The revamp of South Africa's preferential procurement policy will include "stronger" localisation targets for those State-owned enterprises (SoEs) and government departments pursuing ongoing purchases of capital equipment and infrastructure services, Trade and Industry DDG responsible for industrial policy Nimrod Zalk said on Monday.

But the framework, which was a central component of the second Industrial Policy Action Plan (Ipap2), would not support uncompetitive local industry. Instead, it would seek to facilitate local production through the identification of up to ten areas of ongoing repeat procurement "fleets", from locomotives to power-station components.

Speaking at a Metal and Engineering Industries Bargaining Council function in Johannesburg, Zalk said that there were many misperceptions that government would be providing a price advantage to local manufacturers. However, the thrust contained within Ipap2 was about moving from unstructured procurement practices toward fleet arrangements.

The following areas were, meanwhile, identified as opportunities for the fleet procurement model: municipal buses; locomotives, coaches and carriages for Transnet and the Passenger Rail Agency of South Africa; components for the coal-fired power stations being built by Eskom; systems for the future nuclear build programme; aerospace purchases by South African Airways and the Department of Defence; set-top boxes for digital migration; and the purchases of antiretroviral pharmaceuticals.

The current short-horizon, at times even emergency-style, procurement practices were not only raising the level of imports, but also leading to higher prices.

"We believe that this ad hoc, rather than strategic, procurement gives rise to huge cost disadvantages. In other words, we are getting the worst of both worlds: we are not getting good prices as the State or as SoEs and we are not domestic production," Zalk lamented.

UNIFIED PROGRAMME WITH TARGETS

He also confirmed that the National Industrial Participation Policy (NIPP), which demands offsets worth 30% of the value of government procurement worth more than $10-million, and the Competitive Supplier Development Programme (CSDP), which currently governs Eskom and Transnet procurement processes and insists on a fleet-procurement model, would be combined.

However, the integration of the two offset programmes might not automatically translate to the 30% target being transposed on to the CSDP projects, which had hitherto not included any firm localisation targets.

In fact, the model, which was developed by the Department of Public Enterprises, had specifically eschewed targets, owing to the fact that it wanted Eskom and Transnet to be partners of choice for international equipment suppliers. This had been seen as particularly important, given that the two SoEs had reinitiated their big investment programmes, worth R460-billion-plus and R93,4-billion respectively, at a time when the market for power and transport equipment had been particularly overheated - a scenario that changed markedly once the global economic crisis gained traction in 2008.

"There will targets, but level of specificity and depth is something we need to identify as we review the policy," Zalk said, cautioning that government would not move "back into a situation where we have local ‘content-by-weight' arrangements".

"What I can confirm, though, is that they will certainly be stronger than the current targets that are set under the CSDP," Zalk explained.

The idea would be to formalise "some of the good intentions" of the NIPP and the CSDP through the way SOE and government tenders are drafted - the review of the NIPP and the CSDP should be completed by the end of the second quarter of the 2010/11 fiscal year.

In other words, the idea would be to have a more "strategic pretender process", for those projects over a particular price threshold and/or within the identified strategic sectors.

Under the new model, the offset requirements and opportunities would be built into the tender, rather than the current approach, where these are negotiated one the tender is already awarded.

Ipap2 has identified the following areas for specific focus: metals fabrication, capital and transport equipment sectors; green and energy saving industries; agroprocessing; automotives, components, medium and heavy commercial vehicles; downstream mineral beneficiation; plastics, pharmaceuticals and chemicals; clothing, textiles, footwear and leather; biofuels; forestry, paper and pulp, furniture; cultural industries and tourism; business process outsourcing; nuclear; advanced materials; and aerospace.

LEGISLATIVE CHANGES

Overall, Ipap2, which will seek to facilitate the creation of some 2,5-million direct and indirect jobs, promises greater coordination and standardisation across government and its SoEs in the area of procurement with the aim of creating local industrialisation opportunities around South Africa's R846-billion public investment programme.

But changes would have to be made to the current Preferential Procurement Policy Framework Act to achieve the following objectives:

• Align discretionary points with broad-based black economic-empowerment (BBBEE) codes and local procurement.
• Eliminate "import fronting", whereby small BEE firms are used to supply fully imported goods and services.
• The designation of "fleets" and other "critical industries" for domestic production.
• And, to allow price matching by domestic producers.

"The leveraging of procurement is a very specific focus area for government," Zalk stressed, adding that there was a significant amount of work currently under way to identify the specific localisation opportunities that could help boost South Africa's productive economy.

In fact the main objective of Ipap2, which would run from April 1, 2010, through to March 31, 2013, was to support the larger government thrust of moving towards a "new growth path", which transitions the domestic economy away from the current "unsustainable consumption-driven" growth model, to one that focuses on enlarging labour-intensive productive sectors.

It is premised on stronger coherence between macro- and microeconomic policies in relation to exchange and interest rates; inflation and trade balance imperatives, upscaled industrial financing, the leveraging of procurement to raise domestic production and employment; developmental trade policies, enhanced competition policies; an alignment between skills, technology and innovation policies; and specific sector interventions.