Procurement and Localisation / Designation of Sectors

Presentation to the SMME Summit

10 October 2013

Tebogo Makube (Ph.D)

• Economic challenges facing South Africa and the role of the IndustrialPolicy Action Plan

• Rationale for the Designation of Sectors, Industries and Products• Calculation of Local Content and Procurement Process• Industrial Finance, Incentives and Special Economic Zones

Purpose

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RSA: Manufacturing challenges & the need for designation

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In recent years, South Africa South Africa has been posting trade deficits primarily due to deterioration in commodities exports, high imports of fuel and high value added goods. The trade deficit amounted to R19.05bn in August 2013.

Manufacturing contribution to GDP (%)

Source: DTI, SARS, SARB Databases

Value and Supply Chain Linkages

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Background

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• The NGP and IPAP identify the need to leverage publicprocurement

• Many sectors targeted in IPAP will depend on leveragingpublic expenditure for industrial development

• Public procurement is a strategic instrument widelydeployed by developed and developing countries to:

– Enhance and smooth out certainty of demand over the years– Promote competitive industrial capabilities with high

employment and growth multipliers– Diversify the economy towards more employment-intensive

and value-adding activities– Ensure value for money for the fiscus and society

Arguments in favour of designation

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• Leveraging public expenditure

• Supporting economic growth and creation of job opportunitiesin the country

• Attracting new investments (in particular, foreign directinvestments)

• Reducing South Africa's trade deficit

• Overall savings due to lower impact of currency fluctuation(owing to high local content) and faster response time tovarying demand.

The importance of local production and content

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• Goods and services bought from abroad – represents an outflow of funds from South Africa (reduces AD & local AS) – import spending is recorded as negative

• Goods and services sold abroad – represents a flow of funds into the South African economy (raises AD & local AS)

Reform of the PPPFA

• Preferential Procurement Policy Framework Act (PPPFA) was enacted in2000, and its Regulations promulgated in 2001

• The Regulations were amended in 2011 and new regulations came intoeffect 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 manufacturedproducts with a prescribed minimum threshold for local production andcontent will be considered

• Regulation 9 (3) prescribes that “…where there is no designatedsector, an organ of state may include, as a specific tenderingcondition, that only locally produced services, works or goods orlocally manufactured goods with a stipulated minimum threshold for localproduction and content, will be considered, on condition that suchprescript and threshold(s) are in accordance with the specificdirectives issued for this purpose by the National Treasury inconsultation with the dti”. 8

Reform of the PPPFA

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• Amended PPPFA Regulations and Instruction Notes for DesignatedIndustries/Sectors are applicable to all:– National and Provincial Departments;– Constitutional Institutions;– Public Entities listed in schedules 2 and 3 of the PFMA; and– Municipalities and Municipal Entities to which the MFMA applies.

• Bids i.r.o. designated sectors must contain a specific bidding condition thatonly locally produced or locally manufactured goods, works and services with astipulated minimum threshold for local production and content will beconsidered.

• Bids in respect of Textiles, Clothing, Leather and Footwear (TCLF) mustcontain a specific bidding condition that only locally produced or locallymanufactured (TCLF) from local raw material or input will be considered.

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Designated sectorsIndustry/sector/sub-sector Minimum threshold for local content

Buses (bus body) 80%

Textile, clothing, leather and footwear 100%

Power pylons 100%

Canned / processed vegetables 80%

Rolling stock 65%

Pharmaceutical products

(oral solid dosage tender)

73%

Set-top boxes for TV digital migration 30%

Furniture

• Office Furniture • School Furniture • Base and Mattress

• 85% • 100% • 90%

Power and telecom cables 90%

Solar Water Heaters (collectors and storage

tanks/geysers)

70%

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Local Content Calculation Formula

“Local Content” means that portion of the tender price which is not included in the importedcontent, provided that local manufacturing does take place within the borders of South Africa(SABS approved technical specification SATS 1286:2011)

• Prices referred to in the determination of X must be converted into Rands(ZAR) by using the exchange rate published by the SARB at 12:00 on the dateof advertisement of the bid

Invitation of Bids

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AOs/AAs must clearly stipulate in the bid documentation all the relevantdocumentso Standard/Municipal Bidding Documents (SBD/MBD 6.2)

o Annex C: Local Content Declaration (Summary Schedule) If the bid is for more than one item, local content percentages for each

product contained in Declaration C must be declared and usedo Annex D: Imported Content Declaration (Supporting Schedule to Annex C)o Annex E: Local Content Declaration (Supporting Schedule to Annex C)o SABS approved technical specification - SATS 1286:2011o DTI’s Guidance Document for the Calculation of Local Contento Bid evaluation and award

Two stage evaluation process- First stage: Local content and functionality (if applicable)- Second stage: Preference point system - BBBEE and price

Rail Rolling Stock Opportunities

Highlights of Public Sector Infrastructure Projects

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Energy Road transport Water

• Sentech’sdigitalization of television terrestrial network

• Layout of broadband network

• SANRAL to spend R32.9 billion on roads improvements and R2 billion on coal haulage roads

• Public transport networks to begin in Tshwane, Rustenburg and eThekwini

• Komati scheme to be completed 2013

• Municipal allocations of R44.5bn for water infrastructure

• Dam completed on Olifants river, reduced scope on bulk distribution

Education

• Medupi and Kusile: delays in construction, first units expected in 2014 and 2015 respectively

• 2 460MW of renewable energy procured in the first two bidding rounds

Human settlements

• R31.9bn allocated for basic education

• R6.5bn allocated for higher education

• Preparatory work on two new universities funded by fiscus

Health

• Feasibility studies for five major hospitals

• R29.5bn to be spent on district hospitals

• R5bn to be spent on primary health care including R3.2 billion for clinics

• R84.3 billion to be spend on low-income housing and upgrading of informal settlements

• R2.9 billion allocated for special economic zones

Telecommunications

• Trunk line on new multiproduct pipeline complete, construction of terminals to be completed in 2013

• Ongoing oil and gas exploration on west coast

Liquid fuels

Source: PICC, Budget Reviews

• To improve service delivery, increase the capacity and efficiency of the economy, government will invest R827 billion in infrastructure over the MTEF

• Continued implementation of the national infrastructure development programme will lead to robust public sector fixed capital formation, forecasted to grow at an average of 9% in the MTEF

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MP: Budgeted Payments for Goods, Services, Machinery and Equipment

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16Revised

estimateGoods and services 5 296 662 5 634 258 6 020 768 6 556 724 6 572 347 6 950 049 7 365 921 Buildings and other fixed structures 1 776 901 1 615 493 1 990 378 2 336 762 2 408 640 2 374 961 2 033 321 Machinery and equipment 234 897 265 549 361 350 301 860 264 729 243 081 299 493 Software and other intangible assets 10 401 13 374 931 28 648 1 233 19 425 24 007 Total 7 318 861 7 528 674 8 373 427 9 223 994 9 246 949 9 587 516 9 722 742 Year-on-year growth (%)Goods and services 6.4% 6.9% 5.1% 0.2% 5.7% 6.0%Buildings and other fixed structures -9.1% 23.2% -1.7% 3.1% -1.4% -14.4%Machinery and equipment 13.0% 36.1% -1.2% -12.3% -8.2% 23.2%Software and other intangible assets 28.6% -93.0% 12.5% -95.7% 1475.4% 23.6%Total 2.9% 11.2% 3.1% 0.2% 3.7% 1.4%Source: National Treasury Provincial Database

Economic classification (Rm)Audited Medium-term estimates

Description

LP Tactics Matrix • The Local Procurement strategy

integrates the business case, demand-side analysis and supply-side analysis to identify strategies to increase sourcing from local suppliers

• Local procurement targets and action plans are specific deliverables

Developing local procurement strategy

Reform of the PPPFA

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Key policy objectives Focus areasIndustrialisation Leveraging procurement spend to foster

industrial and competitive capabilities in the South African economy

Localisation• Country• Province/Municipal• Site/Operation

Utilisation of procurement spend to develop South African based suppliers (integrating B-BBEE and Black Owned suppliers)

Skills development Increasing the skill base (number and skill level) of South African workers, especially in areas where there is a national scarcity of skills

Employment and job creation Creation of new jobs directly and indirectly by suppliers in the value chain

Enterprise and supplier development programmes

Providing a platform for SA-based suppliers to develop into national and international suppliers, through Capability, Capacity & Competitiveness development

Incentive Schemes managed by the dti

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CLUSTER INCENTIVE SCHEME

BROADENING PARTICIPATION

• Black Business Supplier Development Programme (BBSDP)

• Co-operative Incentive Scheme (CIS)

COMPETITIVENESS INVESTMENT

• Sector Specific Assistance Scheme (SSAS)• Export Marketing & Investment Assistance (EMIA)

MANUFACTURING INVESTMENT

• Manufacturing Investment Programme (MIP)• Capital Projects Feasibility Programme (CPFP) • 12i Tax Incentive• Automotive Incentive Scheme (AIS)

SERVICES INVESTMENT

• Film & Television Production • Business Process Services (BPS) • Tourism Support Programme (TSP)

INFRASTRUCTURE INVESTMENT

• Critical Infrastructure Programme (CIP) • IDZs

Industrial Financing

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Manufacturing Competitiveness Enhancement Programme(MCEP)

• Budget allocation of R5.8bn over the 2012/13 MTEF

• Manufacturing support response to companies impacted bystructural and cyclical economic changes

• Deployed towards upgrading competitiveness of labourintensive and value-adding manufacturing sectors

• Grant finance with clear rules-bound access criteria

• Maximise employment and value-added potential in keysectors

• Exclusions: sectors with dedicated support programmes

IPAP: 2012/13-2014/15 Strategic Priorities

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Special Economic Zones (SEZ’s)

• Budget allocation of R2,3bn over MTEF forSEZ’s

• Promote creation of a regionally diversifiedindustrial economy

• Establish broader range of industrial parksand infrastructure for effective clusteringand hubs

• A dedicated and integrated legislativeframework to enable effective regulationand management

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