Eustace Mashimbye is the chief executive of Proudly South African.
Eustace Mashimbye is the chief executive of Proudly South African.

ProudlySA: How the actions of a single company threatened an entire sector

By Opinion Time of article published Sep 17, 2020

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By Eustace Mashimbye

JOHANNEBSURG - In July this year, the law around the designation of certain items, which are mandatory for government entities to procure from local manufactures under the Preferential Procurement Policy Framework Act (PPPFA), was tested in the high court in Pretoria and a judgment in favour of the Minister of the Department of Trade, Industry and Competition (the dtic) was delivered.

We celebrated the victory, but simultaneously shuddered at the thought of the consequences had the judgment gone the other way.

Electrical transformers are one of 27 items that have been included in a list compiled since 2011 by the government as products which all government departments or agencies must procure from local manufacturers.

This means that a clause around local content provisions must be included in the tender or request for proposal documents in order to ensure that imported items will not be supplied to the procuring government entity.

Transformers carry a 90 percent local content threshold meaning that only 10 percent of the order can be procured from outside the country or from a local supplier that has imported the specified item.

In 2018, a government entity issued a tender for transformers and in response received a request for exemption from the localisation clause by one private company that wished to bid. The private company cited a lack of capacity to produce these transformers locally and they were seeking relief from the relevant Ts&Cs.

The dtic declined the request, claiming that even if this specific company did not have capacity, others did. That is the point of designated items and sectors – they have been identified as ones that are able to fulfil local demand.

The applicant challenged the dtic’s rejection of its request for exemption on the grounds that it was irrational and unconstitutional, but the dtic countered that it was exercising its discretionary power and enforcing a government policy.

Having considered the arguments, the court where the case ended up held that the dtic, as the delegated custodian of the local content regulations and resultant designations, had acted in accordance with its own policy and that the information it had regarding the industry's capacity to produce the item in question was based on a proper sectoral review, and that the decision of the dtic was therefore rationally related to the purpose sought to be achieved by the PPPFA regulations.

Accordingly, the court held that the decision of the dti was rational, lawful, reasonable and procedurally fair. Further, that the applicant failed to satisfy the court that an order reviewing and setting aside the decision of the former minister should be granted in its favour.

The court thus made the order that the application for the review and setting aside of the decision of the minister to refuse the applicant's exemption in respect of transformers should be dismissed with costs.

Had the court granted the order sought, it would have meant that the applicant in this case and many other companies that request exemption from local content requirements, would be able to procure transformers, or any of the other 26 designated items, or raw materials required to manufacture them, from overseas suppliers, notwithstanding the fact that there are local companies that have the capability and capacity to produce locally.

The PPPFA is one of the government's measures to protect the domestic market and jobs and had the court made a different ruling it would have been seriously detrimental to the government's efforts to support and promote local industry and the creation of jobs through its localisation policy.

What this whole story, with a happy ending for the buy local campaign, shows is what the behaviour of one private sector player could have done to an entire industry that is already largely depending on the government's support for survival.

In addition, and by extension, a different outcome would have set a dangerous precedent and damaged other industries that are also designated, if another private company chose to take the same stance as the one in this case, relying on this judgment and using precedence to claim exemption from local procurement requirements.

Proudly South African has a tender monitoring system, which ensures that any tenders that fail to stipulate local content where it is required to do so under the PPPFA are referred to the dtic for remediation.

Since it was launched more than two years ago, we have seen compliance levels remain at unsatisfactory levels, which calls for urgent consequence management measures to be enforced over and above those included in the Auditor-General’s Act which seeks to deter state officials from committing material irregularities as a result of non-compliance with the regulations.

So, as much as we can find serious flaws in the government's tender processes, the private sector is not without its faults in seeking to circumvent clauses which are intended to benefit local industry.

We need to think broadly as business, whether entrepreneurial enterprises or as medium to large companies, in order to stop limiting our interests to those which will benefit our individual business only, but to think of the entire economy, value chains in the industry and the multiplier effect that local production and procurement can have on retaining and creating jobs and lifting many out of persistent poverty.

As Mama Letta Mbulu says in her classic song Not yet, Uhuru, the struggle continues for many of our people who are yet to be freed from the shackles of unemployment, hunger and abject poverty. We all have a role to play in this struggle.

Eustace Mashimbye is the chief executive of Proudly South African.

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