out the employment debacle in South Africa, we will need to support this initiative.”

For the regulations to be successful, the country needs to get the economy growing by about 5% a year. “Initiatives such as nongovernmental organisation Proudly South African, paired with the private sector, are a start. South African businessperson Leslie Sedibe was recently appointed CEO and it seems a new energy level is taking over.”

He also explains that the only way to mitigate the Chinese threat to the manufacturing sector is for South Africans to look at job creation as the main objective. “I think we are far from that. Everyone acknowledges that it is our biggest problem; however, government and business have not really put their muscle and energy behind this critical issue. It has a significant multiplier effect to create jobs.”

Jennings points out that manu-facturing is under stress and it is necessary to cut interest rates, which will stimulate more growth in the economy.

Further, he adds that South African manufactured products’ quality is far better than that of Chinese manufactured products. “China, in particular, brings forth ‘golden samples’, which means the first few products that are imported are of good quality; however, over time, the quality starts to decline. You get what you pay for. To ensure that we have a future and create jobs, encouraging South African manufacturing is the only way out. And, of course, as the rand weakens, imports also become more expensive.”

He believes that, although critics of the Act might say that it is inflationary, there are more bene-fits to the legislation than risks. “One of the biggest problems, when it comes to manufacturing in South Africa, is volume and critical mass. If we convince more South Africans to buy local, greater volumes will be produced and the economies of scale should kick in, which will result in significant savings overall