Policy impediments that prohibit SOEs from advancing their developmental mandate: National Treasury & dtic briefing

Meeting report

National Treasury on State-Owned Companies' procurement legislative challenges

Ms Estelle Setan, Acting Chief Procurement Officer, National Treasury (NT), briefed the Committee on the NT's response to State-Owned Companies' (SOCs') procurement legislative challenges.

She said the first challenge was the requirement for National Treasury to approve all the contract amendments above prescribed thresholds in terms of instruction three of 2016/2017. Approval of these variations should be done away with, as they had contributed to a marked increase in the SOCs' irregular expenditure, as some contracts had expired due to the additional timelines required. The NT proposed that these responsibilities should reside with the SOC accounting authorities (AAs), with them having the discretion to delegate authority to the chief executive officer (CEO) to manage the risks. There was also a proposal that there should be quarterly reporting by SOCs to the National Treasury on a threshold above R100 million.

She informed the Committee about the new supply chain management (SCM) Instruction Number three of 2021/22 on enhancing compliance, transparency, and accountability in SCM issued by the National Treasury, effective from 1 April 2022. The instruction states that the power to approve procurement by “other means”, i.e., deviations from inviting competitive bids, had been vested once again in the AAs. This instruction repealed the 2016/17 instruction three.

Instructions were required to report the procurement by “other means” to National Treasury and Auditor-General of South Africa (AGSA).

The intention of the reporting to National Treasury and the AGSA was to ensure that glaring matters of non-compliance were acted on with urgency.

The second challenge was the requirement for National Treasury to approve all deviations from a competitive bidding process in terms of paragraph eight of instruction three of 2016/17. She highlighted that there were challenges with the use of original equipment manufacturers (OEMs) to install and maintain equipment, and the use of organs of state, such as the Council for Scientific and Industrial Research (CSIR).

There was a proposal once again that these responsibilities should reside with the respective Accounting Authorities. A list of deviations must be submitted to National Treasury concurrently, and the NT should be given 14 days to object.

The third challenge referred to the requirement of NT to approve the supplier restrictions process in terms of paragraph 7.4 of instruction three of 2016/17. The challenge was that only National Treasury could restrict suppliers and the ability of the SOC to restrict suppliers who had compromised procurement systems.

The proposal was that SOCs should be able to restrict suppliers going through the SOC supplier review. The list of restricted suppliers must be submitted to National Treasury concurrently, and NT should be given 14 days to object.

She noted the importance of the impact of restricting a supplier, highlighting that the supplier could not do business with the SOC and all other government institutions in their entirety. Consequently, the rules of natural justice needed to be complied with when limiting a supplier's right to trade with government.

The fourth challenge was that the Preferential Procurement Regulations (PPRs) only allow negotiations to achieve a market-related price. They do not allow for competitive post tender negotiations which may result in organs of state paying a premium for goods and services. Historical prices were inflated and had a massive impact on cost.

There was a proposal that the SOC would like to be able to allow for competitive negotiation in a fair and transparent manner. Negotiation should be allowed even where a market-related price had been achieved so that the SOC could achieve the most optimal price and value for money.

The fifth challenge was that the Preferential Procurement Regulations required National Treasury to approve the second cancellation of tenders. She highlighted that this delayed the processes and impacted a SOC’s operations unnecessarily. It also impacted the Accounting Authority’s accountability for such processes.

They proposed that these responsibilities should reside with the respective SOC Accounting Authorities.

The sixth challenge referred to the bid evaluation criteria. It was stated that the criteria and principles must be developed and agreed upon. The current evaluation process did not take technical competence into account in the final selection. All suppliers who passed the minimum functionality level were scored against the 90:10 scoring principle.

The proposal was that SOCs should develop an evaluation criterion and must include independent third parties in bid specification and evaluation committees. SOCs should be allowed a concession to apply an evaluation matrix that took functionality into account in the final awarding of contracts -- giving an example of 40% price, 40% functionality, and 20% broad-based black economic empowerment (BBBEE).

It was stated that only acceptable tenders may be evaluated in terms of price and preference. She highlighted the definition of an acceptable tender as defined in the Preferential Procurement Policy Framework Act (PPPFA), as “any tender which, in all respects, complies with the specifications and conditions of tender as set out in the tender document.”

The seventh challenge related to the irregular expenditure framework section on condonations. She said that condonations must be taken to National Treasury irrespective of the materiality or the value. NT makes a decision on the suitability of consequence management applied. It could not be removed until NT condoned.

The legacy of the historical irregular expenditure as a result of state capture continued to hamper the achievement of unqualified audit opinions on the annual financial statements.

It was proposed that there should be appropriate thresholds for condonation approval within the delegation of the Accounting Authority. Irregular expenditure should be reportable in the annual report of the SOC, and not a requirement for reporting in the annual financial statement (AFS).

The eighth challenge was related to the e-auction platform, to allow for the bidding process to take place through auction on an automated system.

There was a proposal to develop systems that would allow reverse auctions, in line with section 217 of the Constitution.

The request to implement an e-auction platform was being considered as part of the modernisation and automation initiatives.

Challenge nine referred to the geographical set contracts -- the opportunity for a SOC to set aside work from local to site. Community expectation in terms of local site opportunities for procurement resulted in industrial action, and property damage.

They proposed that SOCs should be able to identify commodities and services that qualify for local site considerations.

The tenth challenge referred to the directive on advertising, publishing and closing of bids during the festive period, highlighting that the specific directive made it procedurally unfair to advertise, publish and close off bids from 16 December to 7 January.

They proposed that the SOC should be able to do procurement were needed for operations, without it being irregular. A criterion should be defined for such instances.

The directive was not an instruction, but rather provided advice. The advice was provided due to the abuse of tenders being issued when most companies would not be able to respond. It advised against advertising during that period.

The penultimate challenge was related to the usage of the Central Supplier Database (CSD). SOCs said that the CSD information was not verified and therefore they still had to verify the supplier information. The products or services listed in the CSD did not match the requirements for the technical nature of the business.

The proposal was that SOCs should be allowed to maintain an internal supplier database, where the prerequisite supplier checks and verifications were done for the stated products that suppliers could offer.

The CSD had been implemented with the aim of simplifying the process of doing business with the state and reducing the compliance burden for both suppliers and buyers. The NT did not verify the skills of suppliers registered on the CSD -- this was left to procuring entities.

The final challenge referred to the emergency procurement definition, which did not cover real situations of operational contingencies, such as the breakdown of power units or locomotives resulting in production losses, security of supply or loss of income.

The proposal was that the SOC’s definition of emergency procurement must be agreed upon. The Accounting Authority of the SOC should have the authority to do emergency procurement based on the wider definition of the emergency, including the threat to security of supply.

The Chairperson handed over to the DTIC to make their presentation.

 Briefing by Department of Trade, Industry and Competition (DTIC)

Mr Stephen Hanival, Chief Economist, DTIC, introduced the delegation from DTIC. He said it was a known fact that the localisation and the use of state procurement as an industrial policy tool were fundamental in economic policy.

He said that the delegation would cover both the discussion around industrial policy, and the potential for state procurement to be used for industrial policy objectives. Some of the colleagues represented the sectors directly affected by decisions from SOCs.

Mr Hanival’s internet connectivity was cut, but Dr Tebogo Makube, Chief Director: Industrial Procurement, indicated that he was going to lead the presentation.

Dr Makube said that the DTIC presentation would try to advance the debate on the issues of the preferential procurement policy framework (PPPF). The DTIC was responsible for the implementation of the local content policy and the BBBEE policy. The presentation would also touch on some of the challenges faced by Eskom and Transnet.

He highlighted the reason why the DTIC played a critical role in the procurement arena. The government's expenditure as a percentage of gross domestic product (GDP) was critical -- in South Africa, it was about 21%. Looking at what was spent on goods and services and taking out money spent on wages, on average 15% expenditure was spent on goods and services, and that was procurement. He said the DTIC could strategically utilise this expenditure to support economic restructuring and recovery.

The economic reconstruction and recovery plan (ERRP) placed an emphasis on industrialisation through localisation. The objectives of the programme to drive industrialisation through localisation were to reduce the proportion of imported intermediate and finished goods, improve the efficiency of local producers, and develop export competitive sectors that could expand the sales of South African-made products on the continent and beyond.

He took the Committee through some of the procurement levers in the South African public procurement system.

The National Industrial Participation Programme (NIPP) was currently being applied by Eskom and Transnet. NIPP was used to support the aerospace industry, was applicable where imported content was USD$10 million or above, and was focused on goods that were not manufactured in South Africa. He made reference to companies such as Boeing and Armscor.

The Defence Industrial Participation (DIP) was managed by Armscor and applicable to all defence procurement. There were vessels currently being manufactured on behalf of the army, and both the NIPP and DIP procurement levers were being applied.

The competitive supplier development programme (CSDP), which was no longer in operation, was managed by the Department of Public Enterprises in conjunction with the SOCs. There had been a directive from Minister Gordhan in 2020 that Eskom and Transnet must cease to implement the CSDP and implement NIPP. Hence there were currently projects that were being registered under NIPP, coming from Eskom. He made an example of the project of the maintenance of Koeberg being registered under NIPP.

 With regard to the designation and local production level, he said he would highlight more on the court judgment that had led to the regulations being deemed invalid. He said the regulations were empowering provisions legally for the Government to implement localisation.

The Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) was where localisation methods were also being applied. Municipalities would also be playing a huge role in this space, as there needed to be support for the green economy. The government had a choice on whether to rely on imports or to support its own companies to produce.

He referred to the Local Procurement Accord (LPA), highlighting that most of the levers applicable were not legally obliged to be implemented. The National Economic Development and Labour Council (Nedlac), together with the DTIC, agreed that through the LPA business labour and government had committed themselves to buying locally manufactured products.

Eskom and Transnet had committed themselves through the localisation and policy positions to support industrialisation and localisation by leveraging procurement spending. A roadmap issued by Eskom in 2019 and the integrated report in 2021 further reiterated this commitment. Transnet indicated in their integrated report of 2021 that they would implement the enterprise and supplier development initiatives that would support localisation and industrialisation, and provide opportunities for black people, youth, women, small businesses, people living with disabilities and people living in rural communities. 

He highlighted the legislative requirements on public procurement in South Africa. Section 217(1) of the Constitution requires that when an organ of state contracts for goods and services, it should do so in accordance with principles of fairness, equitability, transparency, competitiveness, and cost effectiveness. Section 217(2) - subsection 1 did not prevent the organs of state or institutions referred to in the subsection from implementing a procurement policy, which provides (a) categories of preference in the allocation of contracts; and (b) the protection of persons, disadvantaged by unfair discrimination. Section 217(3) states that national legislation must prescribe a framework within which the policy referred to in subsection (2) must be implemented.

The PPPFA (Act 5 of 2020) prescribes the framework within which preferential procurement policies may be implemented.

On 16 February 2022, the Constitutional Court declared the preferential procurement regulations to be invalid in totality.

Some of the challenges pertaining to localisation in public procurement referred to specifications. Sometimes specifications were written to meet import product grades, and not those of local markets. The requirement in tenders was in most instances for brand-specific components which were manufactured abroad. Requests for proposals (RFPs) were specific on proven design (in most instances, outside of the country) thus making innovation in the industry impossible.

The lead times for local industry to “turn around” operations to supply specific programmes were not considered. Procuring entities did not give an opportunity for the development of a local design. Local engineers were not consulted.

The requirements of procuring entities for performance bonds as a requirement to qualify for a tender hampered the ability of the industry to apply for tenders,

Finally, the lack of procurement plans and the urgent nature of SOC’s procurements did not give the industry enough time to get ready, thus leading to importation.

He also highlighted some of the specific problems pertaining to Eskom and Transnet.

He referred to the DTIC’s engagement with SOCs, saying that since the implementation of localisation there had been numerous engagements to emphasise the strategic role of procurement as a lever for industrialisation and the negative impact of imports on the economy.

Highlighting that alignment with public procurement that enabled industrialisation was still difficult to achieve.

He requested that the Committee should get a broader view of what the court judgment was all about.

 Discussion

The Chairperson indicated that he anticipated challenges with his connectivity, therefore an interim Chairperson was elected. He asked Mr S Gumede (ANC) to take some of the questions from the Committee Members based on both presentations.

The interim Chairperson thanked both the presenters from National Treasury and the DTIC, and said that the presentation had left much to be desired. He noted that there were only nine Committee Members compared to the number of visible participants on the virtual platform. He highlighted the importance of the engagement, and said that it had required more than an hour or two hours, as it had talked about the issues related to procurement, localisation and industrialisation. A factor that remained a weakness was that documents often arrived late, and therefore not enough time was given to prepare penetrating questions.

He indicated that since the PPFA document was about to be finalised, he hoped that the Committee would be allowed time to engage on the matter.

He gave the Members a chance to discuss the presentations, based on the attendance record.

Ms J Mkhwanazi (ANC) welcomed both the presentations from DTIC and National Treasury. She shared the sentiments of Mr Gumede, saying these engagements should be ongoing with the Committee as they remained of utmost importance. She also referred to the late arrival of some documents. The discussion of procurement issues was not a new discussion.

She noted the absence of the DPE, and asked if the DPE had had any engagements with the National Treasury on the issue of Denel SOC, highlighting that in the last oversight period the Committee had placed emphasis on the matter. She asked for an update on its progress.

There had been a discussion in the last oversight meeting on the issue of lessons learnt and the proactive strategic plans in dealing with all SOCs. She asked whether the DPE was assisting some of these SOCs, particularly on the issue of reinforcing of their finances.

Mr G Cachalia (DA) welcomed the presentation from National Treasury on its proposals and referred to the current crisis that was faced by Eskom and the looming crisis at Transnet.

He asked if the reliance on the Companies Act should not be investigated versus the PFMA, as well as to cover increasing private sector involvement aimed at assisting SOEs to re-emerge sustainably. He asked if SOEs should not procure constitutionally in accordance with the principles of fairness, equitability, transparency, and cost effectiveness. He asked if a revision of the bid criteria was not required to reflect this issue, particularly the BBBEE component which had created many costing issues, to put it mildly.

He referred to the presentation from the DTIC. Localisation and industrialisation were government policies, and they sought to advance developmental policies in seriously challenged SOEs. He said that the current needs and requirements that were needed to stabilise these entities, in particular at Eskom and Transnet, should be addressed.

He requested that these policies, and their applicability, should be revisited. That would provide time for the provision of data as to how industrialisation and localisation had fared, as well as the options to sustain and provide public goods to ensure stability of SOEs. Without such, there would continue to be a drain on the fiscus and the requirement of a massive bailout.

He said that would negate the policy of the DTIC.

Cutting across both the DTIC and NT, there needed to be compliance with the constitution.

He asked for a legal opinion on the implications of the Constitutional Court judgment so that there was clarity on the constitutional requirements regarding procurement, section 217(2) and other grey areas. Failure to do so would lead to legal contestation.

Mr N Dlamini (ANC) echoed the sentiments of Mr Cachalia, agreeing that there needed to be a proper legal opinion on the court judgment among reasons for government passing laws that passed the equality clauses of redress. He said that they needed to get a legal opinion in terms of how the judgment affected the legislation.

He addressed the issue of localisation of local content. He asked how the skills of Eskom and Transnet were being utilised and how they fitted into the local procurement and localisation debate.

He made reference to a past company that used to produce the bulk of the steel used in rail networks. The plant in the Western Cape close to Saldanha Bay had been dormant for quite some time now. He said that with railway lines being stolen, the Committee would have to address how to source steel and would probably have to import from countries such as Australia. He asked if South Africa had the capacity to produce locally.

He said that there were processes to review and evaluate the laws that were being passed, and asked if they were serving their purpose. He was not sure if that was still a discussion.

Ms V Malinga (ANC) asked how it was possible to lose such court bids when there were state attorneys. She said that when SOEs and government departments passed bills, the state attorney needed to come on board and be available for a legal opinion.

She asked for clarity on the meaning of "an emergency procurement."

Chairperson Magaxa reminded the presenters of the main objectives of the issue at hand. The Committee needed to be concerned with the issues of state-owned entities which were under the DPE. He said that central to the collapse of these SOEs was the lack of consideration of the importance of public partnerships.

Mr Gumede made a few remarks with regard to the presentations. He said that the comments of the DPE were important, as they were the principals of the entire process.

 Responses from DTIC and National Treasury

Ms Setan responded to the request for an explanation of "emergency procurement." She outlined the definition of an emergency situation -- it was an immediate, serious or unexpected situation that posed a risk to life, property or environment, and which called for immediate action without time to follow a competitive bidding process. Companies that were closed over the festive season missed out on the opportunity to participate in the tender process.  The issue of cautioning departments on issuing new tenders planned over the festive period was because most companies did not see these tenders. She said that emergency procurement happened under completely different circumstances. 

She said that Accounting Officers were usually heads of departments (Directors-General), provincial or national. The Accounting Authority was the board, and the PFMA made reference to it in terms of the public entities, although some responsibilities may be delegated to the CEO. The proposals made by the SOCs were to make quarterly reports on the deviations, expansions and extensions of contracts. This would assist with the proactive intervention measures that needed to be put in place.

Ms Leanda Pietersen, Director: SCM Legal Advisory Services, National Treasury, added that she agreed with some of the Members on the issue of the time constraints of the meeting, as some of the issues such as the court judgment did not have much time to be discussed and reflected upon. She said that National Treasury did not believe that the judgment had thrown out certain issues regarding the protection and advancement of the category of persons previously disadvantaged by unfair discrimination. The reality was that even with so many lawyers in a room, there would be differences in opinions. The judgment had been a four-five split, and even the judges at the Constitutional Court level disagreed on their views.

Mr Gumede made a few remarks on the responses from the National Treasury. He asked again for clarity on the finalisation of the PPPFA.

Dr Makube responded to the questions about exemptions. He said that often words were used interchangeably, and they had tried working with NT to explain the definition of exemptions. The exemption referred to in the presentation referred to lowering of minimum thresholds for local content. Bidders should approach the DTIC for an exemption to import materials in this context. There had been attempts to change the word to relate to the lowering of the minimum threshold. He referred to another form of exemption which was the responsibility of National Treasury.

He said that there were limitations, so the legislation should address the deviation in the context of organs of state procuring from each other.

Ms Thandi Phele, Acting Deputy Director-General: Industrial Competitiveness and Growth Branch, DTIC, said that the Department had to be selective in how they would want to create locally manufactured content.

She said that as part of the locomotive programme, there were parts of the package that were dedicated to Transnet engineering, which had assisted in creating changes in certain facilities.

The meeting was adjourned.