South Africa needs to adopt policies that develop local capacity.
In the global downturn, there is broad recognition that government investment in the economy has a critical role to play in kick-starting economic activity and, consequently, boosting both business confidence and private investment.
The challenge is to spend this money in a way that optimises its impact on domestic economic activity, particularly investment and the development of technological and industrial capabilities.
Between 1976 and 1994, public investment in infrastructure dropped from 16% of GDP to around 6%. Between 1994 and 2004, fixed investment remained at the 5% to 6% level. As a result of this drop in investment, our capital procurement capabilities declined, as well as the capacity of supplier industries.
Analysis by the Department of Public Enterprises (DPE), with the Industrial Development Corporation, suggested that up to 40% of the requirement for Eskom and Transnet investment programmes would need to be imported.
It is tempting to believe that the solution is simple: proclaim a policy directive that the public sector needs to procure a high proportion of the capital programmes locally. This would seem to provide additional stimuli to national industry and decrease the import bill — both good news for growth. The problem is that in many areas local capabilities do not exist, or where they do exist they are comparatively expensive.
We need to promote investment to build a globally competitive national industry, capable of supplying not just the needs of the national infrastructure programme, but of exporting as well. The question is how.
The first step must be to ensure basic procurement disciplines are put in place. Very often national suppliers are excluded because of inadequate communication between the buyer and the supplier community. Equipment is often not procured locally because the tender is unnecessarily specified, thus excluding national suppliers. Inadequate notice of the tender means national suppliers are not able to prepare capacity to meet the demand.
After the massive downturn in government investment in the 1970s, suppliers are wary of making significant investments in plant and skills without some security of demand. This requires the supplier entering into a longer term relationship with the customer, giving it the confidence to invest.
While this can give the supplier additional power, in practice, when the supplier depends on a major customer, these relationships are often associated with continuous productivity and quality improvements and innovations. This has happened in the automotive and deep mining industries in South Africa.
As a first step towards building a developmental procurement culture, the DPE, with the support of the Department of Trade and Industry, introduced the competitive supplier development programme. This requires Eskom, Transnet and the Pebble Bed Modular Reactor to produce strategic supplier development plans, based on an assessment of the demand created by their five-year infrastructure plans, and an assessment of the capabilities of the national supplier community.
The plans encourage the enterprises to start thinking about supplier development at the earliest stage of the project development cycle, with an emphasis on where the enterprise will build longer term relationships.
In addition, they are made public so the supplier community can plan ahead.
Transnet took the plan a step further by establishing a rail and port supplier association — a platform for communication.
Also, in partnership with the DPE and the UN Development Organisation, Transnet launched a supplier benchmarking programme to encourage suppliers to achieve world-class levels of efficiency and quality, and to enable Transnet to broker developmental relationships between global original equipment manufacturers and South African companies.
Eskom is establishing component hubs to encourage development of national capabilities in key components.
The basic requirement for achieving leverage from procurements is to have highly skilled procurement practitioners in place overseeing the project development cycle.
Transnet has launched an ambitious procurement capability programme. In partnership with the UK Chartered Institute of Procurement and Supply, it has a comprehensive procurement capacity building programme to provide increasingly sophisticated skills to support supplier development. In addition, Transnet annually benchmarks the quality of the procurement capability as a whole. So, it is encouraging investment in suppliers while achieving significant savings from procuring effectively.
There is no reason large private sector companies cannot also enhance their procurement capabilities and leverage their procurements to promote investment and growth in their supplier industries. This is already an accepted practice in advanced manufacturing industries such as automotive and aerospace.
South Africa already pays an effective premium for black economic empowerment. It is critical that this policy coherently supports supplier development.
For example, the empowerment profile of a company should take into account the “empowered value add” or the concrete value that is being produced in South Africa. For example, a company with a 50% empowerment score, but that produces a product in South Africa, should be given a higher rating than a company with an 80% score, but which imports the product.
Capital expenditure programmes in state- owned enterprises, government and private sector companies create vast potential for the development of supplier industries and contribute to growth and employment.
Enormous value is lost to the economy through inefficient procurement and the absence of concerted national initiatives to build procurement capability. Investments in building national capabilities are not being made because of poor procurement planning and execution. We need to implement policies that encourage and reward the building of capability.
Dr Ritchken is strategic projects adviser to the Department of Public
Enterprises
http://www.thetimes.co.za/Business/BusinessTimes/Article1.aspx?id=968853
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