Portfolio Committee on Trade and Industry Local Procurement Colloquium 18 August 2016

OVERVIEW Background Objectives Position Challenges Possible Solutions

1. Background The Manufacturing Circle is the voice for South African manufacturing. Our purpose is to promote the interests of manufacturers to enable job-rich growth in the South African economy. 

Background 40 significant manufacturers are members to include Actom, Aerosud Aviation, Air Products South Africa, Altron, Amka Poducts, Apex Cordset Technologies, Arcelormittal South Africa, Aspen Pharmacare, Columbus Stainless, Consol Glass, Denel, Frigoglass South Africa, Hulamin, Kaytech, Kansai Plascon, Mpact, Multotec, Macsteel, McCain, Melco Conveyor Equipment, Nampak, Pelchem, PEP Clothing, PG Group, Pioneer Foods, Robor, Sappi Southern Africa, Scaw South Africa, Tiger Brands and Weir Minerals Africa.

2. Objectives Our perspective on the importance of local procurement by government in particular its impact on stimulating local manufacturing and local value chains to achieve IPAP objectives. Our position on whether technical support for localisation is appropriate, and how business perceives the use of local content verification to ensure compliance with minimum local content thresholds. Our insights regarding challenges and possible solutions.

3. Position We firmly support the view that industrialisation is critical in driving economic growth. We further believe that one of the key levers to industrialisation is local procurement. Notwithstanding Legislation prescribed by the Preferential Procurement Policy Framework Act (PPPFA) 2000, we maintain that local procurement by the public sector is not always sufficiently complied with or monitored.

4. Challenges Position of the dti Objectives of the dti and public procurement entities not always aligned. The dti is the custodian of local procurement but does not have the mandate of enforceability. Large number of public procurement entities, not all of which have an understanding of the PPPFA legislation and requirements to comply.

Specifications for capital equipment 4. Challenges Technical complexity Specifications for capital equipment For example, in the rail sector, cast train wheels for freight are designated, whereas the substitute product (forged train wheels) is not designated as nobody produces them in South Africa.  The products are essentially and in most cases interchangeable on freight wagons yet there is a loophole to import as many forged train wheels without infringing on the local designation.  This has had a significant impact on the casting division of one of our members.

Identification of designated items 4. Challenges Technical complexity Identification of designated items Rolling stock axles (now fully designated) should be identified when imported fitted to locomotives or freight wagons.  Many designated or dutiable products are still being imported as part of “Staged Consignments” or buildings are imported as “Food processing plant”, for example.

Procurement decision making structures on projects 4. Challenges Technical complexity Procurement decision making structures on projects For example, in the construction sector, private sector companies (contractors and consultants) are mandated to make procurement decisions on behalf of a public sector client (for instance the Department of Public Works [DPW], acting on behalf of the Department of Health for the construction of various hospitals). One of our members notes inadequate knowledge and capacity within the DPW to communicate to its contractors (and consultants) the importance of locally manufactured product and the fact that this is mandated by the PPPFA. This resulted in the loss of supply of locally manufactured product to various hospitals, in favour of imported product

4. Challenges Competition We have also witnessed instances where motivation for a designated product has been difficult, due to perceived lack of competitiveness from a pricing point of view in the event of a single local supplier For example, one of our members is the only producer on the continent of a specific product which is also supplied by international manufacturers. Our member sources the materials for its product from three local upstream suppliers, all of which would benefit from a designation initiative.

5. Possible Solutions: Public Maintain the position of the dti in mandating local procurement objectives We note that the notice by National Treasury regarding draft amendments to the PPPFA Regulations, 2016, proposes that designation of a sector, sub sector or industry is by the National Treasury, after consultation with the dti. The current regulations mandate designation by the dti. We motivate that the Regulation is not amended as proposed, as this would in effect reduce the role of the dti. The dti has a comprehensive understanding of the complexities involved in designation, and we feel it important that its role is maintained

5. Possible Solutions: Public Strengthen the position of the dti in mandating local procurement objectives We suggest that a percentage of procurement budget is allocated to the dti to allow it to compensate for scenarios where the pricing of a locally procured product is higher (within a given percentage range) than an imported substitute. This would allow for the commercial incentivisation of local procurement decisions.

5. Possible Solutions: Public Involve the private sector and technical expertise in communicating the public sector’s local content commitments as legislated by the PPPFA For example, the Southern African Institute of Steel Construction (SAISC) has made significant progress over the past three years by working together with Eskom to ensure the dti’s designation of steel power pylons and powerline hardware is understood and adhered to. SAISC’s message is that  achieving designation is just the start of a lot of work to ensure implementation

Possible Solutions: Public Involve Institutions in monitoring compliance For example, the Southern African Clothing and Textile Workers' Union (SACTWU) has been involved in a State procurement advocacy programme over more than 10 years, to communicate tender information and compliance to industry and government Introduce punitive measures in the event that compliance does not take place by involving the Auditor-General of South Africa

Possible Solutions: Public Increase awareness both within the public and private realms of the economic importance of local procurement, the existence of the PPPFA and the importance of compliance For example, the dti, the State Owned Enterprise Procurement Forum (SOEPF) and the Manufacturing Circle is hosting an information session in September aimed at the private sector to communicate the importance of local content procurement, the mechanics of the PPPFA and successes achieved by SAISC and SACTWU in compliance and monitoring.

Possible Solutions: Private We acknowledge that there has been insufficient local procurement within the private sector. We attribute this in part to a lack of understanding of the importance of local procurement and the benefits to our economy with regard to the ‘multiplier effect’. There is an absence of a strong campaign and lack of strong private sector leadership / voice in this regard.

Possible Solutions: Private As a means to address this issue, the MC, through Proudly SA, has commissioned an economic analysis of the benefit of the economic multiplier generated by local manufacture. The analysis aims to quantify the benefit in order to inform a price premium that could be assigned to locally produced product. This, in turn, could inform the suggestion of a local procurement incentive administered by the dti, as noted.

www.manufacturingcircle.co.za philippa@manufacturingcircle.co.za