Competition law fears!

Publication October 5, 2015

The public procurement framework is used as a tool for not only ensuring that government can procure the right goods and services at a competitive price, but also to drive key economic policy objectives.  Recently, there has been a growing emphasis on incentivising local production through the public procurement framework.  This has led to concerns that the collaboration encouraged to make local procurement workable might lead to contravention of the Competition Act.  

On 1 July the Competition Commission hosted a seminar attended by a range of stakeholders to discuss some of these issues.  The keynote speaker was the Minister of Economic Development, Minister Ebrahim Patel.  The Minister noted that, in promoting local production, two processes are needed which have an inherent tension:  collaboration and competition.

To incentivise local production, the Department of Trade and Industry designates specific sectors where only goods meeting a minimum threshold for local production may be procured by the public sector.  In engaging in supplier development in order to make local production feasible, the emphasis on collaboration by potential suppliers, or the collaboration between competing firms with the intention of fostering local supply, may contravene the Competition Act.

At the seminar, a speaker from the private sector highlighted the pro-competitive justifications for local procurement policies, including the reduction of barriers to entry for SMMEs; contributing to a transformative economy where ownership is shared; local industry is developed with the attendant job creation; and job loss is prevented.  The principal risks are that this could lead to competitive distortions such as market foreclosure to international entities and creating an unnatural competitive advantage for the entities that receive support.

Dr Mncube, chief economist at the Competition Commission, provided guidance on some of the best practice considerations that should be taken into account in emphasising local procurement.  These include:

  • Local procurement should be limited to defined, strategic industries – the focus should be on government imperatives with the aim of driving real economic efficiencies and therefore there needs to be careful assessment of the policy effects and impacts.
  • The requirements for local procurement must be clearly articulated with a focus on the terms of reference to avoid discrimination – this can be achieved by, for example, clearly articulating the function of the suppliers and specifically detailing the requirements and the product descriptions.
  • Participation of competing suppliers must be maximised – this is achieved in a number of ways, including the avoidance of unnecessary restrictions on participation, specifying minimum require-ments that are proportional to the size and content of the procurement contract, avoiding large mon-etary assurances as a condition for participation, and the breaking up of large contracts into smaller components.
  • Local procurement drives should have well-informed manufacturing gains – as with any policy intervention, there should be a thorough study of the likely impact of the policy at the outset.  The return on investments should be calculated given the large level of expenditure, and the various policy tools available to incentivise local production should all be considered.
  • Raising awareness of bid rigging in procurement contracts – all people involved in local pro-curement drives should be fully informed of the competition issues associated with bid rigging so as to aid in the detection of cartels.  Dr Mncube also suggested that a review of tenders be done periodically on a targeted basis in order to fight bid rigging more effectively.
  • The selection criteria must be carefully formulated – local procurement should be designed in a manner that attracts effective small potential bidders and the selection criteria should be clear to al-low smaller, less well-resourced companies to bid.

The Competition Commission is aware of the competition law risks in driving local procurement.  In promoting supplier development through local procurement, companies should adhere to best practice considerations, including those set out above, because compliant collaboration between competing firms can contribute to the development of local industry.  

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