The global public procurement market is estimated at approximately $9,5 trillion each year (~R145,2 trillion in August 2019), accounts for 25% of all government spending and approximately 20% of global GDP.
Government can influence the economy by employing either demand or supply side policies, with public procurement policy considered a legitimate tool to stimulate domestic production and consumption. The primary objective of public procurement is the acquisition of goods and services to enable the delivery of infrastructure and other public services. This provides an important source of demand for key sectors such as energy, construction and transport.
The significant scale of public procurement means it is increasingly being used as a vehicle to drive secondary policy objectives. By designating contracts for particular sectors or groups, government is able to influence the economy through driving innovation, developing local industrial capability and competitiveness and, in some cases, redistribute wealth.
The Netherlands, the UK, China and South Korea are examples of countries that have successfully used public procurement to achieve both primary and secondary policy objectives. Their experience offers lessons for those countries intending to leverage public procurement for a broader set of objectives.
Public Procurement in South Africa
In 2018, government expenditure in South Africa contributed just over 30% of total GDP.
The South African government has identified public procurement as an important lever to drive secondary policy objectives. These include stimulating economic growth and redressing historical injustices and, as a result, granted such with constitutional status.
Over the last 20 years, several programmes have been introduced that leverage public procurement to derive social benefits, such as employment creation, skills development, enhanced R&D and support for local industry. These programmes include the Defence Industrial Participation (DIP), National Industrial Participation Programme (NIPP), Competitive Supplier Development Programme (CSDP) and designation of locally manufactured content. For each of these programmes, success has been reported in terms of job creation, training, and the transfer of skills and technology.
Despite the reported success of these programmes, the envisioned benefits of public procurement on the broader economy have yet to reach their full potential.
Reasons for this include but are not limited to:
- Inadequate planning and linking demand to budget
- Limited visibility and reliability of demand
- Sufficient support for prioritised industry value chains
- Corruption and unethical behaviour
- Limited visibility and insufficient knowledge of local industry capability and capacity
- A lack of necessary knowledge, skills and capacity within supply chain management (SCM)
- Non-compliance with SCM policy and regulations
- Inadequate monitoring and evaluation systems and tools
Despite the presence of these policies, over the last decade, the economy has been characterised by negative economic growth, rising unemployment and reduced levels of FDI. In 2018, South Africa was the only economy in the Organisation for Economic Cooperation and Development (OECD) to experience a recession and ranked lowest among the same peer group. The large capital build programmes, expected to drive localisation, were characterised by significant cost overruns and little true localisation. State Capture is an important factor within this narrative, reportedly costing South Africa R1,5 trillion, a third of the country’s GDP.
As a result, procurement and supply chain units within government bodies are in the spotlight. They are under immense pressure to balance management requirements (such as quality, cost-effectiveness, competitiveness) with regulatory compliance. Striking this balance is difficult, particularly in environments which are complex and comprised of competing interests. Additionally, SCM units are generally under-resourced in terms of adequately skilled and prepared procurement staff.
Powering Change Through Effective Procurement
In order to leverage procurement to drive true value, we believe that public SCM functions would benefit from the following high-level recommendations:
- Improve planning and demand visibility to provide credible and reliable demand for suppliers
- Encourage pre-market engagement to promote awareness of existing local capability and stimulate local innovation
- Enhance local knowledge, skills and capacity to drive value through operational efficiency
- Consult international best practice to promote procurement excellence
- Redesign performance management systems to drive the right behaviours
- Improve governance and accountability to regain systemic trust
Letsema understands the dynamics and is able to navigate these in a way that delivers measurable impact both ethically and efficiently to accelerate your organisation’s ability to achieve its supply chain objectives. The figure below illustrates Letsema’s ability to support in addressing common issues facing many public procurement departments.
Our engagements deliver expert advice and support in Strategic Sourcing on complex transactions, real resource deployment within client environments to resolve backlogs, optimise processes and deliver cost savings whilst transferring key skills and expertise.
As a home-grown South African, black-owned and managed management consultancy with over 20 years’ experience, we are well positioned to support African governments to achieve procurement and supply chain excellence that effectively delivers on their primary and secondary objectives.
If you are interested in finding out more on how Letsema can help streamline your procurement and supply chain functions, click here.