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
9
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
10
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
17
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
18
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
19
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
Progress on Designated
Sectors
21
• 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.
22
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.
23
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
24
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
25
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
26