Portfolio Committee on Economic Development – Briefing on B-BBEE and Local Procurement 7 August 2012

Background What is Local Procurement? Local Procurement is essentially procurement from local or indigenous sources . Focus has been place on this concept as part of the New Growth Path and the accompanying Local Procurement Accord (Oct 2011). Focus compounded by aspects of Local Procurement (Local Content) and designation of specific sectors and sub-sectors in PPPFA (Dec 2011). SABS Technical Standard on Calculation of Local Content in domestic products has been promulgated and is being refined at present. Many infrastructure projects (REIPPP, Transnet Locomotive Procurement, etc) are driving the concept of Local Content at present. Current B-BBEE regulations (Codes) do not promote Local Procurement directly

The status and impact of Broad-Based Black Economic Empowerment (B-BBEE) in South Africa Where are we?

B-BBEE on the JSE A snapshot of performance in 2012

B-BBEE on the JSE A snapshot of performance Key Points: Data represents that top 100 B-BBEE performers on JSE have average compliance rate of over 75% in respect of the scorecard. Weakest elements are all linked to Human Resources (Management, EE, Skills). This is unusual as Employment Equity legislation has been in place since the late 90s. Preferential Procurement and Enterprise Development are 3rd and 2nd highest performers. Socio-Economic Development is the highest performer (also the easiest).

B-BBEE in SA Limitations of Research Key Points: DTI currently conducting 2nd baseline study on B-BBEE in SA economy after 1st baseline was completed in 2007. Due to nature of data, it is difficult to actually measure the impact of B-BBEE compliance on economic development. Large corporates are highly focused on compliance, making current research positively biased due to lack of data from smaller and unlisted businesses.

BEE and Local Procurement How is B-BBEE related to Local Procurement and the problem of fronting

B-BBEE and Local Procurement B-BBEE Procurement Mechanism Total Expenditure (Capital and Operational) Exclusions: Taxes Salaries Direct Imports (where no local production) Monopolistic procurement Separated into Categories: All Suppliers QSE / EME 50% Black-Owned 30 % Black Women-Owned Total Measurable Procurement Spend

B-BBEE and Local Procurement Are they connected? Using the points system in the Codes, Local Procurement is incentivised in the following ways: Procurement from small enterprises is largely local, except when the entities are distributors of imported goods. Similar situation in respect of procurement from 50% black-owned and 30% black women-owned enterprises. Largely, scoring in these elements is driven by outsourcing of services, which are locally produced. Enterprise Development of suppliers (usually small businesses) allows for enhanced recognition in scoring.

B-BBEE and Local Procurement What Impact? There is little data to support the notion that increased scoring in the procurement element of B-BBEE has INCREASED the levels of Local Procurement. It appears that, in the majority of cases, existing companies have “transformed” or purchasing has been switched to more B-BBEE compliant companies. This notion is supported by levels of economic growth, which are not correlated with the increase in scoring in respect of procurement by large corporations. There is a possibility that more small businesses are supplying goods and services, due to the incentive on the scorecard, but there is no empirical data to support this as yet.

B-BBEE and Fronting Is it a problem? Fronting is widespread and difficult to detect. Usually, fronting takes the form of sub-contracting to non-B-BBEE compliant companies by entities that win business in the private and public sectors. There is also a tendency for black BEE partners to get into contracts that are not to their advantage with severe limitations on economic benefit which is even harder to label as fronting as they would have agreed to the terms, even if they are not in the spirit of BEE There is a lack of will for fronting to be actively reported by B-BBEE Verification agencies as the allegations are grave and not easily proved, especially where contracts are involved.

Are there any real differences? An overview of all the Sector Charters and how they advance the BEE and Local Procurement objectives Are there any real differences?

Sector Charters and Codes Similar in nature to the Codes by design The following Sector Codes have been gazetted: ICT Property Chartered Accountancy Transport Forestry Construction Tourism The following Sector Charters have been gazetted: Financial Sector Agriculture Marketing, Advertising and Communications

Sector Charters and Codes Similar in nature to the Codes by design Given that the charters/codes are required to explain any deviations from the Generic Codes, there is little differentiation in this regard in all sector charters/codes. This indicates that the role-players find the current procurement mechanisms to be palatable. There is very limited data available on performance in these sectors as most of the codes are fairly new. Sector Charter and Sector Code Councils will be primary sources of this data.

General experiences with B-BBEE and Recommendations What has worked and what has failed?

General Experiences Where has B-BBEE worked Creation of larger middle class of increasingly diverse racial composition Creation of increased (if still limited) diversity in the workplace Incentivised creation of initiatives to support small business Why? Businesses have driven compliance from a competitive point of view. Exposure to state scrutiny of practices. Moral imperative (limited influence)

General Experiences Where has B-BBEE failed Poverty alleviation Job Creation Economic Growth Why? Scorecard system drives “compliance” behaviour as opposed to performance Limitations of ancillary imperatives (education, access to economy). Too much focus on ownership element. Global economic turmoil.

Recommendations What can work to drive B-BBEE and Local Procurement? Skills Development, combined with Local Content Procurement and Enterprise Development initiatives MUST become the focus of B-BBEE. Clear methodology for calculation of “Local Procurement” must be promulgated. The current SABS technical standard is insufficient. Specific and targeted measures of industrialisation must be introduced and credit given to companies for facilitating this. Focus must be removed from Ownership as a separate element and integrate this measure into Local Procurement measures. Collaborative interventions in strategic development areas (EG: Infrastructure Development, Pharmaceuticals, ICT, etc) must be optimised.

End - Thank You