South Africa: What Is Contained In Local Content Under The Renewable Energy Procurement Programme?

Last Updated: 5 April 2012
Article by Happy Masondo

The Department of Energy's RFPs place great emphasis on local content and aim to ensure that local communities benefit economically from renewable energy facilities.

In the Request for Proposals (RFP) issued by the Department of Energy (DOE) to Independent Power Producers (IPPs) as well as in a total of nine briefing notes (issued as clarifi cation points on the RFP), great emphasis has been placed on local content requirements. In setting out the specific prescripts for all project developers submitting proposals under the RFP to comply with the local content requirements, the DOE achieves many objectives beyond the mere production of energy from renewable sources.

The DOE has found an ingenious mechanism through which it can also ensure that there are economic benefits flowing through to the communities in which the renewable energy facilities are located. Compliance by the project developers with the requirements of local content promises to give effect to tangible and real benefi ts for the local communities.

Local content requirements

The RFP defines local content as the total costs attributed to the project at the commercial operation date which will be spent on South Africans and South African products. These costs specifically exclude -

  • finance charges;
  • land;
  • mobilisation fees of the operations contractor; and
  • imported goods and services.

On 2 February 2012, the DOE issued briefi ng note 8 in which it stated that "the requirements for localisation have been revisited in recognition of a need to continuously improve potential benefi ts to local industry"1. In light of this assertion, the Department of Trade and Industry (DTI) also maintains that local content thresholds and targets have to be incrementally improved at each bid phase submission date, being 5 March and August 2012 as well as 5 March and August 2013 respectively, as manufacturing capacity in the renewable energy industry increases in South Africa. The DTI's optimism of increased manufacturing is supported by some renewable energy publications including the report on 8 February 2012 that "India's largest wind turbine manufacturer, Suzlon, considers building a plant to make equipment for the turbines in the country."

Pending legislation on local content

During December 2011, the DTI published the Broad Based Black Economic Empowerment Bill 2011 (B BBEE Amendment Bill)3 for public comment. The final date for comment was 9 February 2012. Following the collation of the public comments and submissions, the Amendment Bill will be tabled in Parliament and, if accepted, passed into law. In terms of the B BBEE Amendment Bill, new phrases and concepts are substituted to clarify the hitherto generic lexicon used in the context of B BBEE.

Key amongst these concepts is the definition of "local content" which means locally produced goods, services or works, or locally manufactured goods which satisfy a stipulated threshold for local production and content. It is not clear what the phrase "stipulated threshold" refers to and there is no further use of the phrase in the Amendment Bill.

The B BBEE Amendment Bill makes it clear that local content requirements under the RFP, and in general, are specifically applicable to goods that are produced in South Africa by South Africans. In addition, local content requirements can only be satisfied by services and works rendered and performed by South Africans. It will not avail any of the project developers to attempt to have goods which are not produced by South Africans or services or works which are not rendered and/or performed by South Africans to count towards local content.

The Amendment Bill also substitutes the definition of "broad based black economic empowerment" as the sustainable economic empowerment of all black people, including in particular, women, workers, youth, people with disabilities and people living in rural areas, through diverse but integrated socio economic strategies that include, but are not limited to -

  • increasing the number of black people that manage, own and control enterprises and productive assets;
  • facilitating ownership and management of enterprises and productive assets by communities, workers, co operatives and other
  • collective enterprises;
  • human resource and skills development; achieving equitable representation in all occupational categories and levels in the workforce;
  • preferential procurement, including the promotion of local content procurement; and
  • investment in enterprises that are owned or managed by black people.

With these definitions under the Amendment Bill, project developers have no reason to claim that there is ambiguity in the use of the concept "local content". Any ambivalence shown by project developers in complying with these local content requirements will only prejudice the project company and perhaps, ultimately, lead to the disqualification of the bid submission. Project developers have to put in greater effort in meeting the requirements of local content or the manner in which they can comply with such requirements.

There is a clear, concerted effort on the part of the DOE and the DTI to achieve the objectives of the socio economic development requirements under the RFP, particularly through the promotion of manufacturing in the renewable energy industry, and meeting the local content requirements is but one of many ways to do so.

What is the ultimate evil?

The Amendment Bill appears to be aimed at eliminating the ultimate "evil" of "fronting" which has plagued the implementation of the policies and principles associated with B BBEE since the B BBEE Act 53 of 2003 came into force.

The B-BBEE Amendment Bill defines the phrase "fronting B-BBEE practice" as a transaction, arrangement or conduct that directly or indirectly undermines or frustrates the achievement of the objectives or the implementation of the Broad-Based Black Economic Empowerment Act 53 of 2003 (B-BBEE Act). The practices in connection with B-BBEE transactions contemplated by the B-BBEE Amendment Bill include, but are not limited to, B-BBEE transactions in terms of which -

  • black persons who are appointed to an enterprise are discouraged or inhibited from substantially participating in the core activities of that enterprise;
  • the economic benefits received as a result of the B-BBEE status of an enterprise do not flow to black people in the ratio specified in the relevant legal documentation;
  • there is a conclusion of a legal relationship with a black person for the purpose of that enterprise achieving a certain level of B-BBEE compliance without granting that black person the economic benefits that would ordinarily be expected to be associated with the status or position held by that black person;
  • there is a conclusion of an agreement with another enterprise in order to achieve and enhance B-BBEE status in circumstances in which -
    • there are significant limitations on the identity of the suppliers, service providers, clients or customers;
    • the maintenance of business operations in a context reasonably considered to be improbable having regard to resources; and
    • the terms and conditions were not negotiated at arms length and on a fair and reasonable basis.

The Minister of the DTI, Rob Davies, has stated that the DTI is elevating the concept of a balanced scorecard from the codes of good conduct to the B-BBEE Amendment Bill and ultimately into the B BBEE Act 53 of 2003. In addition, the DTI plans to establish a B-BBEE commission whose role will be the monitoring and evaluation of matters relating to B-BBEE, while promoting co-operation between the public and private sectors. The Amendment Bill also contemplates that the B-BBEE commission will pro-actively address non-compliance with the B-BBEE Act 53 of 2003 by introducing penalties for such non-compliance. At the same time, the Amendment Bill also introduces the Independent Regulatory Board of Auditors (IRBA) in order to regulate the verification entities that currently verify B BBEE credentials of entities and industry in general. The IRBA will thus serve the function of regulating the regulators, to ensure that the objectives of the B BBEE Act 53 of 2003 are achieved.

Conclusion

Schedule 2 of the Implementation Agreement is dedicated exclusively to all of the elements associated with socio-economic development. Through this schedule, the DOE seeks to illustrate the point that the renewable energy programme will not only ensure that the country steadily moves towards clean energy, but does so while making a significant contribution towards enterprise development, local content procurement and skills development in all the areas where the renewable energy power stations are developed and established. The DOE will thus attempt to meet a multiplicity of government policy under the single sweep of the RFP.

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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