Designation of Industries, Sectors & Products for Local

Procurement in the Public Sector

Presentation to the dti: Policy Dialogue

24 June 2016

Tebogo Makube (Ph.D.)

Industrial Procurement Chief Directorate

• Socio-economic challenges in South Africa and the need for Local

Content

• The PPPFA and Local Content

• Section 9 of the Preferential Procurement Regulations, 2011

• List of Designated Sectors (approved, outstanding and not

approved)

• Highlights on Designated Sectors

• Regulation 9.3 of the PPPFA

• Way forward

Purpose of the

Presentation

2

3

The National Challenges

The National Agenda

Government Response

• Unemployment

• Inequality

• Skills shortage

• Growing population

• Infrastructure shortage

• Limited industrial capacity

• Reliance on resource export

• Job creation

• Skills development

• Normalising society and economy

• Local procurement and economic

growth

• Infrastructure development

• National

Development Plan

• New Growth Path

• IPAP

• Local Procurement

Accord

• CSDP

• B-BBEE

• SME development

• Overall policy

reform

• PPPFA, designation

Socio-economic challenges facing

South Africa

RSA: Industry value added and

GDP (constant 2010 prices)

4

• The manufacturing sector’s contribution to SA GDP declined sharply from 20.9% in 1994 to 12.4%

by 2015, whilst the mining sector’s share increased marginally from 7.3% to 7.7%.

Agriculture, forestry and fishing, 2.3%

Mining & quarrying,

7.7%

Manufacturing, 12.4%

Electricity, gas and water,

2.2%

Construction, 3.6%

Wholesale & retal trade, catering &

accommodation,

13.7%Transport, storage and

communication

, 8.5%

Finance, insurance, real

estate &

business services, 19.9%

General government

services, 15.2%

Community, social & personal

services, 5%

Sectoral composition of the South African economy in 2015

Agriculture, forestry and fishing, 4.6%

Mining & quarrying,

7.3%

Manufacturing, 20.9%

Electricity, gas and water,

3.6%

Construction, 3.2%

Wholesale & retal trade,

catering & accommodation,

14.2%

Transport, storage and

communication, 8.7%

Finance, insurance, real

estate &

business services, 16.0%

General government

services, 16.2%

Community, social & personal

services, 5%

Sectoral composition of the South African economy in 1994

Source: the dti , compiled from the StatsSA and SARB databases

5

2015 Source: SARB, IDC, the dti

40

45

50

55

60

65

70

75

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Ma

nu

factu

rin

g im

po

rts

& e

xp

orts

(a

nn

ua

l %

g

ro

wth

)

Year

Manufacturing exports (% of merchandise exports)

Manufacturing imports (% of merchandise imports)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

10

12

14

16

18

20

22

24

20022003 2004 2005 20062007 20082009 2010201120122013 2014

Ma

nu

fa

ctu

rin

g im

po

rt le

ak

ag

e (

an

nu

al

gro

wth

%)

MV

A (

% o

f G

DP

)

Year

Manufacturing import leakage (SIC 3) Manufacturing, value added (% of GDP)

Manufacturing Import

Leakage in South Africa

13.5%

15.8%

11.8%

12.2%

2.5%

4.4%

6.5%

8.5%

2.1%

0.0% 5.0% 10.0% 15.0% 20.0%

GP

KZN

WC

EC

LP

MP

NW

FS

NC

Source: SARB, IDC, the dti

Manufacturing contribution to

provinces’ GDP, 2014

1. Problem statement 7

0

2

4

6

8

10

12

1960-69 1970-79 1980-89 1990-99 2000-14

Pe

rce

nta

ge

Years

Public Sector CapitalFormation as % of GDP

Fixed Investments by the

Public Sector

Procurement Levers

8

Government purchasing power through public procurement contributes

between 15% and 25% to GDP (value that is extracted from large scale

procurements)

National Industrial Participation Programme (NIPP): Imported Content =>

US$10 million

Defence Industrial Participation (DIP): managed by Armscor and applicable

to all defence procurement. Imported Content => US$2 million

Competitive Supplier Development Programme (CSDP): managed by DPE

in conjunction with State Owned Companies (SOCs) .

Designation & Local Production

The Renewable Energy Independent Power Producer Procurement

Programme (REIPPPP)

The Local Procurement Accord

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Localisation &

Supplier Development

Designation & Local Content

Economic Empowerment &

Black Industrialisation

Programme

Industrial Participation and Offset Projects

Supplier Development Programmes

Skills Development Programme

• Development of diversified suppliers along the value chains

• Stronger linkages between designation and supplier development

• Leveraging government expenditure • Local manufacturing capability and

capacity

• Leveraging government expenditure

• Non or low manufacturing capability

• R & D, Export benefits

• Integration in the value chains of global OEMs

• B-BBE Codes of Good Practice • Development of diversified suppliers

along the value chains • Access to markets • Incentives • Skills development

• Emphasis on technical skills along the value chains

• At least 730 Public Institutions

– 41 National and 115 Provincial Departments

– 278 municipalities

– 9 Constitutional bodies,

– 21 Major Public Entities (Schedule 2)

– 266 other public entities (Schedule 3)

• Each level of institution has subsidiaries too (e.g. 41

municipal entities)

Institutions involved in Public

Sector Procurement

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Trade and Investment Treaties

WTO: Aim to lower tariffs and non-tariff barriers

Limiting performance requirements related to trade in goods

(TRIMs Agreement in 1995)

Limiting performance requirements related to trade in services

(GATS Agreement in 1995)

Limiting performance requirement related to government

procurement (GPA Agreement in 1996)

Bilateral and Multilateral Trade and Investment Treaties

International investment agreements and others forbid performance

requirements beyond TRIMs

BO

S 1

2

Asian Development Bank Procurement System - Eligibility

Eligibility

Goods

• must be produced in a member country

Bidders

• must be nationals of eligible source countries

• must not have a conflict of interest

• must not be under declaration of ineligibility by ADB

• must not be ineligible due to an UN Security Counsel resolution

• must be, in case of a GOE, legally and financially autonomous, operate under commercial law and be independent of the Employer

• Globally, Local Content (LC) is regarded as the

Maximisation of Local Economic Spillovers

accruing from the following:

– Government contracts (procurement)

– Concessions (turnkey projects: design, build, own, and transfer

assets)

– Mining licenses (mining charter, beneficiation and license conditions)

– Production sharing agreements in the energy sector (exploration and

development) 13

The Applicability of Local Content

• Leveraging public expenditure to industrialise the country

• Supporting economic growth and creation of job opportunities in the

country

• Attracting new investments (in particular, foreign direct

investments)

• Reducing South Africa's trade deficit

• Overall savings due to lower impact of currency fluctuation

• Consistency of supply, quality-wise - compliance with SABS - SANS 15

Arguments in favour of

designation

PPPFA and Local Content

• Preferential Procurement Policy Framework Act (PPPFA)

was enacted in 2000, and its Regulations promulgated in

2001

• The Regulations were amended in 2011 and new

regulations came into effect on 7 December 2011.

• Section 9: Local Production and Content

• Paragraph 9 (1) of the Regulations empowers the dti to

designate specific industries where tenders should

prescribe that only locally manufactured products with a

prescribed minimum threshold for local production and

content will be considered

• To give effect to government decisions on public

procurement; sectors/products were and are being

designated for local production 16

Designated Products

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Minimum

Local Content

Thresholds

Description Date

1. Rail Rolling Stock 16-07-12

Diesel Locomotives 55%

Electric Locomotives 60%

Electric Multiple Units 65%

Wagons 80%

2. Bus Bodies 80% 16-07-12

4X2 Commuter Bus, 36 Seater and more 80%

6X2 Commuter Bus, 56 Seater and more 80%

4X2 City Bus, 21 Seater and more 70%

6X2 City Bus, 50 Seater and more 70%

6X2 Semi-luxury Coach, 50 Seater and more 70%

3. Canned/Processed Vegetables 80% 16-07-12

4. Textile, Clothing, Leather and 16-07-12

Footwear Sector 16-07-12

5. Solar Water Heaters (tank & collector) 70% 19-07-12

6. Set-top Boxes 30% 26-09-12

7. Certain Pharmaceutical Products Per Tender 07-11-12

8. Furniture Products 15-11-12

Office Furniture 85%

School Furniture 100%

Base and Mattresss 900%

9. Electrical andTelecom Cables 90% 08-05-13

10.Valves Products and Actuators 70% 06-02-14

11. Working Vessels 60% 01-08-14

* Instruction notes already circulated by the National Treasury

Sectors Already Designated*

100%

Designated Products

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Minimum

Local Content

Thresholds

Description Date

12. Residential Electricity Meters 01-08-14

Prepaid Electricity Meters 70%

Post Paid Electricity Meters 70%

Smart Meters 50%

13. Steel Conveyance Pipes 28-09-15

Spiral submerged arc welding (Bare) 100%

Spiral submerged arc welding (Galvenised) 100%

Spiral submerged arc welding (Lined & Coated) 80%

Spiral submerged arc welding (Galvenised, Lined & Coated) 80%

14. Powerline Hardware and Structures 100% 28-09-15

15.Transformers 28-09-15

Class 0 90%

Class 1 70%

Class 2 70%

Class 3 45%

Class 4 10%

16. Two Way Radios 30-06-16

Portable Radio 60%

Mobile Radio 60%

Repeater 60%

17. Solar PV Components 30-06-16

Laminated PV Modules 15%

Module Frame 65%

DC Combiner Boxes 65%

Mounting Structure 90%

Inverter 40%

18. Rail Signalling System 65% 30-06-16

19. Wheelie Bins 100% 18-08-16

* Instruction notes already circulated by the National Treasury

Sectors Already Designated*

Designated Products

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Tenders Designated for Local Production: March 2015 - July 2016Designated Signed Standard Bidding Total Value No. of Tender % Verified:

Products Documents Submitted per Sector Companies Value (total value /

to the dti R million Verified Verified tender verified)

Textiles 183 1,136,921 2 624,417 55%

Office furniture 59 220,494 - - -

Electrical Cables 18 1,003,743 3 588,535 59%

Canned Veg 5 2,008 - - -

Valves 2 701 - - -

Rolling Stock 4 49,547,226 - - -

Set top boxes* 1 4,300,000 3 600,000 14%

Power Pylons 3 740,212 3 740,212 100%

Solar heaters** 1 - 3 - -

Others 10 105,523 - - -

Total 286 57,056,828 14 2,553,164 4%

* One tender but different suppliers appointed as a panel by USAASA

* Tender value not known at the time of verification due to a panel appointment of potential suppliesr by DoE

Source: Dept of Trade & Industry & SABS: Local Content databases, 2016

Rail Rolling Stock

Opportunities

Progress on Designated

Sectors

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• Rail fleet procurement

o PRASA and Gibela Rail Transportation announced that the entities had

achieved commercial close on the contract to supply the state agency with

7,224 new coaches at a projected cost of R123 billion over 20 years.

o The tender is is estimated to create over 8000 direct jobs.

o Transnet has awarded a total of R50bn in contracts to CSR Zhuzhou

Electric Locomotive, CNR Rolling Stock SA, Bombardier Transportation

SA and General Electric SA for the building of 1,064 electric and diesel

locomotives to be built in SA.

o All the locomotives, except for the first 70, will be built in Transnet

Engineering’s plants in Pretoria & Durban.

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Progress on Designated

Sectors • Automotives

o Volvo Southern Africa, in partnership with Marcopolo South Africa, has been

contracted to produce 131 buses - 85 rigid 12m and 46 articulated 18m

vehicles - to the City of Tshwane by 2016.

o Mercedes-Benz South Africa (Sandown Motor Pty Ltd) won the tender to

provide 134 busses for the phase 1B of the City of Johannesburg’s Rea

Vaya rapid bus system. ‘

o The City of Cape Town awarded Volvo South Africa a tender to provide 40

busses for the extended MyCiti rapid bus routes at a cost of R180m.

o Tshwane Municipality has awarded MAN a tender to supply 120 A84 Lion’s

City busses.

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Progress on Designated

Sectors • Pharmaceuticals

o Four pharmaceutical companies were jointly awarded a R10 billion

tender to supply the Department of Health with antiretroviral (ARV)

medication from 1 April 2015 to 31 March 2018.

– Sonke Pharmaceuticals was awarded R3 billion, Mylan Pharmaceuticals R2.8

billion, Aspen Pharma R2.5 billion, and Cipla Medpro R2 billion.

o The 2014-2016 OSD tender worth R 2.683 billion was awarded to 38

companies. Including local manufacturers such as Aspen (38%), Adcock

(2%), Sanofi-Aventis and its subsidiary Winthrop (11%), Sandoz (3%)

and Be-Tabs (3%).

o The tenders had a conditional provision for designation of up to 70% of

the tender volume for domestic manufacturers.

Non-compliance with the

requirements of Local Content

• This is complex matter and has different phases:

– Advertisement of tenders with local content (LC) conditions

– Submission of correct LC documents by bidders

(Standard/Municipal Bidding Documents 6.2 and accompanying

annexures)

– Self declaration of correct minimum thresholds for local production

by bidders

– Proper evaluation of bids in terms of local content requirements (no

points allocated for LC but it is the first hurdle that must be achieved by

bidders)

– Understanding of LC requirements and industrial policy objectives

by both Bid Evaluation and Adjudication Committees

– Post tender award reporting to the dti by the organs of state

(submission of signed Bidding Documents and Annexures)

• the dti’s analysis and verification of actual local production by the SABS

• Auditing of tenders and aforementioned by the Auditor General’s Office

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Priority areas for

consideration • Capacity to plan for tenders over the medium term

• Capacity to design for local and the integration of value chains

• Institutional capacity development to deal with complex strategic projects

– Integration of multidisciplinary teams in supply chain (Economic, Legal,

Financial, Engineering, Sourcing and other Technical Skills)

• The alignment of procurement levers to optimise industrial development

– Develop and agree on instruments to support the government’s 75% Local

Procurement Target

– Finalise and implement guidelines on Regulation 9.3 of the PPPFA

• On-going efforts to secure stronger alignment with the National Industrial

Participation programme (NIPP) to secure investment in key industrial

sectors

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Priority areas for

consideration

• Participate in the PPPFA Reforms (amendment of the Act, Regulations and

Competition policy issues)

– Powers to deal with non-compliance on local content / designation

– An engagement is currently taking place with the Auditor General’s Office to

develop a framework to audit compliance and expenditure on designation /

local content

• Alignment of BB-BEE Scorecards (enterprise and supplier

development) and Competitive Supplier Development Programme

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