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New industrial offset instrument to include ‘stronger’ targets

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New industrial offset instrument to include ‘stronger’ targets

26th March 2010

By: Terence Creamer
Creamer Media Editor

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While the key thrust of “leveraging procurement” for industrialisation in South Africa hinges on a transition from unstructured procurement practices toward “fleet-type” purchasing arrangements, explicit offset targets will, nevertheless, also be introduced.

In fact, Trade and Industry deputy director-general responsible for industrial policy Nimrod Zalk has confirmed that there will indeed be “stronger” localisation targets for those State-owned enterprises (SoEs) and government departments pursuing ongoing purchases of capital equipment and infrastructure services.

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To achieve this, the National Industrial Participation Policy (NIPP), which demands offsets of 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, are to be combined.

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

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In fact, the model, which was developed by the Department of Public Enterprises, specifically eschewed targets owing to the fact that it wanted Eskom and Transnet to be the 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 be targets, but the 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 supply community can expect more “strategic pretender processes” 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 once the tender is already awarded.

Buy Local, Not Expensive
But government does not want the ‘buy- local’ push, as outlined in the second Industrial Policy Action Plan, or Ipap2, to be about supporting an uncompetitive local industry.

The plan aims to facilitate productive activities around the following fleet procurement purchases: municipal buses; loco- motives, 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.

Government has found that the current short-horizon – at times even emergency-style – procurement practices are 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 getting domestic production,” Zalk laments.

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 aims:
• aligning discretionary points with broad-based black economic-empowerment (BBBEE) codes and local procurement;
• eliminating ‘import fronting’, whereby small BEE firms are used to supply fully imported goods and services;
• designating of ‘fleets’ and other ‘critical industries’ for domestic production; and
• allowing price matching by domestic producers.

“The leveraging of procurement is a very specific focus area for government,” Zalk stressed.

In fact, the main aim of Ipap2, which will run from April 1, 2010, through to March 31, 2013, is 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.

The plan is also 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.

But the lowest-hanging fruit surely lies in the area of procurement, particularly as South Africa girds itself to continue with its countercyclical fiscal policies. This is going to result in higher national and SoE debt as R846-billion is spent on public infrastructure over the next three years. Therefore, every effort should be made to recoup some micro- and macroeconomic upside through the fostering of local productive capacity.

Indeed, even if Ipap2 achieves nothing else, by getting this right, South Africa would have gone some way to pushing back the strong tendency towards deindustrialisation – a feature that has, unfortunately, characterised the last few decades.

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