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Breaking the mould to secure investment, competiveness and employment creation.
August 2020
Abstract A critical review of Local Procurement Policy Levers and the state of Technical Value Chains highlighting those challenges that impede sustainable job creation in South Africa. This is a step towards a performance-based localisation effort to support investment, competitiveness and job creation by strengthening local procurement and supplier development.
Authors Garth Strachan and Max Smeiman ‘Breaking the mould.’ Strengthening local procurement and supplier development – a step towards a performance-based localisation effort which supports investment, competitiveness and job creation.
31 August 2020
Prepared by: Garth Strachan Telephone: 064 903 8828 Email [email protected]
Max Smeiman, Max Smeiman and Associates
Telephone 011 705 2578 Mobile 082 494 7694 Fax 086 631 7831 e-mail [email protected]
Breaking the mould: Strengthening local procurement and supplier development – a step Page | i towards a performance-based localisation effort that supports investment, Revision: Release 1 competitiveness and job creation. 31 August 2020 Approval Version Control
Version Date Comments
D1 31 August 2020 Draft for Review
Breaking the mould: Strengthening local procurement and supplier development – a step Page | ii towards a performance-based localisation effort that supports investment, Revision: Release 1 competitiveness and job creation. 31 August 2020 EXECUTIVE SUMMARY This document provides a high-level context summary of industrial procurement and localisation policy instruments and programmes utilised in other jurisdictions in a range of forms or combination of instruments.
It provides a summary of which of these instruments have been and are utilised in South Africa and in what form. In addition, it provides a high-level assessment of the efficacy and impact of these instruments and provides some of the reasons for the relative success or failure of these instruments. In this section an indicative set of process proposals for taking forward the application of these policy instruments to achieve a higher impact is provided. This will require far deeper and extensive research, stakeholder engagement and collaboration, policy development and programme execution work beyond the scope of this report.
The second, core section of this report, sets out the findings and conclusions of a previous Mining Value Chain Study, utilising this work to craft a roadmap for all the steps necessary to secure the Digitalisation of the Technical Value Chain (TVC), laying the basis for a similar process across other value chains, optimally aligned with Sector Masterplans and with significant relevance for public sector procurement. In particular the document summarises a framework for stakeholder engagement, mobilisation and alignment and implementation as the basis on which to ‘break the existing mould’ or impasse in relation to the efficacy and impact of localisation and supplier development. In other words a process to secure the Digitalisation of the Technical Value Chain creates an innovative, digital ‘platform’ to secure a collaborative effort between the social partners which can move the localisation and supplier development discourse and trajectory onto a higher level to secure measurable impact in the direction of a more performance based, labour intensive industrial effort.
The proposal for this approach is not meant to detract from the need for ongoing localisation policy development and implementation work with respect to the range of other policy instruments set out in the first section of the report, and which lie within the mandate and are the subject of ongoing effort by a range of departments and entities.
The research methodology and research undertaken and the policy and process proposals, including with respect to the section outlining a Digitalisation methodology, are defined and circumscribed by the scope of work for this project.
Breaking the mould: Strengthening local procurement and supplier development – a step Page | iii towards a performance-based localisation effort that supports investment, Revision: Release 1 competitiveness and job creation. 31 August 2020 THE TEAM
GARTH STRACHAN, MSC. PUBLIC POLICY AND MANAGEMENT Strachan has held positions as the Member of the Executive Council, Western Cape Government (Finance and Economic Development); Chief Director Industrial Policy and Deputy Director General, Industrial Development at the Department of Trade, Industry and Competition; Chair of the Board of Trade and Industrial Policy Strategies; an Executive Member of the Minister of Science’s National Advisory Council on Innovation and Acting CEO of the South African Bureau of Standards. Strachan has a Masters Degree in Public Policy and Management from the School of Oriental and African Studies, University of London. Strachan has lectured on industrial policy at a range of tertiary institutions and the United Nations Industrial Organisation (UNIDO) global leaders programme on manufacturing.
MAX SMEIMAN B. ENG (HONS)(INDUSTRIAL), MBA An experienced and dynamic value chain professional with many years of expertise in industrial supply chain environments. He has a passion for strategic value creation within manufacturing, logistics and retail companies, and is regarded as one of the leading supply chain strategists in South Africa. He is a supply chain transformation specialist with significant international experience. He has a B.Eng. (Hons) degree in Industrial Engineering from the University of Pretoria and an MBA from the University of South Africa. He is the CEO of Max Smeiman and Associates, a supply chain strategy group founded in 2004. His focus is on Strategy & Turnarounds for a select group of local and international clients. Previously, he was a main board executive at DNA Supply Chains Ltd, responsible for Strategy & Technology. He has directed engagements for a diverse portfolio of clients, ranging from Automotive, FMCG and Retail to Petrochemical. Max was also responsible for business development in South East Asia with clients in Singapore, Hong Kong, the Philippines and Indonesia.
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Executive Summary ...... 3 The Team ...... 4 Status of Policy Instruments ...... 6 1. Introduction ...... 6 2. Background: Policy Instruments ...... 7 3. The South African localisation policy context ...... 13 4. A South African Scorecard ...... 16 5. Conclusion ...... 27 Breaking the Mould...... 31 6. The 2018 Mining Value Chain Study findings and implications: (9) ...... 31 7. Impact of Procurement Policy Instruments on Value Chain Design ...... 38 8. The implications for localisation and industrialisation ...... 40 9. Leveraging Investment to Fund Localisation Opportunities ...... 43 10. The Need for Data-Driven and Fact-Based Localisation ...... 44 A Structured Engagement ...... 47 11. Developing a Framework for Stakeholder Engagement ...... 47 12. A Roadmap for Localisation Opportunity Mobilisation ...... 47 13. An Integrated Localisation Stakeholder Alignment Approach ...... 48 14. Framework for Opportunity Evaluation, Implementation and Oversight ...... 49 15. The Way Forward ...... 50 Bibliography ...... 53
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1. Introduction
It is argued in this document that local procurement or localisation policies and programmes should not be seen as ‘stand-alone’ instruments. These instruments form one, albeit very important instrument, in a suite of mutually supportive and ‘inter-locking’ industrial policy instruments – sometimes referred to as a ‘toolbox’ for industrial policy. This is an important consideration including with respect to the inclusion of localisation provisions in the Sector Masterplans as one part of the deployment of a broader suite of instruments appropriate to the factors relevant to each sector.
That stated, public sector demand and supply side support measures for industrialisation have been and are still a widely utilised policy instruments in jurisdictions across the world. Most industrial companies depend upon domestic market share to establish their production facilities; production systems; marketing, distribution and brands, and in optimal cases, as a base from which to secure export readiness and entry into highly competitive global value chains and markets. A domestic demand analysis, amongst other considerations will generally also inform investor decisions in any one country, taking into account a range of factors such as the size of the public and private sector domestic market, a competitor analysis, potential sources and long-term certainty of demand. Given the relatively small size of the domestic market in SA, aggregate demand analysis which includes public sector demand is clearly an important consideration for green and brownfield investment decisions. In a chapter entitled ‘Investment Matters: ‘Even a Skilful Cook Cannot Make a Meal Out of Nothing’, Sender, Cramer and Aqubay make the point, amongst many others on the subject, that ‘it is not possible to generate sustained growth, structural change, wage and employment growth, and welfare improvements without raising the level of investment relative to national income (the investment ratio). (1)
Local procurement is therefore unquestionably an important demand side policy mechanism to stimulate investment as well as provide support for existing domestic companies. Optimally designed and implemented it is one component of a complex and inter-connected suite of industrial development demand and supply-side measures and trade instruments. These may include localisation provisions in public procurement; an array of general and specific incentive instruments; a broad ‘mix
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and match’ of financing mechanisms (frequently by development finance institutions - DFI’s); trade measures such as trade agreements and tariffs; infrastructure build programmes; competition and other regulatory measures; Standards and Technical Standards and technology acquisition and innovation support of one kind and another.
As important as public sector procurement is, it is also important to recognise that the purchasing power of the private sector is critical. The procurement, strategic sourcing and supplier development power of large private sector companies across the primary, manufacturing, retail and services sectors is no less significant and, in many ways more important than public sector procurement. This is not only because of the quantum of procurement involved but also because Original Equipment Manufacturers (OEMS) and large domestic firms, across many industrial sectors, are located at the apex of standards, systems and technology intensive value chains supporting Tier 1 -4 suppliers upstream of production and downstream of production - primary, service, retail and manufacturing sectors.
In summary local procurement instruments should not be seen in isolation from the range of other industrial policy instruments set out above and nor should public sector procurement be seen in isolation from private sector procurement and supplier development.
Given this proviso, this document therefore summarises which procurement policy instruments generally make up the ‘toolbox’ of local procurement in other jurisdictions; provides a summary of which of these instruments have been adopted in SA and within its scope limitations provides a high level assessment of the impact of these instruments, summarising the reasons for their success or sub-optimal outcomes and puts forward a limited number of process proposals for taking the work forward.
Most importantly the second section, the core content feature of the document, sets out a proposal for the Digitalisation of the Technical Value Chain and the incremental steps required to ‘break the mould’ towards the achievement of a collaborative, performance-based localisation effort.
2. Background: Policy Instruments
As context for the first sections of this document, it is worth noting that the World Trade Organisation (WTO) protocols on local procurement place restrictions on buy local provisions in legislation and regulation. SA is not a signatory to the World Trade
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Organisation (WTO) Protocol on local procurement and the provisions of the protocol are therefore not binding on SA. However, both the WTO Trade Related Industrial Measures (TRIMS) and Trade Related Intellectual Policy (TRIPS) prohibits the designation of services for local procurement.
It is also noteworthy that many of the local procurement provisions of the WTO may be more honoured in the breach than the observance. For example, the Buy America Acts, contain significantly strong local content provisions for all US rail (Amtrak), ports, airports and other infrastructure. Objections to local procurement programmes in developing countries by multilateral institutions such as the International Monetary Fund (IMF) and the World Bank (WB) probably amount to a ‘do as we say not as we do’ approach by developed, industrialised nations. For example, the US space and defence programs are considered to be the largest local procurement programmes in the world providing massive, decades long and certain demand for American companies in these sectors backed up by significant supply side technology and innovation; financing, export and other support instruments.
Local procurement/localisation instruments: An indicative and summarised suite of instruments is:
Buy local campaigns: These are designed to persuade the public (and in some domestic companies) to ‘buy local’ utilising a wide range of marketing and mobilisation tools. Such campaigns are generally run by ‘independent’ institutions, (Buy America, Buy Australia etc) and generally funded by a combination of the private sector and state funding. In the case of the latter, to create some ‘distance’ between the state and a buy local campaign and as a mechanism to reinforce the national collaborative industrial effort. In general, buy local campaigns rest on changing consumer sentiment and purchasing behaviour to support national interest objectives to raise demand and nurture domestic companies on the ‘journey’ to achieving export capability and an export led growth strategy.
2.3.1 As important as these public campaigns are, they have generally generated mixed results because of the difficulties associated with changing consumer behaviour towards acceptance of buying locally produced products above other considerations of price competitiveness, quality; branding and technology capabilities. The exceptions to this appear to be where ‘middle- industrialisers’ such as South Korea were able to ride the wave and engender
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an overwhelming and over-riding national sentiment to support locally produced products. Public sector legislation and regulation which enforces local procurement and ‘set- asides’ for local companies of one sort or another, in some instances in combination with other policy objectives such as indigenous population, race and gender preference arrangements. The Buy America Acts described above provide a clear example of strong provisions which ‘applies to all US federal government agency purchases of good valued over the micro-purchase threshold, but does not apply to services.’ (2)
Public sector strategic sourcing and supplier development initiatives are most often implemented by government and State Owned Entities (SOE’s), where the quantum of procurement over an extended period of time, especially for large capital, ‘fleet’ procurement, enables support for local manufacture in discreet value chains such as rail and transport capital goods and maintenance; energy infrastructure and equipment supply and maintenance; aerospace and defence supply and maintenance and ports infrastructure capital goods and maintenance.
2.5.1 Reciprocal Conditionalities: It is often the case that governments ‘build in’ other reciprocal conditionalities for local procurement in an effort to avoid what is referred to as ‘featherbedding’ of local companies. This may be the case in large, multi-year infrastructure programmes where domestic demand can be significantly raised through local sourcing which includes ensuring that domestic companies compete with each for supply contracts. Procurement prescripts for example may require the demonstration of international Standards compliance or that products comply with best practice technology applications, at or near the global frontier of technology. In many instances, local procurement and support for domestic champions is negotiated ‘below the radar screen’ in supplier development processes which fall within the ambit of the law including with respect to ‘safe harbour’ provisions in competition legislation. In these instances, strong technology, price, lifecycle cost and capability considerations are very tightly negotiated and are the subject of long-term relationships between the procuring entities and suppliers. Importantly domestic ‘champions’ are forced to compete with each other in key sectors or sub-sectors or products, especially where these involve long term and significant ‘fleet’ procurement. It may also go without saying that the capacity to negotiate the terms and conditions of this form of strategic sourcing and supplier development requires the requisite capacity in
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the procuring entities as well as fail safe mechanisms to prevent corrupt practices. 2.5.2 Digital capacity and capability: Public sector procurement in a wide range of countries has increasingly moved in the direction of the establishment of appropriately capacitated and digitally enabled procurement ‘portals’. Data systems, data management and ‘real-time visibility’ of a wide range of data is utilised to ensure the efficacy of procurement processes; that purchases meet the required specifications and standards; meet competitive pricing and supplier development arrangements and as an important instrument to curtail procurement corruption. In short, these procurement platforms provide the appropriate digitally enabled mechanisms for local procurement, strategic sourcing and supplier development. These portals rest, inter alia, upon the following (set out in detail in the second part of this document.) - The utilisation of product identification, classification and standardisation of a very wide range of products and services - The identification and categorisation of domestic and international suppliers in each value chain - The procurement history and conditional/ reciprocal ‘industrial relationship’ between the state and the respective companies involved. - Linkages to a range of other state regulatory institutions responsible for tax, company registration and so forth. Defence Procurement: Defence budgets in many countries constitute an enormous percentage of state expenditure which invariably includes significant localisation requirements. These programmes generally include a close relationship between aerospace and defence procurement institutions and domestic manufacturing champions in the aerospace and defence sector. It is widely acknowledged that these ‘arrangements’ secure long-term demand support for these companies and optimally often ensure that domestic companies either compete with each other with respect to technology and product capabilities and/or that procurement conditionalities are put in place to secure these objectives. Such ‘domestic champions’ are often the recipients of very significant supply side support measures in the form of technology research; ‘finely tuned’ conditional financing and export support; global partnership development and other support mechanisms. Quantum leaps in technology, perhaps especially in data utilisation and digitalisation of systems have very often been led by
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the defence industry with enormous ‘spill-over’ effects for other sectors of the economy.
Offset and Industrial Participation Instruments; Offset arrangements are utilised in a wide range of countries and essentially provide conditionalities for large state, most often fleet procurement contracts, where overseas companies secure contracts whose value is above a certain threshold. Generally, these require contracted companies to invest in and develop local suppliers; transfer technology and support local production under licence; support and develop the skills required for new business development and provide entry into global value chains which are often controlled by the contracting transnational Original Equipment Manufacturer (OEM.) SA’s National Industrial Participation Programme (NIPP) – discussed below - is a country specific variation of the general application in other jurisdictions.
Private sector supplier development by OEM’s and large industrial buyers is for obvious reasons premised on competitive market principles. Price and capital equipment life-cycle costs inclusive of maintenance and repair and ‘shorter’ supply chain processes and supplier relations.
2.8.1 It is worth noting that South African industrialisation owes much to historical supplier development and localisation in the upstream energy and mining sectors (without for a moment dismissing either the deep-seated structural imbalances that this created in the domestic economy nor the highly deleterious impact of race-based exploitation.) 2.8.2 In many countries private sector programmes are often supported by reciprocal and conditional public sector measures – often described in the literature as support for ‘domestic champions’ – large domestic companies with significant procurement budgets and strategic capabilities to develop and nurture supply companies – for example the capabilities that exist in automotive OEM’s. In other words, a strong relationship may exist between the OEM whose interests are served by local supplier development and national interest concerns where governments wish to develop domestic industrial capacity and capabilities in key value chains. This is the basis for a collaborative arrangement between the private and public sector where complex trade-off’s and robust reciprocal conditionalities, which are often difficult to monitor and enforce are strongly at play. Concessions, licences, contracts and financing. Support for localisation is utilised in many jurisdictions through the medium of definitive localisation clauses in concessions and licences. This includes for example mining and land use licences; large infrastructure contracts; licences to build and operate transport and other
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infrastructure and concessions of various types in which localisation requirements are set out as conditions.
2.9.1 In addition, financing arrangements involving guarantees, DFI financing and a wide variety of supply side incentives are designed to ensure that local procurement is a condition for support. This is often even a condition of DFI funding for contracts in overseas jurisdictions. Standards and Compulsory Specifications: International Standards Organisation (ISO), International Electrical Commission (IEC) standards, a wide range of European, US and sector specific standards, as well as ‘home-grown’ standards such as the South African Bureau of Standards (SABS) standards constitute a ‘voluntary mark’ of accreditation for manufacturing process and product specifications.
2.10.1 It is often erroneously believed that Standards can be utilised as a trade measure to restrict imports. This is not the case within the provisions of the World Trade Organisation (WTO) and the application of standards as a trade measure can invite counter-vailing action from other countries. 2.10.2 However, Standards which are referenced in legislation and regulation as Compulsory Standards (also referred to as Technical Standards) can and are utilised as a strategic trade measure to prohibit sub-standard, illegal and counterfeit products, generally where these involve issues of health, safety and consumer protection. This is important, as successive iterations of the Industrial Policy Action Plan (IPAP) have pointed out because the production of sub-standard goods which do not meet the technical standard requirements, provide producers in other jurisdictions exporting into the domestic market with an unfair advantage over local producers who must meet these requirements – apart from the obvious health and safety concerns. Technology Transfer, Acquisition and Diffusion: In broad terms technology transfer, absorption and diffusion refer to the propensity of countries to purchase and acquire licences and contracts to manufacture at higher levels of value-addition and technology to raise value-added output, productivity and competitiveness in domestic and foreign markets. Industrial development efforts in many jurisdictions are supported by government programmes to support such technology transfer and diffusion. Such efforts may be supported by dedicated technology institutions and capacity, imbedded in tertiary institutions to support design, innovation and product
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and systems improvements – working closely with domestic, technical industry champions possessed of the wherewithal to do so.
3. The South African localisation policy context
The record of state support for localisation and local supplier development, and the will and capability of state agencies to utilise and ‘mix and match’ the suite of demand and supply side local procurement instruments to support the industrialisation effort since 1994, has by all accounts been sub-optimal to poor, with manifestly limited outcomes.
It is argued that this record of sub-optimal outcomes rests inter alia on the following pre-dominant factors:
3.2.1 The absence of the requisite ‘modernised’ capacity and capability in the state. Such limited capacity as has been built, rests on a compliance model. By this is meant that the legislative framework requires regulatory compliance with the relevant legislation; regulations and Instruction and Practice Notes’ issued at regular intervals to national government departments; spheres of government, SOE’s and public sector entities. The compliance-based system on which procurement is based appears to be an out-moded, paper-based system with limited and post facto reporting, visibility and oversight. The system appears to be opaque and does not make use of the enormous ‘buy-time’ data visibility, management and oversight that a data rich, national digital- system could provide. The importance and potential of a digital procurement platform – in this instance the case study of the Digitilisation of the Technical Value Chain – is set out in detail in the second part of this document. 3.2.2 Secondly and as will be illustrated below, the use of local procurement as a policy tool is what can be described as contested terrain in the public service. The absence of policy coherence, programme alignment and implementation of this lever has been mixed at best. Outright opposition to local procurement programmes in government persists, characterised at one extreme of a spectrum as outright opposition to so-called market distortions. The suite of local procurement instruments set out above require a ‘joined-up’ government approach in which disparate government departments with differing constitutional mandates work to the same, in this case industrial development objectives, supporting the implementation of the suite of distinct and appropriate levers to achieve this objective. 3.2.3 The often repeated and well-known diagnostic that government departments, SOE’s and entities have a ‘silo mentality and practice’ applies no less and perhaps even in a more pronounced manner, to localisation. The National Treasury has a
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constitutional mandate for Procurement. Section 217 of the Constitution requires that ‘when an organ of state contracts for goods and services, it must do so in accordance with principles of fairness, equitability, transparency, competitiveness and cost-effectiveness’ (3) However, presumably flowing from the view that industrial development is the sole constitutional mandate of the Department of Trade, Industry and Competition (DTIC) and for the purposes of this paper, local procurement became and is still apparently regarded as the sole responsibility and preserve of the Department of Trade, Industry and Competition – but with a limited legislative mandate and authority – which is enshrined in the legal mandate of the National Treasury. Thus, for example, the localisation instrument that is utilised by the DTIC is Designation, provided for under the 2011/12 amended Regulations of the PPPFA. (3) This requires the DTIC to follow a process for the designation of a sector, subsector or product for local procurement including a detailed economic analysis to a standard template. Thereafter a motivation for local procurement is transmitted by the DTIC Minister to the Finance Minister, who is empowered to consent to or reject the motivation for a Designation. The record of decision demonstrates that this is a cumbersome, bureaucratic process in which National Treasury has on occasion either rejected Designation requests or ‘sat on’ such requests delaying localisation for lengthy periods of time. In short, this example, amongst many others demonstrates that there is not unequivocal intra-governmental policy coherence and dynamic support for localisation, clouded as this matter is in ideologically loaded economic contestation. This posture and practice it is argued, takes no account of the fact that early, middle and late industrialisers ensured (and still ensure) that a strategic national industrial policy framework constitutes the core of national development policy, around which all other policies and programmes gravitate. This applies no less to the need for a coherent, binding framework for the localisation effort – captured in different forms and instruments - summarised in the first section of this report. 3.2.4 In the view of the authors, the relevant legislation – the Public Finance Management Act (PFMA) and the Preferential Public Procurement Finance Act (PPPFA) are inimical to local procurement programmes which require strategic supplier development, demand planning and smoothing and the concurrent deployment of other supply side instruments to support domestic champion companies. Imports have often trumped locally produced products in state procurement process where Black Economic Empowerment (BEE) criteria are misused for this purpose, even as the possibility exists of an alignment of the two policy objectives to ensure that race and gender empowerment is enshrined in the real economy. In the absence of a fundamental re-formulation of the Acts, an inconsequential and weak compromise in the direction of localisation took the form, amongst others, of the 2012 redesign
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of the regulations of the PPPFA which enabled the dti to undertake Designations and the enablement of minimalist localisation requirements in programmes such as the REIPP. 3.2.5 In the case of State-Owned Entities (SOE’s) the Competitive Supplier Development Programme (CSDP) was utilised, providing exemption from the Designation instrument. The purpose of the CSDP was ‘promote investment and the development of internationally competitive capabilities in supplier sectors’; to reduce costs through increasing efficiencies; reduce dependency on imports and foreign exchange exposure and develop niche export capabilities. (4) The authors have not had sight of any assessment of the achievements and impacts of the CSDP, if in fact one has been undertaken? However, given the extent of import penetration and associated rent seeking and corruption which has been widely reported on, it is most likely that such impacts have been minimal. 3.2.6 Contemporary policy and practice results in the existence of multiple government procurement sites at national, provincial, local government and entity level. In circumstances of sub-optimal capacity at these multiple sites of procurement, it is argued, the potential impact of localisation is significantly reduced. For example, in leveraging price and supplier development advantages in large transversal contracts. Furthermore, as widely reported cases and experience in SA strongly suggests, the existence and potential for higher levels of malfeasance and maladministration in procurement processes is high; the price premium for much of government procurement is very high and import penetration (often enabled by the incorrect application of BEE considerations) is significant. 3.2.7 The pursuit of multiple policy objectives is also a problem. Industrial policy implementation suggests that the pursuit of multiple policy objectives – for example localisation, empowerment, SME support and industrial decentralisation can and sometimes does result in contradictory objectives or outcomes. Given SA’s unique and difficult political economic history, it is suggested that imports have been supported in public procurement as a result of the erroneous, distorted application of empowerment policies, sometimes with a significant premium to the fiscus. It is argued that this may have contributed to de-industrialisation in significant and key industrial sectors such as foundries. 3.2.8 A lack of will, capacity and capability to design, implement, monitor and secure compliance to localisation and supplier development instruments for all of government, combined with rent-seeking and outright corruption in some instances across government departments and SOE’s, has had an enormous negative impact on the industrial development effort and at best has not contributed to the ongoing effort to re-industrialise the domestic
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economy. The size and strategic capacity of the Procurement Office of the National Treasury should matter. The general failure to undertake a consistent, well designed national procurement and localisation training programme is similarly a matter of significant concern. 3.2.9 The role of standards and the capabilities of the South African Bureau of Standards has been steadily eroded in the last few decades. When most countries have moved towards a much higher adoption of product and systems standards in domestic value chains, there is evidence that, with some exceptions, South African companies have not moved in this direction with notable exceptions in certain value chains. This process has been exacerbated by the steady erosion of the capacity and capability of the SABS and its ability to construct an engagement with industrial companies with respect to matters involving domestic standards utilisation; the role and functionality of SABS’ Technical Committee’s and related matters of compulsory standards, especially in the Technical Value Chain. 3.2.10 The role of the Customs Division of the South African Revenue Services (SARS) is or should also be significant. Compulsory Standards – a regulatory function of the National Regulator for Compulsory Standards (NRCS) - which protect South African consumers and buyers against substandard products which constitute a health and safety risk, is vitally important. As discussed above, imported substandard products provide producers and manufacturers in overseas companies exporting into the domestic market a grossly unfair advantage. Apart from economies of scale advantages, the cheaper production of substandard products provides a cost of production advantage which domestic producers do not enjoy. Apart from the recent deleterious decline in the capacity and capabilities of Customs at SA’s land, sea and airports, it is argued that a close and efficient collaboration effort with the NRCS has been absent. Recent announcements that capacity has been improved both with respect to the use of inspections for illegal and sub-standard products and the use of a reference price system to detect illegal imports and tariff evasion practices, are a step in the right direction. The Customs Division of SARS is a critically important, ‘indirect’ policy instrument to support localisation. The absence of robust customs measures can and has undermined the efficacy of the domestic localisation effort.
4. A South African Scorecard
Against this background, this document therefore makes certain indicative and limited recommendations for each of these areas of work set out below. Detailed research, consultation and impact assessment work is required for the process proposals set out below. The issue of constitutional and legal mandates and ‘turf
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battles’ should be set aside and the role of Nedlac and the social partners better defined to build a collaborative effort – in this case in the local procurement and supplier development ‘space’.
4.1.1 It is important to reiterate the point that the second, core section of the document explores the possibility of ‘breaking the mould’ through a process involving the Digitalisation of the Technical Value Chain. The high-level set of process proposals for taking this work forward is advanced with the strong proviso that it is the constitutionally mandated departments and entities of government which are responsible for the legislative reform, design, strengthening and implementation coordination of the intra-government localisation effort. However, it is vitally important that the social partners to government, represented at Nedlac, are appraised of and become an integral part of a more collaborative effort – if it has any chance of gaining traction. Unless private sector support for localisation is secured, the best efforts of public sector procurement will be sub-optimal.
The precipitous negative economic impact of the Coronavirus should underline the urgency of this collaborative effort.
Buy local campaigns: Proudly SA. After a serious decline in its fortunes in the early 2000’s including with respect to a precipitous loss of membership, the dti commissioned a study into the governance and operations of PSA. This led inter alia to the appointment of a new CEO and Board and an improvement in the marketing, publicity and operational effort of the organisation, within the constraints of its budget.
4.2.1 However, it is probably safe to suggest that the scale of the work is not commensurate with the task that is required. Securing changes in consumer behaviour and perhaps more importantly a change in the procurement localisation behaviour of large scale domestic private sector companies in the steel, chemicals, construction, retail (inclusive of clothing and textiles; agro- processing; white goods; electronics) sectors is a very difficult undertaking, which will require more significant amounts of funding. 4.2.2 The following is therefore indicated for possible future work to be undertaken by PSA with support from the relevant institutions in the public and private sector: a) An assessment of work undertaken since 2016 to ascertain the progress achieved including with respect to ensuring that the PSA membership base has increased with concomitant revenue from subscriptions and an
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assessment of the extent to PSA member companies are supporting the buy local campaign in their own supply chains. b) Subject to the requisite briefing and ‘on boarding’; the provision of support for and participation of PSA and its member companies in the Digitalisation of the value chain programme (as set out in Section two of this document.) This process will create a digital platform for PSA to secure private sector support, based on concrete and real time data in value chains for localisation and supplier development. This effort will hopefully take PSA beyond the existing effort to change consumer behaviour into the realm of the higher impact public and private sector value chain localisation and supplier development process. Legislation and Regulation: The government legislative and policy framework is based on what has been described as a ‘four tier system’ consisting of the PFMA and the PPPFA, the Competitive Supplier Development Programme (CSDP) and the NIPP divided into direct and indirect NIPP (5).
Local Procurement support for domestic companies was only enshrined in legislation in 2011/12 with the amendment of the Regulations of the Preferential Procurement Public Finance Act (PPPFA) which enabled localisation. Clause 9 of the amended regulations enables the DTIC to Designate sectors and products to be localised to a specific threshold dependent upon domestic manufacturing capacity and capability.
4.3.1 It is understood that approximately 30 Designations have been promulgated. It is also understood that the SABS Bureau of Standards has audited 20 of these Designations to determine, post-procurement, whether the terms and conditions of the designations were fulfilled. This is a costly and inefficient paper-based auditing process. In addition, outside of funding transferred from the DTIC to SABS for this verification process no decision appears to have been made by government with respect to a funding model for such verification. (The Digitilisation methodology set out in this document provides a real-time and cost-efficient sight of locally produced products.) 4.3.2 Comments on the draft revised PPPFA have been submitted by government departments to the National Treasury. Once these have been processed a draft revised PPPFA will be submitted to Parliament for public comment. Until such time as the Draft is tabled before Parliament, it is not possible to make an informed comment on all the clauses. However, in the view of the authors and by way of illustration in the light of past practices, further consideration
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will need to be given the following: Chapter 4 ‘Preferential Procurement’, Clause 26 states:
‘(c) measures for preference to set aside the allocation of contracts to promote— (i) a category or categories of persons or businesses or a sector; (ii) goods that are manufactured in the Republic; (iii) local technology and its commercialisation; (iv) services that are provided by a citizen or citizens of the Republic; (v) the creation of jobs or intensification of labour absorption; (vi) enterprises based in townships, rural or underdeveloped areas; (vii) enterprises based in a particular province or municipality for goods, services or infrastructure based in that province or municipality…’ (6)
4.3.3 In short, the clause makes provision for preferences to set aside the allocation of contracts to promote 7 policy objectives without apparently assigning priority to locally manufactured products and BEE, with significant discretion. This would it is believed and if prior practice is anything to go by, allow imported products which meet other of the 7 categories to trump localisation requirements – this would constitute a step backwards. This is stated mindful of the fact that the existing draft has not yet been tabled before Parliament as well as the fact that consideration may have been given to the content of Regulations to accompany the Act which will provide greater clarity. 4.3.4 Consideration should also be given to the fact that the need for revision of the PPPFA and its attendant regulations, was apparently proposed and first accepted in 2017 – in short progress is painfully slow. 4.3.5 Non-compliance – even to the existing limited public sector local procurement provisions – has met with very little accountability of any form. It is therefore critical that workable, pragmatic legislative and regulatory compliance measures are put in place and implemented in the full suite of procurement instruments. Conditional Support measures; conditionalities contained within DTIC incentives in the Automotive Sector (the APDP and Automotive Masterplan) and the Clothing and Textiles Incentive have secured important localisation objectives. Localisation in the automotive sector is particularly instructive because it has been achieved on the back of stringent specification, standards, process and pricing requirements of global OEM’s domiciled in SA. This is critical because it means that local Tier 1 -4 suppliers meet the requirements of OEM’s which are common to their operations in other countries and local suppliers can potentially gain entry into global supply chains.
4.4.1 Limited localisation objectives have been enshrined in other ‘big ticket’ incentive schemes such as the 12i tax incentive and it is difficult to escape the
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conclusion that the mechanisms for securing localisation compliance are limited. 4.4.2 The conditional supplier development requirements set out in the Walmart acquisition of Massmart, requiring as it did local supplier development in the domestic retail value chain, stands-out as one possible example of the use of a regulatory instrument to secure localisation. A full assessment of the impact of this programme should be undertaken if it has not already been done so. 4.4.3 The following work is therefore indicated: a) A scan of all of government supply side support measures should be undertaken to ascertain: b) Which instruments contain localisation conditionalities and what form do such conditionalities take, c) What compliance measures are contained and executed relative to these measures d) What measures are employed in other jurisdictions and to what positive outcomes, and e) Make a set of proposals to strengthen the localisation conditionalities for the range of measures across departments – the NT, the DTIC, the DSTI and DELRAD Public sector strategic sourcing and supplier development: The sub-optimal record of SOE’s such as Transnet, Transnet Ports Authority, PRASA, Eskom, USSASA, PetroSA and other SOE’s - to undertake strategic sourcing and supplier development programmes, especially where the quantum and scale of significant fleet procurement undoubtedly enabled localisation has been well documented.
4.5.1 For example, at the time of its announcement the combined Transnet and PRASA locomotive procurement programmes constituted the second biggest procurement programme of its kind in the world, second only to the Peoples Republic of China. The demand which stems from such a massive fleet procurement and the fact that it was a once in a generation programme ‘cried out’ for a strategic sourcing and localisation. 4.5.2 There is compelling evidence to suggest, that the failure of this programme constitutes the biggest single lost opportunity for industrial development in the history of SA. Corruption and rent seeking; a singular focus on BEE at the expense of localisation even where domestic companies had BEE accreditation; support for imported products and a lack of strategic sourcing
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and supplier development capability combined with wilful disregard for government policies have characterised the process to date. 4.5.3 The SOE’s (Eskom and Transnet in particular) have very significant procurement spend which cuts across sectors and constitutes an enormously important policy lever to secure localisation and raise the capacity, capabilities and competitiveness of primary product producers (steel, plastics, chemicals and cement) and Tier One to Four suppliers in rail, port and transport capital equipment; energy and related equipment suppliers (piping, pumps, valves etc) and electrical equipment (transformers, cables, switchgear, etc). 4.5.4 Leave aside questions of rent-seeking and corrupt practice, which as has been indicated played an enormous role in subverting the localisation effort in the rail and energy procurement spaces, other important considerations apply. 4.5.5 The requisite capacity and capability to undertake supplier development and strategic sourcing has to be developed. Positive work was undertaken in Denel, Eskom and Transnet to build such capacity over the last decade and it is argued that SA does have the requisite skills to rebuild such capabilities provided that corrupt and rent seeking practices can be excluded and localisation is fully supported at a political and management level. 4.5.6 It is vital that government policy perspectives, in this instance localisation imperatives are enshrined in shareholder compacts and the statutory performance reporting requirements set out in legislation. 4.5.7 A collaborative approach between large procuring SOE’s and global OEM’s and their suppliers is important in many instances. It is argued that without accurate data and the digitalisation of the respective value chains it will be extremely difficult to secure an optimal supplier development and localisation programme for these SOE’s in SA 4.5.8 Accordingly, this paper recommends, (apart from the follow-up work indicated above which is the responsibility of the requisite departments, especially the Department of Public Enterprises (DPE)) the following: a) A review of the CSDP (if not already undertaken) with a view not simply to providing an assessment of its impact but also potentially to revisit the locus standi and inter-operability of the CSDP, Designations and the NIPP. b) The full participation of the key SOE’s in a process to secure the digitalisation of the Technical Value Chain as a foundation for developing a localised
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supply chain based on real-time data, standards and acceptable processes and systems. Defence Procurement. For well documented reasons the apartheid government invested considerably in its defence industry and built significant capabilities in armaments, air and land-based production.
4.6.1 Much of this capability has been lost in the intervening years since 1994. Notwithstanding certain capabilities South African defence companies have not been able to secure economies of scale which derive mainly from entry into global markets. This factor not only increases demand risk but also increases the total life cycle cost of capital equipment. 4.6.2 Nevertheless, given existing capabilities in Denel and a limited range of private sector defence companies, some of which are highly competitive, it is argued that a defence sector can be ‘re-built’ and should be supported. Hitherto procurement and supplier development has existed in a ‘bubble’ driven apparently with little or no recourse or involvement of government departments, especially the DTIC, responsible for industrialisation. It is critical that an integrated defence localisation programme is constructed which seeks to build on the complementarities that exist, for example in mining equipment. 4.6.3 The fabrication skills required to manufacture body shells for mining and earthmoving vehicles are more or less the same as for military fighting vehicles, as are the control systems and drive trains. Local “niche” mining vehicle OEMS, have to compete with global OEMS (Sandvik, AtlasCopco, Kumatsu) with limited local demand and collaboration with Denel Land Systems and limited supply (financing) and demand side (procurement0 support from the public sector. 4.6.4 In certain niche products SA still has significant capability. For example, in the technical textile space (uniforms, parachutes, tents etc) SA has significant capability and these companies are significant exporters. It is suggested (in the absence of defence procurement data) that defence procurement spend has favoured imports, for the reasons explained above. 4.6.5 South Africa continues to be an exporter of a range of defence equipment, including to the African continent. It is the understanding of the authors that a service provider was appointed to develop an Aerospace and Defence Masterplan and a draft Masterplan has been circulated. A detailed examination and assessment of the Masterplan is required with an
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assessment of the credibility of the localisation proposals set out in Masterplan. Concessions, licences, contracts and financing. South Africa has seldom utilised the potential for utilising local content provisions as condition for concessions, licences and contracts or made the provision of localisation a condition of state supported financing.
4.7.1 For example, local content provisions were only built into round two of the Renewable Energy Independent Power Producers (REIPP) contracts, following pressure from the DTI on the National Treasury. Even then, local content provisions were weak and there was no process put in place to ensure that local content provisions were adhered to. In the case of the REIPP an added factor was that there appeared to be very little effort to smooth demand and bring other policy tools to bear to support investments in renewables manufacturing and thenceforth to penetrate export, particularly African markets. As a result, 5 of the start-up domestic manufacturers producing components for wind and solar energy generation were liquidated within a few years of their inception. 4.7.2 Local content provisions have been set out as a condition in the Mining Charter. Many years after such provisions were first mooted implementation has still not taken place. The existing provision – a 60% local content requirement – is still the subject of a legal proceedings in the courts – and it is argued, constitutes a blunt instrument in this space. Arising from the findings of the Mining Value Chain study set out elsewhere in this document it is argued that the Digitalisation of the mining value will create the conditions for a data rich, real time localisation process which raises productivity and competitiveness across the value chain. 4.7.3 South Africa’s record of ensuring that local content provisions are built into financing arrangements are equally sub-optimal. The development Bank of SA (DBSA) provides significant (some analysts suggest the highest) funding for
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infrastructure projects across Sub-Saharan African countries but apparently with no local or African content provisions. 4.7.4 The follow-up work which is indicated includes; a) A scoping of localisation requirements/conditionalities across all departments set out in the suite of licence/concessions and contract arrangement by department, b) Scope the compliance and efficacy of each of these arrangements c) Scope the localisation conditionalities set out in the financing arrangements of the DFI’s and those government departments which provide incentives, tax incentives and other supply side support measures d) Make proposals and recommendations for each of the measures defined in order to secure agreement for higher-level and compliant localisation requirements. Private sector local procurement and supplier development: Aside from their failure to provide a competitive price, quality and supplier advantage to downstream users in the steel, plastics, and chemicals value chain, large primary producers of these ‘first phase’ processed products in SA have failed to adequately develop upstream supply chains which are globally competitive.
4.8.1 This applies both to former state-owned entities SASOL and AMSA but equally to domestic mining companies which have increasingly favoured imported input products, capital equipment and parts. This has had a deleterious impact on upstream suppliers and led to the closure of many companies with attendant significant job losses. Neither has the private sector taken up what would appear to be an important opportunity for self-interested strategic supplier development with broader economic national ‘knock-on’ effects and spill-overs, including with respect to skills development, technology acquisition and innovation and job creation in the real economy. It is common cause that unemployment, poverty and inequality in SA are themselves very significant barriers to growth in SA resulting as these do in a small market and a low tax base. 4.8.2 It is argued that a process to secure the Digitalisation of the Technical Value Chain, set out in the next section of this document will provide a platform on which significant private sector driven localisation and supplier development could be achieved. Technology Transfer, Acquisition and Diffusion. Government technology and innovation policy has focused predominantly on ‘blue sky’ and big picture research. Many billions of Rands have been spent inter-alia on the Pebble Bed Nuclear reactor;
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the Joulle electric vehicle and fuel cell technology research. Without making the suggestion that ‘blue sky’ disruptive technology research is unimportant, the point should be made that middle and late industrialisers placed significant emphasis on technology acquisition, absorption and diffusion with strong technology research support for design localisation (building the factory and production system) and systematic and gradual improvements for products and components. Furthermore, where SA technology research has yielded commercialisation outcomes these have often been commercialised in other jurisdictions. This points to the strong possibility that the financial support instruments to commercialise research outcomes is weak or non-existent including with respect to support for the long lead times involved in start-up production. In short localisation should include a suite of interlocking technology localisation instruments in an optimal mix. Further work in this regard including with respect to the DSTI 2019 White Paper is indicated.
4.9.1 The Technology Localisation and Innovation Unit (TLIU) at the Council for Scientific and Industrial Research (CSIR) and the Department of Science and Innovation funded Mandela Mining Precinct are very recent and under- funded and resourced institutions. Perhaps more importantly and with some exceptions it would appear that the Engineering Faculties of SA’s tertiary institutions have limited linkages with domestic industrial companies and provide limited support for technology and production localisation in the domestic economy. 4.9.2 A high-level discussion should take place which secures far greater political and financial support for those public sector institutions directly responsible for supporting the localisation effort, some of which are set out above. This should be based on the principle of support for technology transfer; (licence and IP); design and systems and product innovation (gradual improvement) and design of factories and manufacturing systems to support bricks and mortar investment to provide private sector companies and SOE’s, as and where appropriate. National Industrial Participation Programme (NIPP): The NIPP was promulgated in September 1996 and the guidelines in 1997. Further amendment to the guidelines were affected in 2013 (7)
The NIPP becomes an obligatory requirement when any public procurement exceed US$10 million providing for reinvestment of a portion of the price in local industry to secure sustainable economic growth; facilitating access to new markets and trading partners; encouragement of foreign direct investment, technology transfer., research and development, exports, job creation and BEE. The NIPP provides for the
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deployment of measures to achieve these objectives in ‘direct NIPP” or ‘indirect NIPP’ translated to mean either in the sector involved or by agreement in another industrial or economic sector. The policy and regulations lay out a particular process for application and the DTIC management and operational mechanisms for implementation, oversight and closure.
The NIPP was therefore one of the first public sector tools deployed to support localisation in the domestic economy. Successive reviews by the DTIC point to limited outcomes owing to a wide range of factors including the following:
• Wilful non-compliance or non-compliance driven by ignorance with the NIPP provisions or a lack of capacity in this respect by government entities, especially SOE’s • Sub-optimal, governance, management and oversight of the programme • A propensity by obligors to shift obligations to ‘soft’ deliverables because companies are often reluctant to invest in new capabilities which can compete with other, existing suppliers where obligors have sunk costs and investments. The extensive suite of possible NIPP obligations provides leeway for such ‘shifts’ to take place • Wilful neglect or failure on the part of contracted companies to deliver on pre-determined obligations given the small and ineffectual, post contract penalties for non- compliance. Offset instruments are an important ‘indirect’ policy tool to support localisation. Well managed, with strong legally binding and collaborative contractual obligations, especially in the case of multi-year fleet procurement offset instruments can and do provide strong investment finance; technology transfer; skills development and partnership opportunity for local production. In addition, it is a critical tool to secure these shorter-term objectives with offset initiative alignment with long-term, strategic industrial objectives is critical for the establishment of large scale globally competitive Original Equipment Manufacturers (OEM’s) or Tier One value added manufacturing suppliers. These programs can be invaluable for creating opportunities, but require a major overhaul of approach. This requires a strategic long-term approach to provide support for selected ‘domestic champions’ in key industrial sectors where capability and capacity can be enhanced with the end objective of ensuring the penetration of such domestic companies into global markets and value chains.
The experience of Denel is a prime example of how difficult it is to penetrate global markets and retain global clients. On the other hand, the partnership with
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Rheinmetall demonstrates that new markets can successfully be developed in strategic partnerships where offset requirements are careful designed and managed and take cognisance of production to scale opportunities.
Unfortunately, and with some exceptions the NIPP has with some exceptions yielded sub-optimal outcomes with many significant lost opportunities across departments and SOE’s. A full scoping exercise beyond the framework of this work would be required to make an accurate assessment of the opportunity loss. Suffice to mention one example: alleged corruption and non-compliance within the national carrier, SAA led to a missed opportunity to inject R20 billion into the local aerospace industry utilising existing offset provisions in the NIPP. A long-term strategic agreement with BAE Systems and Airbus could have been used to secure collaboration with respect to the proven Oryx and Rooivalk helicopters systems and the incorporation of these into the global value chains. This would have major impact on the viability of Denel Aerostructures and potentially supported private sector tier manufacturers in the aerospace industry. Unfortunately, and flowing directly from this lost opportunity the domestic aerospace industry has experienced a steady decline in the recent past and is presently experiencing severe economic difficulty.
In a similar vein, a global agreement with General Electric to leverage the Transnet offset obligation, could have created an opportunity to establish and/or support a range of rail tier suppliers and even a globally competitive Mining Equipment OEM or tier suppliers. A consolidation of capabilities with Denel Land Systems, some of the existing domestic mining equipment companies and GE could have established domestic mining equipment manufacturing capabilities to compete with transnational, especially Swedish suppliers. It is estimated that an entity of this kind, with 5% global mining equipment market share, could be five times the size of the current Denel, generating significant skilled employment and considerable economic spill-overs.
5. Conclusion
In summary therefore local procurement (localisation) in the public sector has been poorly designed and implemented with attendant sub-optimal industrial development outcomes. Useful but inadequate procurement and supplier development policy’s set out in the National Industrial Policy Framework (NIPF) and
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successive Industrial Policy Action Plans (IPAP, the CSDP and the NIPP have not found expression in practical, measurable implementation.
5.1.1 In the absence of an appropriate supportive policy environment and in pursuit of short-term cost advantages large private sector buyers have increasingly relied on imported products and neglected local procurement and supplier development with grave implications for upstream value adding manufacturing. 5.1.2 It is not intended nor implied by the above analysis that government departments and entities will and should not continue to endeavour to secure a more favourable legislative, policy and implementation environment to secure more favourable industrial development outcomes. However, the authors venture to suggest that the localisation policy framework and implementation processes set out above have hitherto unfortunately had limited outcomes and impact on SA’s reindustrialisation effort. Therefore the remainder of the document constitutes the core of the proposal to ‘break the mould’ away from the existing praxis which is characterised by a lack of policy and implementation coherence towards a pragmatic, digital technical value chain solution which can secure support from the social partners – business, labour and government – and hopefully creating a catalytic effect across a range of other sectors. This document does not purport to deal with the wider range of underlying structural problems which underpin SA’s economic performance and premature de- industrialisation. Many of these structural problems are common to other middle- income developing countries (MICS) and are fully canvassed elsewhere.
Neither does the document address itself to the myriad of related constraints, issues and proposed remedies related, inter alia to: the role, capacity and efficacy of the state; the deployment and efficacy of the full suite of other, interconnected industrial policy levers and instruments; the cost structure of production in the domestic economy and the impact of administered prices including rail and port costs and inefficiencies; the constraints of SA’s economic infrastructure and local government service delivery and matters related to the labour market and skills and so forth.
The document therefore confines itself to the following:
a) A summary of the findings of the Upstream Mining Value Chain Study, and arising from such findings, an examination of the possibilities provided by a process to secure the Digitalisation of one domestic value chain – the Technical Value Chain – to enable the construction of a data rich, collaborative and optimal platform and process – as a portal - to secure
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much higher levels of localisation and performance based industrialisation in a collaborative arrangement between government, labour and business. b) The document also indicatively sets out some of the concepts, pre- conditions, principles and process required to secure digitalisation as part of a deeper, more extensive and collaborative programme of work to breaking the current impasse which bedevils large swathes of the industrial effort. c) Lest the intent of the document be misunderstood, a programme of this nature, should not take the place of nor be a substitute in any way for ongoing efforts to amend and strengthen the suite of available procurement localisation and supplier development legislation, policies and programmes which have been summarised in the preceding text. In summary, this effort should translate into the following:
a) Public procurement reform is long overdue, resting as the existing framework does, on antiquated and misaligned supply chain processes within the PFMA which have singularly failed to prevent corruption, and severely circumscribes the possibilities of coherent strategic sourcing and supplier development to support manufacturing. An effort to secure substantive amendments to the PPPFA, currently before Parliament, to ensure that the Act becomes an appropriate legislative instrument to secure a much higher localisation impact without any compromise to the imperative for BEE and its policy objectives. Similarly, those clauses in the Public Finance Management Act (PFMA) which act as a barrier to local procurement and supplier development should be re-examined. Finally, consideration should be given to the possibility of ‘a safe harbour’ clauses in the Competition Act which allow for longer term procurement support for SA’s industrial champions. b) Ongoing support to ensure that the good work currently undertaken by PSA is strengthened, especially with respect to private sector participation and mass buy local campaigns. c) A new initiative is required to secure localisation conditionalities is contained in the financing and incentive instruments deployed by the public sector in support of both the primary mining and agriculture sectors as well as the industrial sectors, within the parameters of WTO Rules and SA’s bi- and multilateral trade agreements. d) Ongoing and new initiatives to ensure that intra-governmental deliberations and collaboration, including with the private sector financial institutions make localisation a condition of licences, concessions and contracts as well as in the financing of large infrastructure projects on the African continent
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where local content provisions can also be used to support supplier development in individual host countries. e) Ongoing work to entrench the obligation of SOE’s to develop the capacity and strategic capability to roll-out ‘clean’ strategic sourcing and supplier development programmes, enshrined in meaningful Shareholder Compacts and ongoing performance implementation oversight.
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Breaking the Mould.
6. The 2018 Mining Value Chain Study findings and implications: (9)
The quantum of funding available for the first phase of the Upstream Mining Value Chain study, limited its scope. Nevertheless, the study revealed startling findings with major consequences for local procurement and supplier development and industrial development in general.
These included the following:
a) Very low adoption of core Value Chain Standards b) Misaligned business processes c) Poor planning of supply d) An inability to direct supply at buy time e) Limited and inconsistent technology implementation and f) These and other factors contributing to an immature supply chain in significant distress characterised by low levels of productivity, significant import penetration; limited export capabilities and practice. It is a given that any domestic industrial sector requires a ‘sound base’ built on globally-accepted value chain methods and standards. The slow adoption of these best practices within the mining value chain and the Technical Sector as a whole, holds out potentially dire consequences for any future industrial policy effort.
This is undoubtedly and especially true for manufactures in the context of the new digital or fourth industrial economy. The adoption of core standards will increasingly be an important, indispensable and practical step towards the adoption of applied digital technologies to support manufacturing operations across manufacturing sector. In addition, it is inevitable that the adoption of standards will increasingly become a critical prerequisite for participation in global value and supply chains which dominate all manufacturing sectors.
To illustrate this point and in addition, and unlike the retail sector, which adopted the Global Standards One (GS1) GTIN barcode as a common identifier there is currently no standard agreed for item classification and identification within domestic technical industries. The applicable standards for technical industries are grouped in two areas: firstly, those defining the supply chain commercial environment and the data required to facilitate commercial transactions and secondly, the supply chain
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technical environment dealing with the technical specification for the form, fit and function of particular items.
In this regard ISO 55000 formalises Systems Engineering and the proactive asset life cycle management as a comprehensive standard and in so doing determines both Engineering Management within an organisation and compels OEM’s to provide complete support data records inclusive of parts catalogues, maintenance documentation and life cycle models and cost estimates.
ISO 8000 is the international standard for the exchange of quality data and information between systems and organisations, fundamentally altering the manner in which technical industries procure and support capital equipment.
There are many standards available for classification and during the next few years we expect convergence as 4IR and Industry 4.0 reach maturity. The following concepts are pivotal:
a) Standard Industry Classification (SIC) describes where an item is manufactured. b) Harmonized Commodity Description (HS Codes) are used by the World Customs Organization (WCO) to define global trade tariffs. c) The United Nations Standard Products and Services Code (UNSPSC) is a standard initiated by the WTO for commercial classification of products and services. d) The Open Technical Dictionary (OTD) is defined within ISO 8000, and unambiguously describes individuals, organizations, locations, goods, services, processes, rules, and regulations. In short it is the language engineers use to search for specific parts conforming to a technical specification. e) The eCl@ss® is similar to OTD and is proposed by the German Government as part of Industry 4.0. Convergence of these two concepts is expected in the near future. f) The Global Trade Item Number (GTIN barcode) is a unique identifier for trade items, developed by GS1. Today this is the commercially accepted identifier for all wholesale and retail traded items, with billions of items scanned on a daily basis. It is likely that SIC and HS Codes will continue to be utilised in national statistics and underpin macro-economic analysis. However, it is argued that the language or taxonomy of these codes is not proficient to facilitate day-to-day commercial
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transactions and cannot describe the technical specifications of items to the level required by engineers.
UNSPSC® as a standard for item categorisation and the GTIN barcode is the de facto standard for global commercial transactions. For example, Amazon now lists it on products. A quick search of the GS1 database demonstrates that many of the global technical item manufactures have adopted the GTIN barcode as an identifier.
However, within the Engineering Technical Environment, the OTD has not seen the same level of adoption, despite the fact that since 2006 the SABS/ISO Technical Committee 184, facilitated the discussion in SA.
In its current form the GTIN does not contain the OTD technical engineering taxonomy and aligning these concepts will be critical. The difference is that a single OTD relates to many GTIN’s from various manufacturers with the same form, fit and function. This approach will engender a mindset transformation from a “pick the cheapest of three quotes” mindset to much higher levels of procurement efficiency, hitherto not seen in the domestic economy.
A common technical catalogue is equally important and serves the following purposes:
a) It creates a master data record for an item to make it easier to reference demand visibility, cost and performance comparison and optimise sourcing policy within an organization b) It defines an item’s technical characteristics and determines the degree to which it is duplicated, or if it can be substituted without degrading the operational efficiency of equipment and allows for the allocation of unique supply characteristics that can provide information of an item’s local content, quality compliance and safety certification. To ensure this, the Technical Industries need to agree on the adoption of a common standard. Local suppliers will likely continue, with existing sub-optimal ‘bad practice’ until such time the Technical Industry adopts globally accepted best practices. Providing ‘clean’ item catalogues is the responsibility of the product owners and thus
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compliance can easily be ensured if all buyers adopt the same standard within their procurement processes.
The same situation existed within the CPG&R industry until the early 1990’s, when the adoption of common procedures, processes and technologies across the value chain brought about a much-needed sea-change.
The cost of poor inventory data also has major implications, including for localisation and supplier development programmes. Data quality carries a cost to companies and may increase equipment support costs by 30%. However, a recent industry study found a 12% direct impact on bottom line revenue. Some companies indicated that ‘clean’ data contributed to a 50% reduction in procurement costs with 49% less spare parts purchased than initially recommended by OEMs with a 75% reduction in excess and obsolete inventory.
The Mining Study demonstrated that inventories may be low for the wrong reasons. Reactive ‘free-text’ spend is a symptom of ineffective or absent material planning processes that lead to unproductive equipment (waiting for spares) and production delays (waiting for material). This creates significant value chain waste within the sector contributing to the marginal status of some mines. With the adoption of the simple barcode ‘free text’ spend will immediately be eliminated.
In addition to the above, and contributing to the overall ‘state of affairs’ there are unequivocally divergent views and widespread scepticism on the part of many domestic stakeholders regarding the viability of local industrialisation, driven by a range of factors including steeply rising costs of production, including with respect to utility costs and inefficiencies, a lack of policy certainty; inadequate and deteriorating economic infrastructure, corruption and poor municipal service delivery, amongst others.
Stakeholder mis-alignment makes the definition of a coherent industrialisation strategy difficult. For example, regulatory policies such as the Mining Charter go some way to advance localisation opportunities, but without careful consideration of unintended consequences. For example, the 70% local content requirement clause in the Charter is considered by mining and supply companies as an expensive post- procurement regulatory burden for which no adequate mechanism for compliance has been stipulated.
A lack of regulatory clarity has the real potential to discourage capital investment. It is widely accepted that the retention of existing industrial capabilities and the
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establishment and development of new industrial capabilities will not be the outcome of market forces alone. The complex nature of some systems, products and components makes it imperative that the public sector should play an active role in developing critical industries that may not otherwise be economically viable. Global experience demonstrates that state intervention has been used to ensure the sustainability and retention of strategic capabilities within pre-determined manufacturing sectors. All these and other factors find expression in declining capital expenditure and a propensity to shift investments off-shore.
The Technical Value Chain (TVC) (inclusive of mining, steel, chemicals, transport capital equipment and infrastructure) constitutes the exiting backbone and foundation stone for the future prospects of SA’s industrial effort. SA can ill-afford to allow any further deindustrialisation in these critical value chains. Thus:
a) The retention of this domestic capability is critical for SA and involves inter alia; b) The manufacture of critical equipment, components and sub-assemblies (among others); c) The manufacture of high-rate-of-use support spares; and the d) Capabilities to support, maintain and repair equipment and systems. In turn this will require, as far as is practicable, the following:
a) The capability to integrate and support any equipment; b) The capability to design, develop and support relevant control automation and software; c) The capability to design, develop and manufacture certain equipment locally, which does not exclude the use of imported components; and d) The control of those capabilities under custodianship of either a public or private South African-owned company. It cannot be over-emphasised that the very last thing that SA can afford is to lose what remains of its technical industries inclusive of the mining, steel, chemicals, transport capital equipment and infrastructure value chains where both SOE’s (Transnet and Eskom) as well as its principal industrial champions including Arcelor- Mittal and Sasol are critical players.
There is also no doubt that, from a policy perspective, value added manufacturing remains a critically important economic sector, providing a pathway in developing countries from subsistence agriculture to higher value added and technology
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intensive production with attendant positive socio-economic outcomes including higher income and living standards. In developed countries, the manufacturing sector remains a vital source of innovation and competitiveness, with significant contributions to R&D, exports, and productivity growth.
However, the Mining Study also demonstrates, amongst others, the imperative to secure an understanding of Industrialisation Technology – its underlying concepts, principles and practice – which should inform and underpin the drive to retain and build domestic industrial capabilities
Consideration for immediate industrialisation can only be given if the technology requirements to manufacture a particular product are understood, in other words, we must exploit those manufacturing opportunities that are within our immediate capability and build skills for those that require advanced technologies. Thus, immediate job creation is intrinsically linked to current capacity, capability and technology readiness to produce products for a specific market. We have defined four ‘segments’ which frame the technology space for industrialisation opportunities and they are summarised as follows:
a) Low Technology: This sector focuses on basic metal fabrication and forming. The artisan skills required to deliver this level of industrialisation are readily available, especially when mines in these areas release technical staff during retrenchments. This will include the fabrication of parts, basic structures and fluid distribution, e.g. pipes and fittings. b) Current Technology: This segment requires more R&D with integration and assembly skills to manufacture complex systems, such as pumps, compressors, etc. Although equipment in this segment may be complex in design, the underlying technologies required are still of a low to medium technology and within the capabilities of many local regions. c) High Technology: This segment will require advanced technologies to not only compete in the global market, but also to economically support these plants and equipment through the entire life cycle of it. To enable this, we foresee that various technologies developed by Denel and other defence companies may be utilised to enhance current plant equipment and to shorten the R&D process time. Most of these companies are located within
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Gauteng, close to Universities that provide skills and R&D. They are also in close proximity to many component suppliers. d) Future Technology: This will be where local Manufacturing meets the Fourth Industrial Revolution (4IR) and is driven by a requirement to develop new mining methods. There are common themes developing in this segment: • Equipment will be predominantly electrical with complex electronic control systems which will require not only electrical drive systems and components but sources of efficient and cheap electricity, which in turn will provide demand for fixed and mobile fuel cells. • Autonomous systems which will require advanced control systems that will require limited or no human intervention. • Connected equipment that will produce big process data sets. This will require significant development in directive analytics that is supported by Machine Learning and Artificial Intelligence. The development of this ability and capability will be a significant future order-winning criterion in the industrial equipment market. An understanding of future technologies in manufacturing is critically important if we want to enable globally competitive entities. It is argued that:
a) The current convergence of 4IR technologies is creating a perfect technology storm which opens new possibilities and serious disruptive threats for manufacturing. b) Today Industrial Internet of Things (IIoT) research and development has brought about a quantum leap of innovation in product design. Equipment communicates with equipment without human intervention, and need to be able to identify/authenticate each other first with a "globally unique identifier". c) IIOT focuses on the “digitalisation of manufacturing”. In essence it brings to the industrial world a structured and standard approach to ensure digital architecture alignment and interoperability of industrial equipment. d) 4IR concepts can be used to create true visibility in the value chain, that is driven by collaborative planning, based on trusted, accurate real-time data. At its core, 4IR is a formal set of industry standards that will ensure interoperability of machines and equipment companies within global value chains. e) Future industrial equipment requirements should be used to leverage development in equipment design across industrial sectors. For example, the common R&D needs in mining and defence equipment, which share
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many attributes, could be leveraged to establish an innovative and competitive environment to industrialise future technologies. The over-riding point that is being made here is that it critical that domestic industry does not underestimate the levels of discipline which are and will be required to embrace both the potential and the threats of new disruptive industrial technologies and 4IR systems and principles. An approach which suggests for example that the mines should procure locally produced inputs and machinery and equipment regardless of price, quality and technological capabilities is fraught with danger.
7. Impact of Procurement Policy Instruments on Value Chain Design
This document has demonstrated the need for a legislative framework and suite of inter-locking, mutually supportive policy instruments to secure measurable outcomes in the procurement and supplier development arena. Unfortunately, a lack of alignment and ‘interconnectedness’ of legislation, policy and implementation has resulted in limited outcomes and even in some cases may have hastened de- industrialisation.
It is also manifestly clear that the suite of procurement and supplier development measures have failed to prevent rent seeking and corruption; have nor provided the public or private sector with and cost and competitiveness advantages which arise from economies of scale and finally not supported investment in labour, intensive value-added manufacturing entities across key industrial sectors in the real economy.
Much of the legislative and policy framework, including the new draft Preferential Public Procurement Bill, defines the key concepts involved including supply chain management (SCM) but critically stops short of securing an alignment with value chain best practice and from a technology standpoint may be locked in a methodology acceptable in the early 1980s. Aligning these instruments with 4IR best practice processes and standards is long overdue and critical. World class execution performance for strategic sourcing and procurement functions will simply be impossible if the legislative and policy instruments are not fit for purpose. A simple example is to include reference to ISO 55000 and ISO 8000. ISO 55000 references the systems engineering approach that governs capital acquisition and the economic management and maintenance of assets over the asset life cycle. ISO 8000 ensures data quality and integration between trading enterprises. It is a fundamental and
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rudimentary requirement for digitalisation. Current none of the policy instruments prescribe adherence to these basic standards prescripts.
This state of affairs is especially devastating to SOE’s that provide goods and services in competitive commercial markets and/or have a monopoly developmental mandate in the economy. Inefficient and uncompetitive upstream suppliers substantially increase SOE input costs and inefficiencies. This is often exacerbated by wilful failure to implement procurement policy and sub-optimal capacity and capabilities. Rising costs are reflected in above inflation price increases which create severe competitiveness pressures for downstream producers. This applies equally to exporters that are losing their ability to compete in global markets
THE LINK TO STANDARDS, BEST PRACTICE AND DIGITALISATION It is a critical that procurement policies should enhance competitive behaviour, reward value added entrepreneurship, innovation and best practice and not constrain industry with well-intentioned rules which impose a high regulatory burden on procuring and supply entities and do not achieve transformation in the real economy.
Apart from the fact that there may be sufficient remedies in law to deal with procurement corruption and malfeasance, corruption is a direct result of the breakdown in rudimentary supply chain management processes and administrative “paper driven” procedures that provide convenient loopholes for perpetrators. Proper digitalisation will provide the capability and instruments to proactively prevent corruption and eliminate poor supply chain management. More importantly digitalisation provides more than a basis for cost effectiveness and combating corruption – it is at the core of value added manufacturing and sustainable job creation. The manner in which the State presently carries out procurement and not the scale of its purchasing power, determines the sub-optimal outcomes of localisation initiatives. Inefficient implementation of procurement localisation leads to immature and inefficient domestic value chains which should be supported by public sector demand. In these circumstances it is unsurprising that suppliers focus on short-term gains, often with imported products and with limited regard for competitiveness, long-term sustainability and job creation.
Reference to a specific example in the foundry sector is illustrative. In this example a Level 1 transformed entity, which employed two persons and which imported 100% of product from South-East Asia was awarded a tender against a Level 4 domestic
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foundry which employed 350 people. The foundry sector has seen a precipitous collapse with an estimated 60% of domestic foundries shutting down.
The intention here is not under any circumstances to undermine the importance of transformation and BEE. However preferential procurement policy which indirectly favour imports and does not take cognisance of local procurement and the necessity to build competitive value chains and suppliers has and will inevitably undermine industrial development, job creation and empowerment in the real economy. It is critical that procurement policy and other directly related supply side instruments such as the Black Industrialists Programme support local procurement and transformation if the existing paradigm is to be broken. Increasingly uncompetitive supply chains with significant support for empowered importers will continue to increase input costs with the unintended consequence of further de-industrialisation.
A further and final conclusion is that the existing procurement framework has failed to prevent malfeasance because the independent external financial audit process in its current form cannot and does not deal with the transactional complexity within value chain management. It is critical that the audit process adopts the principle and practice of a statutory and independent, external value chain audit, on the same level as a financial audit and preferably not undertaken by the same institution. A Digitalised value chain will enable this process and act as an added support for the process of building domestic value chains.
8. The implications for localisation and industrialisation
The Mining Procurement Study findings demonstrates important implications that will determine the success of localisation initiatives.
Government deploys policy instruments such as the Mining Charter to obligate mining rights holders to transform their supply industry and direct procurement to local and black owned suppliers. However, mining alone cannot transform the whole of the technical supply industry in South Africa.
It is therefore important for Government to ‘guide’ the adoption of similar policies and sourcing strategies discussed in this paper to State-Owned Corporations such as Transnet and Eskom as well as critical and large companies including former state-
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owned companies SASOL and AMSA. In this way the necessary purchasing power, funding mechanisms and economies of scale for suppliers can be leveraged.
In this effort, it is therefore imperative that within the Technical Value Chain, Government and Industry agree on the fundamental collaborative and reciprocal principles and objectives required of each party.
An indicative example of a a reciprocal, collaborative agreement in the technical industries could secure agreement on the following principles and parameters:
8.5.1 Government commitments should include: a) To support the digitalisation of the Technical Value Chain and bring to the table those public sector institutions which are necessary to achieve this objective; b) The provision of a suite of demand and supply side support and trade instruments including a dedicated export promotion effort; c) Support for technology acquisition (manufacturing under licence contracts) and other forms of technology and innovation support; d) Local procurement demand support including via procurement programmes of SOE’s; e) A commitment to applied and more effective provision of suitable qualified personnel; f) An undertaking to establish a degree of policy certainty; g) Lowering the red-tape and regulatory hurdles for business; h) Lowering the production cost and inefficiency drivers such as the price of energy, transport and logistics; and i) A better understanding and implementation of strategic sourcing and supplier development with mitigates demand risks. 8.5.2 For its part a set of reciprocal conditions for the private sector could for example include the following undertakings: a) To support the digitalisation of the Technical Value Chain and work with mines and key private sector buyers and supply companies to commit to the process; b) A commitment to levels of investment in the TVC to secure greater levels of productivity, employment, B-BBEE and other socio-economic outcomes such as environmental protection and climate change mitigation; c) Applied skills development programmes matched to industrial development; and
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d) Commitment to a collaborative effort to expand SA’s small basket of exporters. Some of the policies introduced by the Mining Charter aim to direct procurement to transformed local entities that supply product with a certain local content threshold. However, the reporting of this is long after-the-fact and too late to implement corrective action. In this process, the implementation of mining procurement systems is also not conducive to support automated direction of sourcing and procurement to those entities that are critical to SA’s industrial effort and to build, protect and enhance existing capabilities.
This is not only due to supply chain processes that are essentially outdated, but also poor master data. Data quality is a major constraint to implementing a coherent industry strategy to direct supply to local competitive industries.
This is the main reason for the introduction of ISO standards and other industry best practices as discussed within Digitalisation of the Technical Value Chain papers. It will be a critical imperative for all industrial stakeholders to re-examine their supply chain systems implementation and align their technologies to acceptable industry best practice.
In order to ensure near real-time verification of transactions it will also be important for Government to consider the availability of critical data elements. Queries to Government systems can be self-funding as industry will most likely be willing to pay for each query.
Minimum access to information within the following Government Systems will enable mining companies to assess and direct procurement at the time of order placement. Some of the important considerations are:
8.10.1 DTI centric data to include: a) CIPC verification provides the compliance status of companies under the terms and conditions of the Companies Act. Certain companies may spend R100 million on procurement before it becomes visible that the entity is in deregistration or even finally deregistered. The verification of a company’s SIC is also important and thus the verification of this data within the CIPC database is required and vital to the process. b) SANAS transformation verification is required to determine the BBBEE spend to entities. Currently, industry relies on verification data from uncontrolled
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and unverified third parties. To provide this information digitally will be critical to ensure transformation of the technical value chain. c) Access to SABS local content certification and other compliance standards of supply entities is required. This may include product safety, health, environment and quality certification. 8.10.2 National Treasury-centric data to include: a) Reliable access to the tax compliance status of a supplier should be a requirement. This will prevent directing procurement to entities that are not tax compliant and will, in the long-term, prevent fraudulent transactions. b) Compare local procurement spend with Customs statistics on imports and exports based on SIC codes to quantify localisation opportunities. 8.10.3 DMR-centric data to include: a) Near real-time compliance with the provisions of the charter in a digitalised value chain and the ability to ensure that rights holders are actively engaging in the building of a vibrant technical supply industry. b) Adoption of the above will not only enhance the competitive behaviour of the technical supply industry but will ensure fact-based industrialisation supported by precision analytics. In short, Governments own digitalisation programme will assist in the pro-active alignment of industrial policy and strategy that is not based on after-the-fact data.
9. Leveraging Investment to Fund Localisation Opportunities
It will be critical to secure investment funding to support localisation opportunities and there are essentially the following sources that can be utilised:
a) Government’s own funds that are channelled via DBSA, PIC and the IDC; b) Private Equity Funds; c) Foreign Direct Investments; and d) Leveraging offsets from large government capital acquisition programmes. The deployment of all of these instruments should be based on sound commercial principles.
It will be important to define and set out clear investment guidelines and principles to ensure that new manufacturing entities are sustainable and economically viable over the long term.
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It will be important to document the successes and failures of Transnet and Eskom’s localisation efforts. It is the view of industry analysists that the entities created were not only entirely dependent on state procurement demand, but also totally uncompetitive in price and delivery performance. Also, many of these entities were setup with a short-term gains mindset and were closed as soon as the capital project were completed. Thus, failing to deliver long-term jobs.
Balancing the needs of investors with those of Government will be critically important to fund new manufacturing capacity. This will require the development of a longer-term industrial investment strategy that targets those opportunities that can deliver sustainable job creation.
10. The Need for Data-Driven and Fact-Based Localisation
Lord Kelvin’s phrase “to measure is to know, and if you cannot measure it, you cannot improve it” is directly applicable to a contemporary localisation programme. A reading of the procurement transaction records of many technical industry firms, generally provides a reasonably accurate assessment of the value chain maturity of the industry and the risk a lack of maturity constitutes to localisation and employment creation.
The prevalence of “free text” in procurement is an indication that Master Data Management within the industry is problematic. Not only is the data accuracy of supplier catalogues low or non-existent, but the buyers own data systems, lack the accuracy to link what is being procured to a specific business function, production process or physical asset. ‘Free text’ procurement also brings into question the integrity and quality of the linkage between a physical item of supply; to a physical asset or piece of equipment; to suppliers qualified to supply that item and on to a contract that specifies the supply service levels and price for that item. The absence of integrity leaves the buying party ‘at the mercy’ of a supplier to supply at the price agreed and, most importantly, opens the door wide open for corruption and maleficence. There is a direct link between the efficiency of procurement systems and data quality. It is at best questionable whether most firms actually get a return on investment for deployed systems or that they derive value from “strategic sourcing” initiatives. This is the specific area where ISO 8000, governing data quality can have significant impact.
The use of “free text” compounded by “emergency procurement” indicates that processes are misaligned and that there is limited or no planning in the sourcing and
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procurement of these items. In many instances there is an absence of bills of material linked to a mine, production or maintenance plan. This renders these plans decrepit as soon as they are produced by very expensive ‘best of breed’ planning systems. For example, the non-delivery of a simple hydraulic hose can delay an entire bast sequence at a mine. In many firms “emergency procurement” is used to by-pass stringent supply chain management operating procedures. This often leads to a total breakdown in control systems, leaving organisations open to abuse. Taking into consideration the delivery procedure and potential pricing rule variance a surcharge of more than 30% on normal items costs may apply. Hence the Mining Study estimated total value chain waste in the gold and platinum sectors alone, to be R15 billion per annum driven in the main by cost of production delays and lost revenue.
The breakdown in business process goes beyond the procurement transaction. Using “Invoice 123” as a procurement description also indicates that in many cases these records were created after the fact. This practise passes the scrutiny of many internal and external financial audits. Although many firms implemented Human Capital (or Human Resource) systems, and linked organisational responsibility and delegation authority to a post, very few could show where and when the CEO logged in to approve a procurement order.
Even fewer firms could show how business rules and workflows were implemented to electronically manage the planning, approval deviation and escalation of transactions within their systems. Thus, systems cannot be used to automate procurement and direct procurement to those enterprise development entities that were established as part of a supplier development programme, in some cases with significant investment funds. Thus, many of the transformed suppliers that were established or supported, failed within a couple of years, starved of demand from the entity or programme that helped to create them in the first place. It is therefore questionable what value expensive ERP systems provide and why many procurement offices bypass formal processes and use Microsoft Excel and Outlook to drive the value chain.
Current status and value chain maturity directly impacts Localisation:
a) Low levels of data quality, low levels of value chain best practice adoption and poor systems implementation explains why domestic value chain maturity is low compared to global peers. It is therefore not surprising that certain domestic industries are not globally competitive. The absence of
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value chain maturity is the major contributor to poor performance in domestic industrial development. b) If the status quo remains this will inevitably impede industrial development and employment creation. Digitalisation of value chains will enable Government to more accurately monitor the impact of industrial policy in much shorter time frames. It will assist industry to make decisions pro- actively and adjust localisation programmes to secure optimal job creation opportunities. Many of these decisions can be made at buy-time, with information regarding the legal and tax status of the supplier; the country of origin and local content of the product and the ability to supply against specification at the right quality, time and price. This lies at the core of global competitive capability. c) Sound industrial policy is not possible without reliable and accurate data and targeted large-scale intervention to build industries of scale is almost impossible. It is unfortunately therefore unsurprising to witness ‘opportunistic’ PPE procurement in the absence of a data based, longer-term localisation strategy and programme. It is therefore critical that State and SOE Procurement transactional records are analysed, linked with data from the mining and other technical industries and correlated with census data and commodity and economic indices to establish a Centralised Localisation Workbench. Empirical data can then guide strategy and prioritise initiatives in terms of economic value addition and employment creation.
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A Structured Engagement The aim of this section is to posit a methodology to structure the Localisation initiative towards outcomes; e.g. tangible job creation targets.
11. Developing a Framework for Stakeholder Engagement
Key stakeholders need to be aligned around what is in the best interests of the
manufacturing industry and how it should support critical and core primary segments such as mining, steel and petrochemical.
The following model is a proposed framework to accelerate stakeholder engagement and ensure all objectives are defined, communicated and agreed.
12. A Roadmap for Localisation Opportunity Mobilisation
A roadmap needs to be agreed in order to mobilise industry engagement to secure localisation opportunities in South Africa, beyond what has already been achieved or set out in some Masterplans such as the Automotive Masterplan. The roadmap should focus on the following elements:
a) Leverage State Procurement – Government’s spend in South Africa is substantial and this spend should be used to focus and guide localisation opportunities. b) Formalise Strategic Alliances – develop and secure strategic alliances to increase local manufacturing scale. These alliances should not only provide
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Intellectual Property (IP) but also transfer manufacturing best practice and advanced manufacturing processes and technologies. c) Leverage Innovation and Research – stimulate design innovation and technology research to ensure that competitive advantage in the sector is developed and maintained. d) Formalise Strategic Partnerships – create and develop strategic partnerships to gain global market access because, in many instances, we have developed innovative products, but the extent of local demand is just too small to ensure economic viability and sustainability. These partnerships must secure global demand to ensure manufacturing scale. The elements of this roadmap must be secured at every stage during the implementation of the industrialisation strategy.
13. An Integrated Localisation Stakeholder Alignment Approach
The proposed industrialisation approach includes four key elements that need to be in place to drive the sustainability of any industrialisation strategy. These elements are interdependent and require the alignment of all stakeholders.
The proposed implementation framework flows from the underlying logic and we recommend the following approach:
a) Part I: Develop Fundamentals required for Performance-Based Industrialisation; b) Part II: Attract and Exploit Industrial Opportunities; c) Part III: Develop Strategic Partnerships; and d) Part IV: Leverage Innovation and Technology e) Part V: Monitor, Review and Recalibrate Industrialisation Strategy There is an immediate and urgent emphasis on the development of skills and infrastructure. This must be accompanied by the progressive attraction of industrial investment and the development of strategic partnerships. The desired focus on
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innovation and technology is largely dependent on skills and infrastructure so will only become a focus when these are in place.
For South Africa the key outputs to be sought will be the development of local technology, the creation of jobs, skills development, an increase in productive apacity and, potentially, a reduction in import costs that will benefit domestic industry.
This model will be developed in subsequent engagements.
14. Framework for Opportunity Evaluation, Implementation and Oversight
It will be important to define a clear engagement process to manage performance- based industrialisation from business case inception to the factory is operational and beyond.
In short, this process must ensure that opportunities are transformed into sustainable jobs.
A comprehensive engagement approach is proposed in the diagram below; the detail should be defined in a further study.
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15. The Way Forward
Some proposals with respect to the optimal deployment of the range of policy instruments is set out in the first section of the document. These are not exhaustive. These proposals are offered, mindful of the possibility that the departments and institutions which carry a legislative mandate for localisation may have already taken the work beyond the proposals set out herein and such progress has not been registered in this document, given the scope of this work.
In addition, the key next ‘process steps’ for the Digitisation process work are suggested as follows.
a) Mandate, establish, and resource a “performance-based” Collaborative Localisation Forum to; • Determine the position, challenges and non-negotiables of each stakeholder; • Determine the issues causing job creation gridlock and agree strategies to move forward; • Determine the underlying value chain maturities including the state of digitalisation within each sector and the competitive drivers required for sustainable and economic viable entities. This could commence with the critical Technical Value Chain which includes steel, mining and the SOE’s. • Determine the economic value add and contribution to the industrial effort (and the NDP) of each value chain sector; • Develop a Localisation consensus framework to prioritise focus areas and opportunities – aligned with localisation initiatives set out in the respective
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Masterplans and as and where appropriate, with reciprocal ‘conditionalities’. b) Setup a Localisation Workbench to enable data-driven localisation decision making: • Analyse State and SOE Procurement spend to guide sustainable localisation opportunities; • Analyse the procurement and supplier development of participating technical industry companies with State and SOE procurement in order to develop ‘common purpose’ opportunities; • Combine analysis with economic indicators, commodity indices, import & export data and census data; • Setup research capability and develop an industrialisation workbench that can be used across Government and Industry to guide and leverage localisation efforts; and • Develop a “Voice of Manufacturing” survey to understand the true state of technical value chains within each manufacturing sector in South Africa. c) Develop Localisation opportunities for rapid implementation: • Develop an opportunity governance framework, reporting structures and strategic targets; • Develop critical opportunity design criteria for local competitiveness; • Create an ‘NDP Economic Value Add Model’ to track implementation and monitor performance over the long-term; • Develop industrial opportunity investment packs for wider industry to action; and • Design and action a pilot approach with selected investors; and • Develop an opportunity promotion plan to secure demand. Consideration of leveraging existing and new technologies and the size of the initiatives and interventions required will be important and to identify the “sweet spot” opportunities and potential, sometimes described in policy documents as the ‘fifty top localisation opportunities’.
The expansion of current capabilities and technologies could be relatively quick to scale. Access to global markets will require either global brand support or a trusted local brand such as Denel or Bell Equipment with proven technologies and capabilities to deliver reliable product to global markets. Large-scale industrialisation has the potential to create Tier-One OEMs that employ 5 000 to 10 000 people with a significant impact on upstream supplier development and downstream supply capabilities. It is also relatively easy to ensure the success of these initiatives because
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of their formal organisational and business process design that is based on accepted best practices. With the global reach of these entities they are less prone to failure
This could potentially be supported by certain mergers and acquisitions in the local market to set-up a large single mining equipment brand with scale. This can possibly be accelerated when current investments are considered, especially when small- scale niche companies in distress are merged into larger viable economic entities.
The establishment and nurture of SME’s in the TVC (and other value chains) is obviously important. An initial observation is that small-scale investments are continuously falling into distress owing not only to their limited scale and focus, but also the direct exposure and vulnerability to local economic factors and structural deficiencies within industrial value chains.
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Bibliography The following documents are referenced directly and/or are utilised as general references for the purposes of the study. 1. (1) African Economic Development – evidence, theory and policy. Cramer, Sender and Aqubay, Oxford University Press. 2. (2) Buy America Acts, Reference United States Code. Itle 41- Public Contracts. Subtitle IV- Miscellaneous, Chapter 83- Buy American. 3. (3) Constitution of the Republic of South Africa. www.justice.gov.za. (3) Government Contracting and Public Procurement in South Africa. Bowman Gillfillan. https:www.bowmanslaw.com) 4. (4) The Competitive Supplier Development Programme. www.gov.za and Briefing on the Competitive Supplier Development Programme by DPE to the PPC, Parliament. www.static.pmg.org 5. (5) Public Finance Management Act (PFMA) and Preferential Public Procurement Act (PPPFA) and Regulations. www.treasury.gov.za/legislation/pfma/act.pdf (5) Preferential Public Procurement Finance Act and amended Regulations.www.gov.za and National Treasury. (5) Analysis of Existing Industrial Policies and the state of implementation in SA. TIPS and Frederich Ebert Foundation. www. Fes-south Africa.org.
6. (6) Draft Public Procurement Bill. National Treasury. www.treasury.gov.za 7. (7) The National Industrial Participation Programme (NIPP) (7) The NIPP in South Africa. www://Dentons.com. An analysis of the NIPP 8. General references as follows;
• Trade and Development Report 2014 – UNCTAD • The rise of ‘The Rest’ – Challenges to the late industrializing economies – Alice Amsden • How rich countries got rich and how poor countries stay poor – Erik Reinert • How Asia works: success and failure in the world’s most dynamic region - Joe Studwell • Governing the Market: Economic theory and the role of government in East Asian industrialisation – Robert Wade • Bad Samaritans: The myth of free trade and the secret history of capitalism – Ha Joon Chang • The Rhetoric of Reaction: Perversity, Futility, Jeopardy – Albert O Hirschman
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• State-directed development: Political power and industrialization in the periphery – Atul Kohil • Pathways to Industrialisation in the 21st Century - Szirmani, Naude and Alcorta Eds. • Industrial Policy in a Harsh Climate: the Case of South Africa. Nimrod Zalk – Strategic Advisor: Minister of Trade and Industry. • The National Industrial Policy Framework and successive iterations of the Industrial Policy Action Plan 2009/10 – 2018/19 www.gov.za published by the department of Trade and Industry. • Industrial Policy Action Plans 2009/10 -2018/19. www.gov.za
9. The following publications were referenced in the Mining Study – the research, analysis and findings of which provide the basis for Section 2 of this document. 10. Andre Erasmus, Trade Zones: Recommendations for South Africa (2011) Business Sweden, Opportunities in Indian mining equipment industry (2015) 11. Citibank, various publications 12. DTI, Special Economic Zones Tax Incentive Guide (2018) 13. DTI: “Black Industrialist Programme”. www://thedti, 14. Ernst & Young, Mining Equipment Overview (2014) 15. Fraser Institute, Survey of Mining Companies (2017) 16. G. Saggers: A critical analysis of the fiscal incentives offered to particular South African Special Economic Zones. Faculty of Commerce, UCT, 2015. 17. IDC, “Export opportunities for South Africa’s capital goods industry” (Nov 2014) 18. IDC, Export opportunities for South Africa’s capital goods industry (2014) 19. IDC, Opportunities for downstream value addition in the platinum group metals value chain: Fuel cells (2013) 20. Institute of Developing Economies-Japan External Trade Organisation: “China in Africa”. 21. Jim Rutherford, The Mining Industry - Regaining the trust of investors (2018) 22. Judith Fessehaie, The Regional Value Chain for Mining Capital Equipment: Linkages and Firm Upgrading in South Africa and Zambia (2015) 23. Keith Lockwood, Analysis of Investment in Mining (2016) 24. McKinsey Global Institute, “Manufacturing the future: the next era of global growth and innovation” (2012). 25. McKinsey Global Institute, Manufacturing the future: the next era of global growth and innovation (2012)
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26. METS, 10-year sector competitiveness plan (Mining Equipment Technology and Services – Australia – undated) 27. METS, A Roadmap for unlocking future growth opportunities for Australia (2017) 28. Minerals Council of South Africa “Platinum Strategy Fact Sheet”, February 2019 29. Minerals Council South Africa 30. MSANDA, Mining Industrialisation Initiative (2018) 31. MSANDA, Opportunities in Mining Industrialisation (2018) 32. Nastoserve, Strategic Plans and Alignment to the Platinum Valley Positioning Strategy (undated) 33. NWDC Economic Data Report, 3rd Quarter, 2018. 34. Peter Muchlinsk, Multinational Enterprises and the Law. Oxford (2007) 35. Public Investment Corporation (PIC) 36. PWC Strategy&: “What Foreign Investors Want - South African insights from a global perspective on factors influencing FDI inflows since 2010. (2018) 37. PwC, Mine 2018 – Tempting times (2018) 38. Sandvik Company Presentation (2018) 39. Scott Brundrett, Industry analysis of autonomous mine haul truck commercialization (2003) 40. Trade & Industry Policy Strategies (TIPS) 41. World Bank, Ease of doing Business (2018) 42. World Bank, various publications. 43. World Economic Forum, Survey of Mining Companies (2017)
Web Sources include:
44. http://nwdc.co.za/trade-investment/platinum-valley-sez-established-North West 45. http://www.engineeringnews.co.za/article/sas-top-five-mining-capital-equipment- exporters 46. http://www.investmentincentives.co.za/expenditure-capital/infrastructural-development- incentives/critical-infrastructure-program
47. http://www.sars.gov.za/ClientSegments/Businesses/Pages/Venture-Capital- Companies.aspx 48. http://www.sars.gov.za/ClientSegments/Businesses/SmallBusinesses/Pages/default .aspx
49. http://www.thedti.gov.za/financial_assistance/financial_assistance
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50. https://ewn.co.za/2019/02/03/world-warn-ramaphosa-to-act-against-corruption
51. https://savca.co.za/member-category/all/ 52. https://www.businesslive.co.za/bd/national 53. https://www.businesslive.co.za/bd/opinion/2018-05-04-engineering-companies-now-have- to-re-evaluate-their-appetite-for-risk/. 54. https://www.coega.co.za/ 55. https://www.fundingconnection.co.za/funding-agencies-in-south-africa 56. https://www.gcis.gov.za/sites/default/files/docs/resourcecentre/newsletters/issues.pdf
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