South Africa: New Regulations to Influence Drug Procurement System

Last Updated: 8 July 2011
Article by FJ Labuschagne

FJ Labuschagne LLB (Potchefstroom), LLM (Corporate) (Pretoria) is an attorney at Spoor & Fisher and a member of the firm's Medicine, Foodstuff and Product Regulatory team.

The Department of Trade and Industry's Industrial Action Policy Action Plan (IPAP) of 2010/11 – 2012/13 states that public infrastructure investment in excess of R404 billion has been invested from the 2006/7 to 2008/9 period rising to R787 billion for the period of 2009/10 to 2011/12. Much of the tradable content of public infrastructure investment as well as large components of public procurement were being imported. The government of South Africa identified procurement as factor which will contribute to domestic micro-and macro economic development in line with its policy plan.

Government to address unsystematic procurement

At micro-economic level, IPAP states that failure of government in the past to leverage public procurement adequately resulted in loss of competiveness, and failure to stimulate key sectors of the economy, inter alia that of domestic pharmaceutical manufacturers resulting in a negative level of supply security for the country as well as job losses. At macro-economic level importation has increased the current trade account deficits. Government aims to maintain and increase local output and employment levels by standardising and encouraging preferential procurement from domestic sources.

IPAP identified strategic levering of procurement across a range of sectors including pharmaceuticals so as to not disrupt the roll-out of critical medicines. The Preferential Procurement Policy Framework Act No. 5 of 2000 (The Act) gives effect to section 217(3) of the Constitution of South Africa by providing a framework for the implementation of a procurement policy for government. In terms of section 5 thereof, the Preferential Procurement Regulations were gazetted on 8 June 2011. These regulations, which come into effect on 7 December 2011, aims to address import fronting and will implement a system of preferential procurement through designated fleet procurements, and point matching of domestic manufacturers.

Influence of Broad Based Black Economic Empowerment

When an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective. This implies implementing a procurement policy providing for categories of preference in the allocation of contracts; and the protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination. The public and private sectors are preferred to interact and procure from companies with higher Black Economic Empowerment (BEE) status.

Black economic empowerment is driven by legislation and regulation. An integral part of BEE is the balanced scorecard. This measures a company's empowerment status inter alia through indirect empowerment by means of preferential procurement. This scorecard is defined and elaborated in the Broad-Based BEE codes of good practice.

The codes are binding on all state bodies and public companies. Government is required to apply same when making economic decisions on inter alia procurement, licensing and concessions, public-private partnerships, and the sale of state-owned assets or businesses.

Private companies must apply the codes if they want to do business with any government enterprise or organ of state in order to tender for business, apply for licences and concessions, enter into public-private partnerships, or buy state-owned assets. Companies are also encouraged to apply the codes in their interactions with one another, since preferential procurement will affect most private companies throughout the supply chain.

IPAP specifically identified import fronting (where small BEE operations act as conduits for larger importers) to be addressed by the new procurement regulations.

Effects of new regulations

The regulations will align discretionary points with B-BBEE Codes and local procurement; so that only suppliers providing domestically produced goods and services will be considered for preference points. Domestic manufacturers will be point matched so that where an importing company scores the highest points in a tender, the next highest scoring domestic supplier in the tender must be allowed an option to lower its price to the point that it would have scored sufficient points to win the tender.

The regulations further include provisions allowing the state to designate specific products in sectors as identified in the Industrial Policy Action Plan for exclusive local procurement. IPAP identifies manufacturers of plastics, pharmaceuticals and chemicals as such industries. The regulations will also allow government to designate specific products (like medicines) in the identified sectors for exclusive local procurement.

Public procurement is understood to move away from an 'ad hoc' towards a strategic procurement stratagem. The regulations further align procurement by government with its black economic empowerment legislation, broadening empowerment criteria used for assessing tenders. The envisaged strategic leveraging of public procurement is said to be critically important towards government's commitment to its National Industrial Policy Framework, broadly aimed at increasing domestic industrialisation and productive capacity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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