Government has named the "first wave" of products that will require a minimum level of local content in terms of the Preferential Procurement Policy Framework Act, which came into effect on Wednesday.

The list of designated products include power pylons, rolling stock, buses, canned vegetables, clothing, textiles, footwear, leather products and set-top boxes and comes against the background of the recently unveiled ‘Local Procurement Accord’, which commits business, labour and government to increase local procurement.

Further designations would follow in 2012.

Trade and Industry Minister Rob Davies told Engineering News Online that the minimum level of local content would differ on various levels between sectors and products.

The designations are not intended to take the place of, but rather support other efforts by government institutions, particularly State-owned enterprises (SoEs), to encourage local procurement and supplier development strategies.

This includes ongoing mobilisation within SoEs to introduce localisation and supplier development into the procurement process under the direction of the Public Enterprises Minister.

Further, the new regulations enable all organs of State to include as a “specific tendering” condition that only locally produced services, works, goods or locally manufactured goods with a stipulated threshold for local production and content be procured, Davies said.

The amendments to the Act were was one of several interventions reflecting the confidence in the future of the country’s manufacturing industry.

He added that the designation instrument served to strengthen public procurement in support of the multipliers derived from reducing the trade deficit, strengthening and diversifying the country’s industrial base, and to build up competitive value-adding exports to the rest of continent, high-growth developing economies and traditional export markets.

Where relevant, the designations also set out specific recommendations for ensuring competition among domestic producers and value for money for the State.
“We wish to reiterate that all procurement officers are under obligation to secure the most cost competitive prices for products which fall in designated sectors,” Davies said.

However, government also retained the right to ‘undesignate’ sectors, where there is no progress with respect to co-commitments by manufacturers and/or where any anti-competitive behaviour takes place.

Davies warned industry to support and create jobs, and not seek “abnormal rates”.

Economic Development Minister Ebrahim Patel said the designations sought to strengthen competitive pricing, eliminate collusive and unethical practices and to also extend value chains to other sectors.

National Treasury issued a guideline to all public institutions on the clauses of the new regulations, and a two-stage process to evaluate the bids for designated sectors would apply.

First-stage evaluation is on the basis of functionality, if applicable, and local content, and second-stage evaluation is on the basis of broad-based black economic empowerment (BBBEE) and the price on which price negotiations can be conducted with a preferred bidder.

Law firm Webber Wentzel said the new regulations were more closely aligned with BBBEE, and addressed some of the concerns raised by both the courts and business relating to functionality and how it relates to price.

Webber Wentzel partner Achmat Toefy said the regulations were a step closer to driving economic transformation, empowerment, technically sound delivery in a fair and effective manner and routing out fronting.

The new preferential procurement regulations would now require that all entities, if they wish to qualify for preferential points when bidding for work from the State, would need to be rated by accredited rating agencies in terms of the BBBEE codes and businesses would need to be in possession of a valid rating certificate reflecting such rating.

“This does not apply to smaller entities falling below a particular threshold and they will be given an automatic rating score. However, such entities will need to be rated if they seek to achieve a better rating than the assumed score,” explained Toefy.

A second notable issue was that there might be many private entities that were not yet rated and which had also not made sufficient plans to be rated. Such entities were unlikely to be completely disqualified from bidding processes, but they were however unlikely to qualify for preferential points until they are rated, he added.

“This will result in some bids being awarded to somewhat less transformed entities that would not have won the tender had more transformed entities been duly rated," Toefy said.

He added that the key amendment in respect of functionality was that it might no longer be scored as part of the points, which have in the past been allocated to price.
“Now functionality (or quality of the bid) is seen as a gateway mechanism where bidders must obtain a minimum score for functionality in order to remain in the bidding process and thereafter to be scored for price and BBBEE considerations.”

Toefy added that the more stringent rating process to be conducted by accredited rating agencies would go a long way towards improving the integrity of procurement by the State in general.

“Of course, this does not mean that corruption and fronting will be completely eliminated, but it should be reduced with the implementation of the new preferential procurement regulations.”

Meanwhile, Davies told Engineering News Online that the alignment of small and medium-sized enterprises (SMEs) to the Act was still pending.

But, he believed that there were many opportunities through the new designations and sectors to create job opportunities, through which the SME sector could benefit.

“We believe there will be major opportunities for the SME sector to engage in industrial policy,” he added.

Further, Davies believed that the amendments enabled South Africa to be in a position to “ride the next wave of an industrial revolution”, which would be developed, driven and transformed by the development of a green economy.