Economic Development Minister Ebrahim Patel
Some four years after the signing of the Local Procurement Accord, which sketches government’s intention to achieve a 75% localisation spend in the procurement of goods and services, Economic Development Minister Ebrahim Patel has described government’s greatest challenge in executing its local procurement agenda as maintaining a balance between competition and collaboration by players in the market.
Accepting that private sector companies needed to collaborate on certain issues to, for example, ensure economies of scale, institutionalised localisation policies also laid bare opportunities for anticompetitive market behaviour, such as collusion, rent-seeking and price-fixing, he said.
“Competition is vital because it prevents economic rents and spurs innovation . . . [but] when you have collusion, it negates the benefits of competition. It’s essential that where [companies] collaborate [on public procurement contracts] it is in public interest and [we must] delineate the difference carefully to recognise where collusion serves narrow final interests.
“We need a fine balance between competition and collaboration . . . [and] any major policy process has to consider these conflicting interests and find the ‘sweet spot’ that serves public interest,” he told a seminar on pro-competitive local procurement hosted by the Competition Commission on Wednesday.
Noting that, as a mid-sized economy, South Africa needed to leverage strategic procurement “as a logical response”, Competition Commission commissioner Tembinkosi Bonakele added that sophisticated procurement planning would be required for knock-on empowerment effects to be fully optimised.
“We do not enter this debate [on public procurement] ready to shoot in the direction of collusion and we accept that its effective implementation can be pro-competition by expanding market entry, especially for small, medium-sized and microenterprises, thereby contributing to inclusion, creating jobs and rebuilding at-risk industries,” he said.
Bonakele further acknowledged instances where there was a need for trade-offs between various policy instruments, as well as the possible anticompetitive implications of a localisation-driven public procurement policy.
“If local procurement [requirements] are such that only a small number of firms are compliant, then competing technologies and firms may face barriers to entry.
“We have, in particular, seen this in local government, where the [prescribed] standards serve an exclusionary purpose, so we must guard against this,” he commented.
A second potential anticompetitive negative consequence of public procurement policy, he advanced, was the establishment or strengthening of cartels, particularly where local procurement rules unintentionally served to reinforce these arrangements.
“If you put together firms with a history of collusion, we understand that there is a temptation to move beyond those discussion into tenders and price-fixing and we’ll be sensitive to this,” he said.
Bonakele added that the commission would work to ensure that localisation policy would seek to avoid reinforcing a market-dominant company or firm.
“We’ll be sensitive to these unintended consequences… and we accept that there may be tensions between policy instruments, [but] this calls for striking a balance, because the ultimate goal, as called for in the National Development Plan, is about South Africa’s growth, development and inclusivity,” he iterated.
South Africa intentionally recused itself from signing the World Trade Organisation procurement policy provisions, citing its intention to leverage its buying power in the buying of goods and productive services to drive transformation, employment and economic inclusion.
This move enabled the signing of the Local Procurement Accord by representatives of business, organised labour and civil society in October 2011, which set out initial steps aimed at accelerating the creation of five-million new jobs by 2020 and achieving the objectives of the Industrial Policy Action Plan.
Wednesday’s seminar saw representatives from competition law firms, the private sector and State-owned companies engaging over the possible pitfalls and strengths of the country’s public procurement policy.