PRESENTATION TO PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY FOLLOW-UP MEETING ON LOCAL PUBLIC PROCUREMENT 1

The Competitive Supplier Development Programme (CSDP) has the objective of leveraging State Owned Companies (SOC) procurements for development and transformation. The CSDP involves: The SOC systematically planning and executing procurements to promote investment in plant, skills, and technology and the development of new capabilities in existing, emerging and new suppliers so as to drive the growth, industrialisation and transformation of the economy. The systematic alignment of broader Government policy and mobilisation of resources to support and incentivise the supplier development and transformation process. CONFIDENTIAL

Objectives of the CSDP To promote investment and the development of internationally competitive capabilities in supplier sectors to the SOC’s capital and relevant operational spend, with the aim of: Reducing costs through increasing efficiencies. Reducing dependency on imports and foreign exchange exposure. Developing niche export areas. CONFIDENTIAL

The Programme is measured against a number of Key Performance Indicators. INDUSTRIALISATION Local Content Technology Transfer Skills Development Investment in Plant Small Business Participation (QSE/EME) Job Creation Export Promotion TRANSFORMATION BBB-EE spend BWO spend BO spend Disability spend Black Youth Owned spend These indicators and associated targets are included in the Shareholder Compact for both Transnet and Eskom CONFIDENTIAL

Challenges - The Preferential Procurement Policy Act (PPPA) Historically, the SOC reporting to the DPE, as Schedule 2 Public Entities in terms of the Public Finance Management Act (PFMA) were not bound by the Preferential Procurement Policy Framework Act (PPPFA) and its Regulations as they were excluded. The SOCs did however incorporate many of the requirements of the PPPFA and its Regulations in their procurement policies and procedures so as to ensure that the underlying concerns of the Act were integrated into SOCs business practice. These include the following ; The provisions relating to tax clearance; Remedies such as supplier suspensions (restrictions) for fraud and corruption, based on internal supplier disciplinary processes; Tender declarations regarding authorization of signatories and fair bidding practices; The treatment of trusts, joint ventures and consortiums as single legal entities for purposes of BBBEE evaluation; Formal differentiation between tender and evaluation prices during formal financial evaluations on price where discounts are considered; and, The application of BBBEE levels of contribution against valid verification certificates as part of tender evaluation. The application of the PPPFA, together with its amended Regulations (in terms of Section 5 of the PPPFA) has now specifically been extended to all public entities listed in Schedule 2 and 3 of the PFMA. CONFIDENTIAL

PPPFA- Challenges relating to Ability to Optimise Supplier Development Objectives There is a problem relating to setting thresholds and the ability to have an appropriately weighted second phase evaluation process relating to the tender and broader economic development objectives. The PPPFA requires that a minimum threshold is set for local content (in the case of designated sectors the minimum is determined by the Department of Trade and Industry) and those tenderers who meet the minimum threshold will then be subjected to the 90/10 preference point system. The 90/10 principle (90 referring to the price and 10 referring to the developmental objectives ) is restrictive thus defeating Supplier Development objectives CONFIDENTIAL

PPPFA - Challenges relating to Ability to Optimise Supplier Development Objectives … Continued The definition of local content in the Regulations is problematic. In addition, as mentioned above, local content is calculated narrowly as a percentage of the bid price. This excludes non local content related to development areas such as the number of local people trained, new investment in plant, technology transfer processes, sub-contractor qualification and upgrading processes, export off-set obligations, job-creation etc. Supplier development and industrialisation is a multi-dimensional process that takes place through time and requires the procuring organisation to have flexibility in providing preference to different developmental areas depending on the competitiveness of a national sector and the scope and scale of a procurement. CONFIDENTIAL

PPPFA and Broad Based Black Economic Empowerment The PPPFA requires that the SOC adhere to the B-BBEE scorecards in measuring the empowerment performance of tenderers in the procurement process and use this score as part of the 10 points in the 90/10 evaluation process. In certain instances, aside from the developmental benefits, the SOCs have business imperatives to ensure that “local to site” development takes place in projects that are located in rural areas. Failure to involve local communities in the project through job creation, skills development and small business development programs can place the execution of the project at a substantial risk. This concern is not recognized in the B-BBEE scorecard and would not be given adequate weight based only on a 90/10 preference point system. Fleet procurements are long term in nature that can enable both the qualitative development and transformation of a sector. Given the long term nature of the process, there is a need to incentivize tenderers on their present empowerment performance and on future initiatives. Hence, there is a need for “Further Recognition Criteria” that would allow the SOCs to measure and reward future commitments by tenderers in this regard. CONFIDENTIAL

OTHER CHALLANGES DTI incentives are only earmarked for the private sector and SOCs are not entitled to these incentives. However, it would be more beneficial if these were extended to SOCs as well given their developmental mandate which is often not funded. Funding for projects that requires radical transformation remains a challenge as funders continue to require more stringent conditions to access funding e.g. security and guarantees. Compliance is cumbersome and expansive for small companies and there is a need to simplify the procurement process if we are to build an inclusive economy. Need to embark on an educational drive prior to execution of project(s) in order to enable people and communities to position themselves for these procurement opportunities. CONFIDENTIAL

Eskom and Transnet Supplier Development Regardless of current challenges with the PPPFA both Eskom and Transnet procurements continue to be leveraged for skills development, job creation and preservation, Intellectual Property transfer, the localisation of supply and industrialisation through contractually obligated supplier development plans

Transnet Supply Development Since inception of the Programme Transnet Supply Development obligations that have been committed are as follows: Local Content R30.8 billion Skills Development R4.6 billion Investment in plant R4.9 billion Jobs created R2.9 billion Jobs preserved R3.9 billion Industrialisation R 6.4 billion Small Business development R3.8 billion Rural development R0.4 billion Technology and IP transfer R0.7 billion Other initiatives R2 billion CONFIDENTIAL

Eskom Supply Development Since inception of the Programme Eskom Supply Development obligations that have been committed are as follows: Localisation R116.89 billion BBBEE Suppliers R596 billion Black Owned Business R170 billion Black Women Owned R58 billion Black Youth Owned R5 billion Small Medium Enterprises R 63 billion CONFIDENTIAL

The Industrialization Supplier Development Association (ISDA) Communication between SOC and their suppliers is important. Feedback from the industry in terms of what is working and what is not is also crucial. Consequently the Department Established the Industrialization Supplier Development Association (ISDA) with these objectives in mind. CONFIDENTIAL

ISDA Pillars Supplier Development and Localisation Support existing local industries, develop new industries and create sustainable security of local supply Create local and global competitiveness and avail access to benchmark tools for suppliers Create and maintain a supplier database, enlist supplier skills, competiveness, innovation and accreditation Partner with local and international Development Finance Institutions (DFIs) to efficiently support existing and new industrialists Support and enable local suppliers to adopt global manufacturing best practice Transformation Provide access to information, funding, markets and infrastructure to support emerging suppliers Monitor, report and discourage anti-competitive behaviors in SOCs such as fronting, collusion, and window-dressing Stakeholder Management Become a trusted adviser to the Minister of Public Enterprises and State Owned Companies Consult and represent the interests of all ISDA members and categories CONFIDENTIAL

THE ISDA IS STRUCTURED TO REPRESENT ALL CATEGORIES OF SUPPLIERS Representatives of the ISDA Categories: Category 1: Members of the ISDA Steering Committee – 2 Members Category 2: Global Original Equipment Manufacturers (OEMs) Category 3: Large National Manufacturers Category 4: Small National Manufacturers (SME - QSE/EMEs) Category 5: Designated Manufacturers (Women, Rural) Category 6: Designated Manufacturers (Youth) Category 7: Designated Manufacturers (People with disability) Category 8: Government – 1 Member (DPE) Category 9: State Owned Companies (SOC) – 2 Members (Eskom and Transnet) Other Representatives could include the following; Development Finance Institutions (DFI) Other key Departments (Treasury, EDD, DTS etc.) Other key industries (Mining etc.) CONFIDENTIAL

Conclusion It is recommended that the Committee notes the problems associated with the extension of the PPPFA to the SOC. It is also recommended that the Committee provides support for the review of the PPPFA taking into consideration challenges raised above. The issue of incentives and funding for projects that supports radical transformation should also be addressed. The Committee notes the strides made by the SOC despite the challenges that exist but need to indicate that could be achieved if the constraints are removed. CONFIDENTIAL

THANK YOU