Selling to the Government
Growth Government purchasing is a significant and growing factor in the South African economy, as it addresses infrastructure deficits that include energy, transportation, communications, health, and education.
At a Covid-19 recovery Sustainable Infrastructure Development Symposium South Africa (SIDSSA) conference held in June 2020, representatives from the public and private sectors discussed how to co-operate on infrastructure renewal projects in energy, transport, water and human settlements, digital infrastructure, agriculture, and district development.
Nearly all purchasing (at all three levels of government (national, provincial, and municipal) is done through competitive bidding on invitations for tenders, which are published in an official state eTender Publication website managed by the Department of Finance / National Treasury: https://www.etenders.gov.za/ and sometimes in leading newspapers. The eTender portal is managed by the Office of the Chief Procurement Officer (OCPO) who sets the policy on content, functionality and coordinates the administration with users at national, provincial, and local government level.
OCPO The OCPO has a mandate to ensure that public sector organizations in South Africa honor the provisions of the section 217 of the Constitution when spending taxpayer’s money on procurement of goods, services and works. The eTender Publications Portal is one of the initiatives instituted by OCPO to support fair, equitable, transparent, competitive, and cost-effective procurement in an easy to access, single point of entry, technology driven facility. It is worth noting that this portal displays all public sector tenders in South Africa daily.
Local presence Although the purchasing procedures of the central government and parastatal institutions favor local manufacturers, an overseas firm is not precluded from bidding if the firm has an agent in South Africa to act on its behalf. As a general practice, the local agent receives the payment. Several factors outlined below impact the process of selling to the South African Government and its agencies.
Central Government Procurement
CSD The Central Supplier Database (CSD) maintains a database of organizations, institutions, and individuals who can provide goods and services to the South African Government. The CSD has served as the single source of key supplier information for organs of state since April 1, 2016, providing consolidated, accurate, up to date, complete, and verified supplier information to procuring organs of state. The central government procures through a so-called “supply-chain management” process to streamline the buying procedures of national, provincial, local, and state-owned companies. As part of the Public Finance Management Act (PFMA) Regulations of 1999, procurement accountability has devolved to “accounting officers.” Depending on their level of responsibility, accounting officers may approve government purchases up to a certain amount.
Principles The South African Constitution lays out basic, socio-economic principles for government procurement. Procurement by an organ of state or any other institution identified in national legislation must be “in accordance with a system which is fair, equitable, transparent, competitive and cost-effective,” while also allowing for categories of preference and the protection, or advancement, of persons disadvantaged by unfair discrimination, within a framework national legislation. South Africa also bases procurements on the principles of accountability and just-in-time (JIT) delivery.
Competition Purchases are generally by competitive tender for project, supply, and other contracts. Bidders generally need not pre-qualify, but the government examines the ability of bidders to supply goods or render a service. Foreign firms can bid through a local agent. The due date for a bid is usually at least twenty-one days from the publication of the notice. As a general practice, however, the contracting party allows a lead-time of thirty to forty-five days. Bids for government tenders must be on a basis of all costs included to the specified delivery point.
Local Content Requirements
CSDP Since 2011, the South African Government has increased its local content requirements. The Department of Public Enterprises (DPE) has formulated the Competitive Supplier Development Program (CSDP), aimed at building up the local supply base. This is becoming increasingly important in the bidding process, particularly for foreign firms.
NIPP Previously, state-owned enterprises (SOEs) participated in the National Industrial Participation Program (NIPP), an import-offset program for government agency expenditure managed by the Department of Trade, Industry and Competition (DTIC). Under the NIPP program, all imports of more than $10 million required the supplier to work with DTIC to invest the equivalent of 30 percent of the value of the purchase in a non-related industry. However, under CSDP, companies now have more discretion to meet government requirements in this area.
Foreign prospective suppliers need to look closely at localization requirements, which are complex, evolving, and vary by sector.
Broad-Based Black Economic Empowerment (B-BBEE)
Criteria A pivotal consideration with the government and parastatal procurement process is that manufacturers or suppliers to government get varying levels of procurement preferences if they qualify as a Black Economic Empowerment (BEE) partner. The criteria to become a BBE partner aim to quantify the contribution by these partnerships to empower previously disadvantaged individuals according to a varying mix of the following parameters:
- Black Ownership
- Black Management Control
- Employment Equity
- Percentage of Black Skilled Personnel
- Preferential Procurement from Black/BEE Suppliers
- Skills Development Initiatives
- Enterprise Development Initiatives for Black Businesses
Expansion The South African Government is expanding BEE requirements on an ongoing basis. Amended regulations entered into force in 2013 and 2015 and vary by industry sector charter. In BEE legislation, the term “Black” is used generically to refer to South African citizens of the following racial/ethnic groups: Black (those whose ancestry is exclusively/almost exclusively African), “Coloured” (those of mixed European/African or European/Asian origin), or Indian (those whose ancestry originates in the Indian sub-continent). A 2008 court decision expanded the BEE program to include South Africans of Chinese descent.
Guidelines The Broad-Based Black Economic Empowerment Act of 2003, the legislation enacting the BEE strategy, directs the Minister of Trade, Industry and Competition to develop a national strategy for BEE, issue BEE implementing guidelines in the form of Codes of Good Practice, encourage the development of industry-specific charters and establish a National BEE Advisory Council to review progress in achieving BEE objectives. While firms are not legally required to meet BEE criteria, in practice they have a very limited chance of competing for government or parastatal procurements if they do not. Entities gain credits if they include in their up- and downstream supply chain partnering with other entities that qualify as being compliant on employment equity and other criteria.
BEE Codes of Good Practice and other pertinent legislation may be found on DTIC’s website:
https://www.bbbeecommission.co.za/b-bbee-codes-of-good-practice/
Public Private Partnerships (PPP)
Options The South African Government and its parastatals also pay close attention to public-private partnerships (PPPs). This mode of outsourcing operational responsibility is an alternative to direct government procurement. While it allows a variety of leasing options, it can also include buying a service from a private entity. This mode of business implies less risk for government, due to a significantly reduced capital investment requirement, and a predictable expenditure model (linked to the fee structure payable to the service provider) while at the same time allowing BEE entities to benefit from traditional government operations. The more complex PPP tender bidding process has in some cases also led to longer adjudication and awarding timelines.
Some quarters of organized labor criticize the PPP process as leading to greater privatization and deregulation. The South African Ministry of Finance (Treasury) administers the government procurement process. For more information, see:
South African National Treasury
PPP Unit
Tel: +27 (0)12 315 5741
Fax: +27(0)12 315 5477
Offsets and Countertrade
Stipulations South Africa’s National Industrial Participation Program (NIPP) mandates a countertrade/offset package for state and parastatal purchases of goods, services, and lease contracts over $10 million. Under the program, all bidders on government and parastatal contracts who exceed the imported content threshold must also submit an Industrial Participation package worth 30 percent of the imported content value. All government and parastatal tenders’ issue NIPP requirements with the tender documentation and are overseen by the Industrial Participation Secretariat of the Department of Trade and Industry.
The Department of Trade and Industry administers the NIPP. See the following:
http://www.thedtic.gov.za/sectors-and-services-2/industrial-development/national-industrial-participation-programme/
Parastatals
Parastatals (more commonly known as state-owned enterprises, or SOEs), local authorities, and major private buyers, such as mining companies, must follow practices like those of the central government. Parastatal procurement is guided by and bound to the schedule of local content preference. Local government purchases are increasingly significant and involves overseas bidding. With decentralized procurement by the nine separate provincial governments in South Africa, the prospects for additional government procurement below the central government level are significant, even though strict budgetary restraints are in place and many agencies face a lack of capacity in rolling out and managing projects.
SA National Treasury oversees SOE compliance with the Public Finance Management Act (PFMA) that manages fair and transparent procurement processes. However, by its own admission, Treasury has increasingly allowed non-competitive bids under exceptional circumstances for the sake of service delivery. Deviation and expansion rules allow SOEs to use existing contracts without requesting new bids from suppliers. SOE Eskom reportedly submitted 11 deviations and 28 expansions for approval for the first two quarters of 2021/2022 totaling R879m and R1.9bn, respectively.
Roles SOEs play a significant role in the South African economy. In key sectors such as electricity, transport (air, rail, freight and pipelines), and telecommunications, SOEs play a lead role, often defined by law, although limited competition is allowed in some sectors (i.e., telecommunications and air). The government’s interest in these sectors often competes with and discourages foreign investment. DPE has oversight responsibility in full or in part for six of the approximately 700 SOEs that exist at the national, provincial, and local levels: Alexkor (diamonds); Denel (military equipment); Eskom (electricity generation); South African, Express and Mango Airways; South African Forestry Company (SAFCOL) (forestry) and Transnet (transportation). These six SOEs employ approximately 105,000 people. South Africa’s overall fixed investment is 19 percent of GDP. The SOEs’ share of that investment is 21 percent, while private enterprise contributed 63 percent, with government spending making up the remainder of 16 percent). The IMF estimates that the debt of the SOEs would add 13.5 percent to the overall national debt.
Eskom
The state-owned electricity company, Eskom, generates approximately 95 percent of the electricity used in South Africa by relying on coal-fired power stations which generate approximately 80 percent of Eskom’s electricity baseload. Eskom’s core business activities are generation, transmission, trading, and distribution. South Africa’s electricity system currently operates under strain due to low availability factors for base load generation capacity associated with maintenance problems, an ageing coal fleet, and allegations of widespread corruption. According to the Council for Scientific and Industrial Research, Eskom has conducted load shedding equivalent to more than 90% of the energy it had used throughout 2021 due to increased oil costs following Russia’s invasion of Ukraine, labor unrest, and possible sabotage. A state of disaster was declared over the electrical crisis in February 2023 as a result of the worsening power outages in Q1, 2, & 3—the state of disaster was subsequently lifted in April 2023. The government is now taking action, to raise the license-exemption ceiling for generators, to entice substantial new investment in the electricity sector. To increase efficiency, the government is also pressing forward with plans to restructure the utility into independent units. However, it is still unclear how the government plans to address enduring problems like revenue collection, indicating that power outages will be a problem for the short to medium term. Load shedding will certainly significantly reduce company confidence and have a detrimental effect on several industries, including manufacturing and mining. Loadshedding is likely to continue in the foreseeable future despite increased efforts to resolve the nation’s continuing power problem, including the appointment of an electricity minister during the February 2023 cabinet reshuffle. .
Transnet National Port Authority SOE
Transnet National Port Authority (TNPA) is a division of Transnet, a state-owned company that manages the country’s port, rail, and pipeline networks. It (TNPA) reportedly charges amongst the highest shipping fees in the world. High tariffs on containers subsidize bulk shipments of coal and iron ore, thereby favoring the export of raw materials over finished ones. According to the South African Ports Regulator, raw materials exporters paid as much as one quarter less than exporters of finished products. Transnet is in its third year of the Market Driven Strategy (MDS), a R366 billion ($25 billion) investment program to modernize its port and rail infrastructure. The benefits of this strategy include job creation, skills development, localization, empowerment and transformation with the expectation to create and sustain 584 000 jobs. It will also focus on shifting from Road to rail so as to reduce cost of doing business and also reduce carbon emissions. The majority of investment would therefore be in general freight and freight rail. In 2016, Transnet announced plans to invest R124 billion ($9.2 billion) in the next four years in rail, ports, and pipeline infrastructure. This began with Transnet’s selection of four OEMs to manufacture 1064 locomotives. The 4 OEMs were China South Rail (CSR), Zhuzhou Electric Locomotive, Bombardier Transportation (Canada) and General Electric South Africa Technologies. CSR and Zhouzhou Electric Locomotive would supply 359 electric locomotives valued at R14.6 billion excluding hedging and escalation costs. Bombardier Transportation would supply 233 electric locomotives at R7.1 billion. General Electric South Africa would supply 232 diesel locomotives at R7.8 billion. This CAPEX spend was to be 2/3 funded by operating profits with the remainder from the international capital markets. This was the first phase of the Market Demand Strategy. It was meant to last 4-5 years. However, the second phase (due to start in 2020) has been delayed in large part because of the State Capture inquiry of which Transnet has been severely impacted. This is evidenced by the fact that the awarding of the tender to the 4 OEMS have come under investigation as it was seemingly awarded following an irregular tender process, and the Transnet executives who oversaw the process are currently facing fraud and corruption charges.
Telecommunications
While government efforts to liberalize the telecommunications sector and encourage competition have improved, regulatory uncertainty and fragmented competition have hampered growth. Key challenges include strengthening the capacity of the sector regulator, the Independent Communications Authority of South Africa (ICASA). The South African government completed its high-demand spectrum auction in March 2022, with the goal of transforming the communication sector, allowing more competitors in the business, lowering communication prices, and expanding rural connection. The government’s goal was also to switch off from Analogue TV, but the target date of March 31, 2023, for complete switch off from analogue TV signal was not met. South Africa’s new Minister of Communications and Digital Technologies was recently charged with determining and publishing the analogue switch-off date for South Africa in the Government Gazette. South Africa failed to meet the 2015 International telecommunications Union (ITU) deadline for switching off analogue TV signals as part of the digital migration.
The South African Government plans to bridge the digital divide with SA Connect, a project to deliver widespread broadband access to 100% of the population by 2030. SA Connect is overseen by the Department of Communications and Digital Technology in collaboration with the State IT Agency (SITA) that manages procurements. South Africa Connect and SA Broadband Infraco (an SOE) have plans to increase the connectivity speed from 10Mbps to 100 Mbps (depending on available budget). This connectivity project aims to close connectivity gaps and meet the technology goals of the National Development Plan to have an inclusive digital society.
In May 2014, the government of South Africa signed the Special Economic Zones (SEZ) Act into law aimed at supporting balanced industrial development, manufacturing capabilities, and the development of more competitive free port-centric regional economies.
Prior to the SEZ Act, the Department of Trade, Industry and Competition (DTIC) initiated the Industrial Development Zone (IDZ) program under the Manufacturing Development Act of 2000. The focus of the current SEZ program is to attract foreign direct investment, increase the exportation of value-added manufactured products, and to create linkages between domestic- and zone-based industries. Bulk ore handling, chemicals, automotive manufacture, and related industries benefit from this initiative. Seven SEZs (Coega, East London, Richards Bay, Dube/King Shaka IA (KSIA), OR Tambo IA, Maluti Pafung/Harrismith, and Saldanha Bay) are operational with plans to create seven more. The largest SEZ, Coega, has attracted investments worth approximately R30 billion ($2.27 billion).
Advocacy
U.S. companies bidding on Government tenders may also qualify for U.S. Government advocacy. A unit of the U.S. Commerce Department’s International Trade Administration, the Advocacy Center coordinates U.S. Government interagency advocacy efforts on behalf of U.S. exporters bidding on public sector contracts with international governments and government agencies. The Advocacy Center works closely with our network of the U.S. Commercial Service worldwide and inter-agency partners to ensure that exporters of U.S. products and services have the best possible chance of winning government contracts. Advocacy assistance can take many forms but often involves the U.S. Embassy or other U.S. Government agencies expressing support for the U.S. bidders directly to the foreign government. Consult Advocacy Center for Foreign Government Contracts and for additional information.
Financing of Projects
MDBs Many governments finance public works projects through borrowing from the Multilateral Development Banks (MDB). A helpful guide for working with the MDBs is the Guide to Doing Business with the Multilateral Development Banks. The Commercial Service maintains Commercial Liaison Offices in each of the main Multilateral Development Banks, including the European Bank for Reconstruction and Development, the African Development Bank, the Asian Development Bank, and the World Bank. These institutions lend billions of dollars to developing countries on projects aimed at accelerating economic growth and social development by reducing poverty and inequality, improving health and education, and advancing infrastructure development. The U.S. Commercial Service Liaison Offices in these banks help American businesses learn how to get involved in bank-funded projects and advocate on their behalf to win bids. Learn more by contacting the Advocacy Liaison for World Bank or the Advocacy Liaison for African Development Bank.
Resources
For more information contact:
Ashley Ndir, Senior Commercial Liaison to the African Development Bank
Email: Ashley.Ndir@trade.gov
U.S. International Development Finance Corporation (DFC)
U.S. International Development Finance Corporation (DFC) is a modern, consolidated agency that brings together the capabilities of OPIC and USAID’s Development Credit Authority, while introducing new and innovative financial products to better bring private capital to the developing world.
Scope DFC partners with the private sector to finance solutions to the most critical challenges facing the developing world today. DFC invests across sectors including energy, healthcare, critical infrastructure, and technology. DFC also provides financing for small businesses and women entrepreneurs to create jobs in emerging markets. DFC investments adhere to high standards and respect the environment, human rights, and worker rights.
For more information contact:
Vibhuti Jain, DFC Regional Director for Africa
Email: vibhuti.jain@dfc.gov
website: www.dfc.gov
U.S. Trade and Development Agency (USTDA)
The U.S. Trade and Development Agency promotes economic development in developing countries by funding feasibility studies, consultants, training programs, and other project planning services. USTDA is a source of funding for pre-financial close project preparation. In Africa, USTDA assists U.S. firms by identifying major development projects that offer large export potential and by funding U.S. private sector involvement in project planning. This, in turn, helps position U.S. firms for follow-on activities during the implementation phase of the project.
For more information contact:
Danielle Agress
Country Manager, Southern Africa
U.S. Trade and Development Agency
Email: dagress@ustda.gov
website: https://ustda.gov/