Describes how major projects are secured and financed. Explains activities of the multilateral development banks in and other aid-funded projects.
Selling to the Government
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. In 2013, the National Treasury announced significant public-sector-driven infrastructure spending that foresaw spending of R827 billion by 2018; actual investment was less due to a variety of factors.
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:
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.
The OCPO has a mandate to ensure that public sector organizations in South Africa honour 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 on a daily basis all public sector tenders in South Africa.
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:
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 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.
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.
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:
Since 2011, the South African Government has increased its local content requirements. The Department of Public Enterprises (DPE) has formulated the Competitive Supplier Development Programme (CSDP), aimed at building up the local supply base. This is becoming increasingly important in the bidding process, particularly for foreign firms.
Previously, state-owned enterprises (SOEs) participated in the National Industrial Participation Programme (NIPP), an import-offset program for government agency expenditure managed by the Department of Trade and Industry (DTI). Under the NIPP program, all imports of more than $10 million required the supplier to work with DTI to invest the equivalent of 30% 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 varying by sector.
Broad-Based Black Economic Empowerment (BB-BEE):
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
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: Blacks (those whose ancestry is exclusively/almost exclusively African), “Coloureds” (those of mixed European/African or European/Asian origin), or Indians (those whose ancestry originates in the Indian sub-continent). A 2008 court decision expanded the BEE program to include South Africans of Chinese descent.
The Broad-Based Black Economic Empowerment Act of 2003, the legislation enacting the BEE strategy, directs the Minister of Trade and Industry 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 a government or parastatal procurement 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 DTI’s website: https://www.thedti.gov.za/economic_empowerment/bee_codes.jsp.
Public Private Partnerships (PPP).
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
Tel: +27 (0)12 315 5741
Fax: +27(0)12 315 5477
Offsets and Counter-Trade:
South Africa’s National Industrial Participation Program (NIPP) mandates a counter-trade/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% 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:
Parastatals (also 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.
SOEs play a significant role in the South African economy. In key sectors such as electricity, transport (air, rail, and 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 Airways; South African Forestry Company (SAFCOL) (forestry) and Transnet (transportation). The DPE transferred control of South African Airways (SAA) to the National Treasury in 2014. These six SOEs employ approximately 105,000 people. South Africa’s overall fixed investment is 19% of GDP. The SOEs’ share of that investment is 21%, while private enterprise contributed 63%, with government spending making up the remainder of 16%). The IMF estimates that the debt of the SOEs would add 13.5% to the overall national debt.
The state-owned electricity monopoly, Eskom, generates approximately 95% of the electricity used in South Africa. Coal-fired power stations generate approximately 93% of Eskom’s electricity. Eskom’s core business activities are generation, transmission, trading, and distribution. South Africa’s electricity system operates under strain because of low availability factors for base load generation capacity due to maintenance problems. The electricity grid’s capacity reserve margins frequently fall under 2%, well below international norms. Between November 2013 and early 2016, Eskom periodically declared “electricity emergencies” and asked major industrial users to reduce consumption by 10% for specified periods (usually one to two days). Additionally, Eskom has implemented load shedding (rolling blackouts) to ease demand on the system on a periodic basis. The mining and industrial activity downturn also helps account for Eskom’s ability to meet demand. To meet rising electricity demand, Eskom is building new power stations (including two of the world’s largest coal-fired power stations, but both are years overdue and over budget) and power lines. Eskom and independent industry analysts anticipate South Africa’s electricity grid will remain constrained for at least the next several years. The South African Government has implemented a renewable energy independent power producer procurement program (REIPPP) that in the past three years has added an operational 2,000 MW with another 4,000 MW planned or under construction. Standard and Poor’s rates Eskom debt as B+ with a negative outlook, and all three ratings agencies have recently expressed concerns about the level of Eskom’s debt and the ability of the government to cover its contingent liabilities.
Transnet National Port Authority (TNPA), the monopoly responsible for South Africa’s ports, reportedly charges 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. TNPA is a division of Transnet, a state-owned company that manages the country’s port, rail and pipeline networks. 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. Transnet’s March 2014 selection of four OEMs to manufacture 1064 locomotives is part of the MDS. This CAPEX is being 2/3 funded by operating profits with the remainder from the international capital markets. Transnet has previously reported that in 2016 it had invested R124 billion ($9.2 billion) in the last four years in rail, ports and pipeline infrastructure.
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), and implementing a spectrum auction. South Africa failed to meet the 2015 International telecommunications Union (ITU) deadline for switching off analog TV signals as part of the digital migration.
In February 2015, the DTPS announced that Telkom (a 51 % state-owned telecommunications company) will take the lead in a national broadband rollout with the goal of introducing broadband to rural and historically underserved areas. Analysts are skeptical of Telkom’s ability to roll out effectively broadband on such a scale. The DTPS released a policy paper in October 2016 stating a planned course of action to realize the potential of the ICT sector. The DTPS policy paper advocates for open access requirements which could overhaul how ICT firms gain access to and use the broadband infrastructure. The paper also advocates the assignment of all high demand spectrum to a Wireless Open Access network. The controversy is expected to delay any policy implementation and contribute to ongoing uncertainty in the sector as the parastatal, Telkom, agrees with the general approach but the major private sector mobile carriers feel interventions would curb investment.
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 and Industry (DTI) initiated the Industrial Development Zone (IDZ) program under the Manufacturing Development Act of 2000. The focus of current SEZ program is to attract foreign direct investment, increase exportation of value-added manufactured products, and to create linkages between domestic- and zone-based industries. Bulk ore handling, petro-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).
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
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 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
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.
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 in order 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
U.S. Trade and Development Agency (TDA)
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. TDA is a source of funding for pre-financial close project preparation. In Africa, TDA 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:
Jacob Flewelling, USTDA Africa Business Development Manager
Tel: + 27 11 290-3084