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LOCAL CONTENTPUTTING SOUTH AFRICA FIRST

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Contents

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Putting South Africa firstSouth Africa still faces legacy problems and other severe challenges in our national drive to create jobs, alleviate poverty, address historical inequality and build a sustainable future for all our people. To this end, the country needs a burgeoning manufacturing sector. Our economy cannot achieve our goals on the basis of importing most of the products we use. A thriving manufacturing industry creates jobs and business opportunities, enables skills development, and improves our competitiveness in global markets. Putting South African industry first should therefore be a priority for all South Africans.

Government is leading the way with its Local Production and Content initiative, which flows from the government’s policy framework that includes the National Development Plan, the New Growth path, the Industrial Policy and Action Plan and the Preferential Public Procurement Finance Act, among others. Local Content is an initiative of the Department of Trade and Industry (the dti).

The Local Content initiative was first introduced in the Preferential Procurement Framework Act in 2011, with an amendment that made provision for the dti to designate certain sectors for local production and content, in line with national development and industrial policies for local production.

Regulation 8(2) of the amended Preferential Procurement Regulation 2017 prescribes that in the case of a designated sector, an organ of state must advertise the invitation to tender with a specific condition that only produced services or goods or locally manufactured goods with a stipulated minimum threshold for local production and content, will be recognised.

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This includes manufacturersof:

Procuring Organs of State, in particular State Owned Companies (SOCs), play a critical role as enablers and drivers of industrial development in many countries, specifically to leverage public expenditure in both capital and operating expenditure (CAPEX and OPEX). In South Africa, SOCs are expected to contribute to the following key policy goals:

Securing local procurement and strategic sourcing/supplier development in key valuechains

Creating employment and sustaining jobs

Boosting exports and ensuring that suppliers are integrated into OEM global value chains

Supporting broader economic empowerment through support for historically disadvantaged industrialists.

Developing and enhancing local manufacturing capacity and capabilities

Supporting industrial innovation and technological developments, especially through technology absorption

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How is Local Content andProduction applied?Government is a major buyer of products and services via its state tenders. Procuring locally manufactured goods has obvious benefits for national competitiveness and economic growth. The Local Production and Content initiative therefore mandates minimum local content requirements for state tenders in designated sectors.

Local production and content is usually stipulated as a minimum percentage of the tender price and specific production conditions. So, for example, a tender for goods from a designated sector may specify that at least 60% of the tender price must consist of products manufactured within South Africa and that specific components used in the production process must be sourced from local manufacturers.

Although the Local Content initiative is relatively new, there has been steady progress towards the desired outcomes. Policy coherence is improving across government, with growing appreciation of the importance of procurement policy as a lever for industrial policy as a whole. Compliance has improved across departments and spheres of government, although more needs to be done to build capacity. There has also been intervention in non-compliant tenders to ensure that local content obligations are not bypassed.

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This includes manufacturersof:

Designation process

The sector or product

designation process by the

dti involves the process as

outlined.

Gazette Regulations &

Circulate Practice Notes

Designation ofIndustries &

Sectors

Approval bythe DTI’S

Designation Advisory

Committee

Consultation &StakeholderManagement

Industrial / Sector

Research &Review

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Designated sectorsDesignated sectors are subject to the following local content thresholds:

80%Buses

(Bus body)

85%

Furniture ProductsOffice Furniture

100%Textiles, Clothing,

Leather and Footwear

100%Steel Power

Pylons

70%Solar Water

Heater Components

80% Canned/Processed/

Vegetables

80% Transformers,

40% -100% Rail Signalling System

and AssociatedComponents

100%

School Furniture

100%Associated Equipment

90%Shunt Reactors

90%Base and Mattres

50% - 70% Electrical and

Telecommunication Cables

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“All national and provincial departments, all municipalities,all entities listed in terms of Schedules 2 and 3A and 3B, as well as all other

government agencies and State Owned Companies comply with the minimum local content thresholds prescribed when procuring goods and

services from these sectors”.

Pharmaceutical Products – OSD

Tenders (Volumes) 70%

Family Planning Tenders (Volumes) 50%

70% Valves Products

andActuators

65% Rail Rolling

Stock

65% Set Top Boxes

30% - 100% Fire Fighting

Vehicles

50% - 70% Solar PV

Components

60% Working Vessels

(Boats)

80% - 100%Large Bore Spiral

Submerged Arch Welded Steel Conveyance

Pipes

50% - 70% Electricity

and Water Meters

100%Rail Permanent

Way

100%Wheelie Bins

100%Steel Products and

Components for Construction

60%Two Way

Radio70%

Pumps, Medium Voltage, Motors

and Associated Accessories

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Standards and verificationIn order for a policy initiative like Local Content to be broadly understood and correctly implemented, it is vital that all parties have a clear understanding of the metrics involved, which must be relevant and accepted at a global level. Accordingly, the South African Bureau of Standards (SABS) was tasked with developing a national standard which sets out the terminology, definitions, formulae and other specifications that govern local content. The resulting standard - SANS 1286:2017: Local goods, services and works - Measurement and verification of local content – has now been published and is available from the SABS standards webstore.

SANS 1286 uses the following formula to calculate local content:

(1 – x/y) * 100

Where x is the imported content and y is the tender price.

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Verifying that suppliers of products have complied with the local content requirements is an important aspect to ensure the success of the initiative. Local content verification is conducted in two parts:

Financial verification assesses the value of input items used in the production process and distinguishes between imported and local components. Financial verification also involves calculating the local content percentage of the product in question.

Technical verification ensures that successful tender bids can follow through on the local content commitment expressed in their bid. This involves verifying that the manufacturing facility exists, along with assessing the facility’s suitability to manufacture the goods required, the manufacturer’s capability to produce, and the completeness of the bill of materials. Technical verification also identifies input materials that cannot be sourced in South Africa and flags them for further assessment by financial verification.

The SABS is ideally positioned to undertake its verification duties, with ample capacity of expert staff on call. The SABS employs 412 laboratory engineers and certification auditors across its network of offices around the country. In addition, the SABS has appointed a panel of 12 Auditing Firms to be deployed with the verification teams. Specialists from these accounting firms have been trained by the SABS to be competent in conducting local content verification. Only resources trained by the SABS can be deployed to conduct local content verification.

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How will Local Content affect your tender bids?Local Content designations may affect the government tenders for which you bid, so it is vital that you understand and comply with Local Content processes and procedures. This section will provide valuable information to help you submit bids that comply with requirements. If you would like more information, we recommend that you procure a copy of SANS 1286:2017: Local goods, services and works - Measurement and verification of local content. This national standard is available from the SABS standards webstore.

Tenders subject to Local Content designations will require you, the supplier, to make a declaration in your tender documentation with regard to local content. These are the important steps to follow in making your declaration:

Identify all import components that will be used in the production process by you or your downstream suppliers.

Assess whether you can meet all local production and content requirements as stated in the tender brief.

Calculate local content percentage as per the formula (1 – x/y) * 100 where x is the imported content and y is the total tender price.

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Determine the rand value of all import components by converting the foreign currency at the exchange rate listed by the South African Reserve Bank at 12h00 midday on the day the tender was advertised.

Complete annexures C, D and E of the tender documentation to determine if the product meets the local content designation requirements.

A supplier can apply for exemption from the dti on some import components used on products that cannot meet designation local content requirements. Exemption will only be granted after careful consideration of the availability of the components within South Africa.

Complete the returnable declaration form SBD 6.2 or MBD 6.2 (Municipal Tenders) and Annexure C in the tender documentation to formally make a local content declaration on the product.

Your Local Content declaration is a key factor in determining whether your bid is successful or not. If you are awarded the tender, you may either be contractually required to undergo verification, or selected to do so. Either way, please ensure that you are able to comply with the verification process.

An SABS representative will contact you to arrange the verification process that applies to your bid. To prepare for verification, please gather all information relating to input materials used in the production process. It remains the manufacturer’s responsibility to determine the local content of input materials used in the production process. The manufacturer must also source and provide supporting information to confirm local content level on all input materials used in the production process.

Distributors who have been awarded tenders are responsible for local content claims made for products which they supply.

Verification applies to the whole supply chain. If you are awarded a tender with a Local Content designation, please inform all parties in your supply chain that they may be visited by the SABS to verify the level of local content on components they supply.

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The schematic below outlines the Local Content verification process along with roles and responsibilities of the parties involved:

Prin

cila

A

udito

r OpeningMeeting

Review allworking

documentsand complete

audit plan

ProvideRequested

Data

ProvideRequested Data

ExecuteAudit

ExecuteAudit

CompleteFinancial working

papers

CompleteFinancial working papers

Report

CompleteTechnical working

papers

Assignwork

requirementsto

Auditors

Fina

ncia

l A

udito

rTe

chni

cal

Aud

itor

Sup

plie

rs &

Tier

Sup

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Should the audit successfully verify that you meet the Local Content requirement against the threshold, the SABS will issue a Local Content Verification Certificate. This certificate is valid for a period of one year.

On-going surveillance and “spot checks” by the SABS throughout the duration of the contract will ensure that the supplier adheres to the Local Production and Content requirements. The Local Content verification conducted by the SABS will incur a cost payable in line with the arrangement between the bidder and the Procuring Organ of State, based on the audit time.

In summary, the local content certification process consists of the following steps:

The dti forwards the winning bidder’s information to the

SABS

Results of audit provided to the SABS Approvals Board for

a verification decision

Certificate details are added into the local content

database

Verification audit is conducted

The SABS, the dti and the Procuring Organ of State scope the

verification process

Winning bidder is issued with a quotation for the verification

process

Upon approval, Local Content certificate

is created and issued

“the duration of the contract will ensure that the supplier adheres to the

Local Production and Content requirements.”

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Progress to date on tenders with Local Content thresholds

The pie chart below illustrates the ratio per sector of public procurement tenders subject to minimum Local Content thresholds.

Tenders Awarded 1 Textiles & Clothing Products2 Furniture Products3 Electrical & Telecom Cables4 Canned & Processed Vegies5 Valves & Actuators6 Rail Rolling Stock7 Set top boxes8 Power Pylons9 Solar Water Heaters10 Steel Products11 Busses12 Working Boats & Vessels13 Transformers14 Residential Meters15 Construction

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The chart below represents tenders subject to Local Content prior to 2018. Relatively few sectors were designated for minimum Local Content thresholds, with the Department of Energy being prominent.

1 Textiles & Clothing Products2 Furniture Products3 Electrical & Telecom Cables4 Canned & Processed Vegies5 Valves & Actuators6 Rail Rolling Stock7 Set top boxes8 Power Pylons9 Solar Water Heaters10 Steel Products11 Busses12 Working Boats & Vessels13 Transformers14 Residential Meters15 Construction

Verified Pre 2018 1 Textiles & Clothing Products2 Furniture Products3 Electrical & Telecom Cables4 Canned & Processed Vegies5 Valves & Actuators6 Rail Rolling Stock7 Set top boxes8 Power Pylons9 Solar Water Heaters10 Steel Products11 Busses12 Working Boats & Vessels13 Transformers14 Residential Meters15 Construction

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Since 2018, the number of sectors with Local Content designations has increased substantially. The chart below reflects the growing acceptance of, and compliance with, the Local Content initiative.

Verified Post 2018 1 Textiles & Clothing Products2 Furniture Products3 Electrical & Telecom Cables4 Canned & Processed Vegies5 Valves & Actuators6 Rail Rolling Stock7 Set top boxes8 Power Pylons9 Solar Water Heaters10 Steel Products11 Busses12 Working Boats & Vessels13 Transformers14 Residential Meters15 Construction

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1 Textiles & Clothing Products2 Furniture Products3 Electrical & Telecom Cables4 Canned & Processed Vegies5 Valves & Actuators6 Rail Rolling Stock7 Set top boxes8 Power Pylons9 Solar Water Heaters10 Steel Products11 Busses12 Working Boats & Vessels13 Transformers14 Residential Meters15 Construction Local Content

in the Mining sectorLocal content is especially pertinent to the mining sector. In September 2018, the Department of Mineral Resources issued the Broad-Based Socio-Economic Empowerment Charter for the Mining Industry (Mining Charter #3). Under the new charter, mining houses are expected to spend at least 70% of their procurement on South African manufactured goods. This will result in mining houses giving preference to procure goods that meet the definition of South African manufactured goods. Suppliers whose products meet the local content requirements will see this as an opportunity to secure preferential consideration in procurement decisions.

Local content certification for mining goods will not be linked to tenders but can be secured by a supplier whenever they feel confident that their product meets the local content requirements. In preparation for local content verification, the supplier will have to assess the local content value of their manufactured products. The Mining Charter #3 provides guidelines on how to calculate local content. The following formula will be used:

A = (B- C)/B x 100%

Where A is the percentage local value add, B is the sales price in rand of the capital good, component or consumable excluding mark-up and indirect overheads, and C is the value of the imported inputs/components used in the assembly or manufacturing of the capital good, component or consumable.

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It remains the manufacturer’s responsibility to know the local content contribution from any input components used in the production process. Procuring from a local supplier does not mean that components sourced are 100% local.

Manufacturers producing multiple products can selectively opt to attain verification and certification for products that meet local content requirements. In preparation for local content verification, the manufacturer will identify the scope of products to be verified. The supplier must be able to distinguish how materials and direct overheads are allocated for each of the products selected for verification.

Mining goods that meet the local content requirements will be certified as meeting the definition of South African manufactured goods for a period of five years. The certificate is issued on condition that the audited supply chain activities and production technology are maintained over the full five year period. Manufacturers holding local content certificates for the purposes of Mining Charter #3 compliance are required to submit an annual declaration to confirm consistency in procurement behaviour and the manufacturing process. Annual declarations will be used to conduct annual surveillance audits where necessary.

The supplier remains responsible for informing the SABS of any changes to the production mix and/or supply chain during the period of certification. The SABS will consider the changes and assess whether they have any impact on the assertions made in the certificate. Only products or product ranges verified and found to have met local content requirements will be included in the certificate.

The SABS is currently developing an online system which will serve as confirmation of local content claims for the mining sector. Certificates issued will be verifiable online to check which products from a particular manufacturer meet the local content requirements.

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SABS local content verification in non-designated sectorsThe SABS has conducted local content verification work on other products outside of the designated sectors and processes. Most notable among these are:

National Lotteries CommissionThe National Lotteries Commission (NLC) invited bidders to operate the

national lottery for eight years when their contract with Gidani expired. The invitation required the bidders to stipulate their local content commitments and explain how localisation would be achieved over the years of operation.

Three bidders were shortlisted and the NLC contracted the SABS to conduct local content verification on claims made by each of the bidders. Verification was conducted on claims made on localisation of operating equipment, consumables to be used by operators, software development and operating costs.

Eskom ICT ProjectEskom invited suppliers to bid for provision of ICT services throughout their

operating areas. The invitation required the bidders to quantify their local content commitments and outline how localisation was going to be achieved over the years of operation.

Three bidders were shortlisted and ESKOM contracted SABS to conduct local content verification on claims made by each of the bidders. Local content verification was conducted on claims regarding the localisation of operating equipment, consumables to be used by operators, software development and operating costs.

MiningThe pilot Local Content verification process in accordance with the Mining

Charter #3 was undertaken by Multotec, a Leading South African mineral processing equipment manufacturer. Although the Local Content threshold will be phased in over a period of five years to allow suppliers time to adjust, Multotec decided to be proactive and lead the way.

The pilot project provided a valuable learning experience for Multotec, the dti and the SABS. As with any new process, there were bound to be teething problems. Multotec and the SABS cooperated to create an assessment and verification prototype. This served to streamline and refine the principles into a practical nd efficient process. The pilot assessment was completed successfully by Multotec in July 2018.

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Frequently Asked QuestionsWhy do suppliers in certain sectors have to include Local Content when providing goods, works and services to users in the public sector?In terms of revised regulations to the Preferential Procurement Policy Framework Act (PPPFA), Act 5 of 2000, which came into effect on Wednesday, 7 December 2011, all suppliers in designated sectors will have to meet the set minimum threshold requirements for Local Content when tendering.

What is the role of the SABS? SABS is a trusted standardisation, quality assurance and verification provider. Acting on behalf of the Department of Trade and Industry (the dti), it has been appointed the Verification Agency for Local Content in South Africa in terms of the amended regulations to the Preferential Procurement Framework Act, Act 5 of 2000.

Is there a cost to the Local Content Verification?There is a cost to the Local Content Verification; this cost is based on audit time and the respective size of the bill of material of the designated product.

Why is Local Content important?Local Content verification is part of the implementation of the Industrial Policy Action Plan (IPAP) and is an initiative of the dti, directed by Treasury regulations. Local Content supports the New Growth Path by developing the industrial infrastructure of South Africa and the skills of South Africans.

How will the SABS verify Local Content?The SABS will conduct an audit made up of two parts. One part will verify documentation related to the purchasing or manufacturing of the Local Content claimed by a supplier. The other will be an onsite technical verification of the Local Content purchased or manufactured. Should the audit successfully verify the Local Content requirement against the threshold, the SABS will issue a Local Content Verification certificate. On going surveillance and spot checks by SABS throughout the duration of the contract will ensure that the Local Content requirement is adhered to by the supplier.

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How is Local Content calculated?Public Sector ProcurementLocal Content is calculated by using the standard formula:LC = (1-x/y)*100Where LC is Local Content, x is the imported content in Rand and y is the tender price in Rand. The SABS approved technical specification number SATS 1286:2011 is accessible at www.sabs.co.za under the heading “Local Content”.

Mining Sector ProcurementThe following formula will be used:A = (B- C)/B x 100%Where A is the percentage local value add, B is the sales price in rand of the capital good, component or consumable excluding mark-up and indirect overheads, and C is the value of the imported inputs/components used in the assembly or manufacturing of the capital good, component or consumable.

Where can the regulation for Local Content be found in the Preferential Procurement Regulations, 2017 made in terms of section 5 of the Preferential Procurement Policy Framework Act, 2000 (Act 5 of 2000) Local Content?The regulation for Local Content can be found in paragraph 8 of the regulations, which prescribes that local production and content is of critical importance in the case of designated sectors. Such bids must be advertised with the specific bidding condition that only locally produced goods, services, works or locally manufactured goods, with a stipulated minimum threshold for local production and content, will be considered.

What documents and information are required when submitting a bid for a tender in respect of Local Content Verification?Suppliers are required to submit a Declaration of Local Content form as part of the bidding documents. The Standard Bidding Document SBD6.2 or MBD 6.2 must form part of all bids invited and must be completed when submitting a bid. This must be completed in line with the requirements of SATS 1286:2011 and the Guidance Document for the calculation of Local Content. Local Content Declaration Templates Annexure C, D and E must be completed, as they are important for the calculation, measurement and verification of Local Content.

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Where can Standard Bidding Documents SBD 6.2 or MBD 6.2 be accessed?They can also be accessed on the National Treasury website: http://www.treasury.gov.za/divisions/sf/sc/PracticeNotes/default.aspx

What is Annexure C?Annexure C is the Local Content Declaration Summary Schedule. This includes information on tender item numbers, list of items, tender price, exempted imported value, tender value net of exempted imported content, imported value, local value, Local Content percentage, tender quantity, total tender value, total exempted imported content and total imported content.

What is Annexure D?

Annexure D is the Imported Content Declaration form. It is a schedule that supports Annexure C and Annexure E. Information on exempted imported content, information on content directly imported by the tenderer, information on content imported by a 3rd party and information on foreign payments will be provided by the supplier or potential supplier on this form.

What is Annexure E?Annexure E is the supporting schedule to Annexure C. Information on the items purchased, local suppliers, value, manpower costs, factory overheads, administration overheads and markup will be provided by the supplier or potential supplier on this form.

How can a supplier or potential supplier become certified for Local Content?

Download the SABS Local Content application form from the SABS website: www.sabs.co.za.

What are the stages involved in evaluating a bid?According to the Preferential Procurement Policy Framework Act (PPPFA) Act 5 of 2000, a two-stage evaluation process may be followed to evaluate bids received. The first stage is the evaluation of the stipulated minimum threshold for local production and content and functionality. The second stage is the evaluation in terms of the 80/20 or 90/10 preference point system.

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Why is Local Content certification important for a supplier?

Public Sector Procurement

Local Content Verification Certificate certifies that a supplier has adhered to legislative requirements in terms of Local Content. It is also confirmation of a supplier’s commitment to promoting local employment and contributing to economic growth in South Africa. By obtaining a Local Content Verification Certificate, a part of Stage one compliance to Preferential Procurement Policy Framework Act (PPPFA) Act 5 of 2000 can be achieved.

Mining Sector Procurement

Local Content Verification Certificate confirms that the goods supplied by the supplier meet the definition of South African Manufactured Goods as stated in the Mining Charter #3. Certification is vital for Mining Houses to report the extent to which they have performed on their obligation to spend at least 70% of their procurement spend on South African manufactured goods.

Which sectors does Local Content affect?Please refer to the website: http://www.treasury.gov.za/divisions/ocpo/ sc/PracticeNotes/default.aspx

How does the SABS Local Content verification contribute to South Africa’s economy?SABS Local Content verification process contributes to South Africa’s economic growth and supports the New Growth Path by promoting and certifying genuine Local Content. SABS will provide a database that will quantify Public Procurement in the respective designated sectors, thereby indicating the impact of Local Content procurement.

How will Local Content verification assist the public sector?

SABS Local Content verification will provide quality assurance as to the level and integrity of Local Content in the goods, works and services of suppliers. This verification will provide an independent benchmark that can be trusted and relied on by national, provincial and local government departments, municipalities, state-owned institutions, science councils, government agencies and other public sector institutions.

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Can the dti request certificates confirming the authenticity of declarations made in respect of Local Content?Yes, the dti has the right, as and when necessary, to request auditors’ certificates confirming the authenticity of the selfdeclarations made in respect of Local Content. A Local Content Verification Certificate issued by SABS is the independent check, which will confirm to the dti that a supplier has adhered to the legislative requirements in terms of Local Content.

Who will cover the costs of obtaining a Local Content Verification Certificate?Public Sector Procurement

The successful tenderer will cover the costs of obtaining and retaining a Local Content Verification Certificate for the bid once it has been awarded. For more information on the costs involved.Contact the SABS on: 0861 277 227 or via email: localcontent@sabs.co.za

Mining Sector Procurement

The responsibility is on the supplier to present evidence that goods supplied meet the local content requirements of the Mining Charter #3. There is however, nothing preventing the Mining Houses from assisting their suppliers in getting local content certification.

Once a supplier has received a Local Content Verification Certificate from SABS, will that certificate apply for all other bids it may submit to the same public entity?No. Each tender is evaluated on its own merit. Should the supplier’s bid for another service be successful, it will need to apply to the SABS for a certificate for that particular bid. A separate Local Content Verification Certificate will then be issued once compliance has been established by the SABS for that bid.

When does the dti get involved with the process?Once bids are awarded, the dti must be notified of all the successful bidders and the values of the contracts. The dti must also be provided with copies of the contracts, the SBD / MBD 6.2 certificates together with Declaration C, which was submitted by the successful bidder.

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What is the duration of the audit and certification process?The full requirement depends on the scoping of the audit, that is, the depth (supplier tier levels) of the audit. The audit scoping will be determined in consultation with the dti after receiving the necessary documentation on award of the tender.

When will SABS commence with the Local Content audit?The audit will commence as soon as possible after the winning bidder’s documents have been forwarded to the dti by the public entity. The timeframe will be determined by the audit scoping between the dti and the SABS. The public entity will be invited to attend.

ConclusionThe Government’s Local Production and Content initiative is a necessary and beneficial project which dovetails well with other industrial policies to achieve our national development goals. The SABS is proud to be part of this initiative and committed to fulfilling its specialised role in local content verification for the benefit of South Africa’s industry and people.

Thank you for your interest in local content verification. If you have any questions or would like to know more about how the SABS can help you to meet local production and content requirements for your tender bids, please do not hesitate to contact us at info@sabs.co.za or 0861 277 227.

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Website:www.sabs.co.za

Telephone number: + 27 12 428 7911 or

0861 277 227

Fax number: + 27 12 344 1568

E-mail address: info@sabs.co.za

Head office: 1 Dr Lategan Road

GroenkloofPretoria

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Postal address: Private Bag X191 Pretoria

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