Law firm Cliffe Dekker Hofmeyr (CDH) says the incoming Draft Block Exemption Regulations (BER) for small, medium-sized and microenterprises (SMMEs) holds opportunities for small agricultural businesses to enter into joint procurement arrangements or buyer groups, and enjoy discounted procurement rates.

Trade, Industry and Competition Minister Ebrahim Patel in August 2022 published the draft regulations for public comment. The regulations are aimed at exempting certain categories of agreements or practices of SMMEs from the application of Sections 4(1) and 5(1) of the Competition Act, thereby enabling collaboration between SMMEs that would otherwise contravene the Act.

“The draft BER assists in creating certainty that SMME firms will not be prosecuted for contraventions of the Competition Act in circumstances where broader economic considerations, such as their effective participation in the economy, are deemed more important,” CDH notes.

Section 4(1) of the Competition Act prohibits outright competing firms from colluding to fix a buying or selling price or other trading conditions; and collusive tendering and dividing markets by allocating customers, suppliers, territories or specific types of goods and services.

The regulations propose the exemption of seven categories of agreements or practices of SMMEs, including research and development agreements; production agreements – for production of a good or the provision of a service, or toll manufacturing by one firm to another; joint purchasing agreements, which may include collective purchasing by a subset of firms in a market; and joint selling prices of goods or services to and through intermediaries or other business customers, by a subset of firms in a market.

CDH competition director Andries le Grange explains that the agricultural SMMEs who qualify for these exemptions, as per the draft BER, are medium-sized businesses employing between 51 and 250 people, with a yearly turnover of about R35-million; small businesses employing between 11 and 50 people, with a yearly turnover of about R17-million; and micro-sized businesses employing between zero and ten people, with a turnover of about R7-million a year.

Le Grange says joint purchasing or joint procurement involves buyers cooperating to source all or part of their requirements for products that are either production components which they transform, or goods which they resell.

In turn, buying groups involve procuring products as a group, which enables negotiation to receive products at a discounted rate, and selling products at a competitive rate to consumers in the market.

The benefits of these arrangements include the ability to negotiate bulk price discounts and offering the product or service, in turn, to customers at a discounted rate, particularly as SMMEs often have weak bargaining positions.

Le Grange highlights that the aim of the regulations is to help get small businesses on their feet or give them a leg-up in the market.

Le Grange explains further that the courts have often found a joint purchasing agreement to not have collusive outcomes, and yet it is prohibited in terms of the Competition Act. Therefore, there is room to characterise arrangements as conduct which does not contravene Sections 4 or 5 of the Act.

Although the regulations provide some relief for SMMEs, firms that do not fall within the threshold requirements for SMMEs do not qualify for the exemption. Notably, the exempted agreement must be inclusive of the majority of SMMEs in a market, Le Grange explains.

He adds that, before the publication of the draft BER, there was not much South African jurisprudence which shed light on the circumstances in which joint procurement would result in a contravention of the Competition Act.

Moreover, Le Grange suggests that other firms that are part of buyer groups should carefully consider whether their arrangements are compliant with the law or not.

He says many larger firms may feel at risk once these re...

Pulp and paper manufacturer Sappi recorded a strong performance for the first quarter of its 2023 financial year – well above pre-Covid-19 levels and the best ever first-quarter results, CEO Steve Binnie points out.

Its earnings before interest, taxes, depreciation and amortisation (Ebitda) for the quarter ended December 31, 2022, of $290-million, were 21% higher year-on-year and in line with guidance.

The positive results were underpinned by year-on-year pricing gains for paper products, which offset cost inflation and lower sales volumes to deliver an Ebitda margin of 17.5%, Binnie says.

“The lower profits relative to the record levels in the prior quarter were reflective of the slowing global economy, which led to a softening in demand for our products, driven by the volatile and uncertain macroeconomic context including ongoing geopolitical turmoil, rampant inflation, rising interest rates and an underperforming Chinese economy, as well as rapid downstream inventory accumulation in all our major product categories,” Sappi outlines.

“Factoring in the protracted macroeconomic uncertainty, and coming off three quarters of outperformance, we anticipate a return to a normalised level of earnings in full-year 2023.

“The second quarter will likely be the most challenging with a recovery in earnings expected later in the financial year. Ebitda for the second quarter of full-year 2023 is expected to be below that of the first quarter,” Binnie warns.

Sappi posted a net profit of $190-million for the quarter under review, compared with a profit of $123-million in the first quarter of the prior financial year, while net debt decreased to $1.24-billion, from $1.92-billion in the prior comparable quarter.

Sappi notes that recent improvements in global supply chains resulted in a reduction in delivery lead times and a surge in customer inventory levels.

The same market dynamics of elevated retailer stock levels and general concerns over negative consumer sentiment adversely impacted on demand for all textile fibres, placing pressure on the hardwood dissolving pulp market price which decreased to $900/t by quarter’s end.

Despite this pressure, Sappi’s net average sales price for the pulp segment was 9% higher than a year ago, although this was offset by an 8% reduction in sales volumes.

Underlying demand in the packaging and speciality papers segment remained relatively stable. Selling price realisation more than offset the lower sales volumes and supported year-on-year margin expansion for the segment. Sales volumes were down 14% compared with the prior comparable quarter, driven primarily by the large customer inventory build.

A series of price increases in the previous year neutralised the impact of cost inflation and lower sales volumes in the graphic papers segment. Margins remained healthy but reduced relative to the highs of recent quarters. Sales volumes were down 31% compared with the prior comparable quarter as a result of production rates having been optimised to match sales.

The profitability of Sappi’s operations in the European region improved substantially compared with the prior year as pricing gains offset cost inflation. Lower demand occurred across all product categories and there was a significant inventory build. Selling prices remained stable quarter-on-quarter, which protected margins, Sappi notes.

The North American region delivered another strong performance, with first-quarter Ebitda of $114-million. Selling price gains offset significant cost inflation but sales volumes were negatively impacted on by a broad-based softening in paper demand towards the latter part of the quarter.

SOUTH AFRICAN OPERATIONS

Significant year-on-year cost inflation and slightly reduced sales volumes negatively impacted on the profitability of the South Africa region, despite the higher average dollar selling price for Verve – Sappi’s dissolving pulp brand – and a significant rand:dollar exchange rate benefit on the rand selling pri...

The South African Revenue Service (Sars) is emerging after State capture allegations and has made progress in several areas; however, there is still considerable work to be undertaken to get the institution to where it needs to be, Sars Commissioner Edward Kieswetter said on February 7.

Speaking during financial advisory network PSG Konsult’s “Future of Taxation” episode of its Think Big Series, he said that taxpayers should hold the institution accountable when it occasionally drops the ball.

“We should not hide behind any of our inefficiencies,” he emphasised.

In terms of some measurable progress, Kieswetter outlined that there had been improvements in revenue collection, compliance trends and trade facilitation – with all of these on a positive upward trajectory, showing encouraging signs of growth.

However, he said that comparing these improvements against the challenges and constraints still faced showed that there was still much to be done.

Some of the constraints included Sars presenting itself as an attractive employer, with the private sector able to offer higher remuneration and benefits. Kieswetter said Sars was, however, slowly reclaiming its position as an employer of choice, thereby enabling it to attract the skills it required.

He pointed out that the revenue service had appointed 500 additional employees skilled in technical areas during 2022 and that it was also employing the first 50 of a cohort of new service consultants.

“We're doing multiple interventions to improve our attractiveness in order to improve our efficacy as a revenue administration, thinking about the level of data science, technology and artificial intelligence we need,” Kieswetter said.

He also pointed out that there were opportunities to improve revenue collection, such as addressing the many levels of noncompliance.

Kieswetter said that what would provide real benefit was growth in the “compliance dividend”, with additional revenue coming, notwithstanding the economic climate, from focused efforts by Sars employees to collect every available rand.

“The bad news is we have low levels of compliance in relative terms. The good news is it provides us low hanging fruit to work on.”

Kieswetter also highlighted Sars’s efforts in risk profiling and using artificial intelligence. He pointed out that, last year, the institution prevented the outflow of R42-billion in fraudulent refund claims.

Kieswetter pointed out that loadshedding would have a material impact on Sars’ ability to collect revenue, with economic growth severely impacted and many companies, especially small businesses, closing.

Also, he said that during times of crisis, people tend to be ultraconservative, and where there was an opportunity, tempted to withhold taxes, which required additional efforts by Sars.

He emphasised that Sars did not do this out of desperation, nor to become heavy-handed with taxpayers, noting that staff needed to be held to the highest level of professionalism.

Rather, he said that Sars knew that collecting every rand available would reduce the need to borrow in a difficult market.

Kieswetter also said the aim remained to not raise taxes, but that this could not be completely dismissed later if pressures rose.

“Right now, I think our collective mindset is rather on improving administrative competence, and not on increasing the burden on taxpayers,” he indicated.

With regard to tax incentives being offered for people keen to explore alternative energy sources, to alleviate pressure on the grid, Kieswetter said the National Treasury should be reviewing what additional provisions could be made to provide some relief and provide an incentive for people to make an investment and become more self-sufficient.

However, he pointed out that using tax as a way to correct a particular behaviour in society was often not the most effective way to achieve a target.

Kieswetter also touched on the emigration issue, noting that this had been overstated.

“Last year, just mor...

The absence of a functional mining cadastre in South Africa, which has been undermining the sector for years, is now having potentially negative knock-on effects for developers of renewable-energy projects, particularly in Mpumalanga – a region where there is still capacity to connect new projects to the grid and the designated epicentre of South Africa’s just energy transition.

AmaranthCX director Paul Miller, who has conducted extensive mapping of the coal mines and projects in Mpumalanga, says without the cadastre renewables developers are facing difficulties in complying with a legal requirement to identify any mining or prospecting rights on, or within two kilometres of the proposed development.

This requirement is outlined in Section 53 of the Mineral and Petroleum Resources Development Act (MPRDA), which states that any developer of a non-agricultural project must apply to the Mineral Resources and Energy Minister or a delegated local official for permission to proceed with the development. That delegated local official must also identify and then consult with all affected rights holders.

The requirement is designed to prevent the sterilisation of mineral resources, and Miller says it is not desirable that it be suspended or scrapped, as it is necessary to check for competing rights.

In a recent article published in Business Day, Seriti Resources CEO Mike Teke and Seriti Green CEO Peter Venn also noted the need for wind developers to comply with Section 53 of the MPRDA as one of several regulatory steps that had to be undertaken before proceeding with construction.

The other lesser-discussed requirements highlighted in the article included securing approval for tall structures from the Civil Aviation Authority and confirmation with the South African Weather Service that the turbines will not interfere with weather radars.

Miller argued that, without a functional mining cadastre, it is practically impossible for project developers to determine who has what rights and where these are.

“I have heard that the DMRE itself is taking upwards of six months just to identify which rights holders may be affected by a new project.

“This poses a serious red tape bottleneck, while the country sits in the dark for upwards of ten hours a day,” Miller says, adding that the process to comply with Section 53 is also not clear, while the DMRE has huge discretion.

Miller believes the process is so time-consuming because the department's own Geographic Information System (GIS) data is spread across the Samrad system, which has been described as dysfunctional, as well as poorly managed, paper files.

“Due to a complete absence of transparency by way of an open online mining cadastre there is no way for a developer to determine if a project will impact on mining rights or prospecting rights, other than to approach the department.

“The department must then determine what rights exist in the vicinity of the project and contact those rights holders.”

The roadblock could be eased, Miller argued, if the DMRE were to periodically extract the full ESRI geodatabase file from the ArcGIS system that underlies Samrad and make it available for download on its website. Miller says this could be done in an afternoon at no additional cost to the department.

“Then a developer’s own GIS consultants could use their own systems to take a look at what rights are competing.

“The developer could then solicit letters of no objection from those rights holders and submit them with the Section 53 application to the DMRE.

“This would help ameliorate the bottleneck until a functional mining cadastre is procured and implemented - which is still many years away.”

Should such a temporary solution not emerge, Miller believes it may be necessary for the renewables industry to take legal action to force transparency by the DMRE.

“Perhaps the organised renewable energy industry will have the courage that the mining industry has not yet displayed.

“The promises of an imminent ...

The Department of Mineral Resources and Energy (DMRE) says it is working with other departments to expedite negotiations on a new nuclear cooperation agreement with the US, following the expiry of a previous agreement, with implications for the supply of nuclear fuel to Eskom’s Koeberg power station.

The Nuclear Cooperation Agreement on the Peaceful Uses of Nuclear Energy was signed between South Africa and the US in 1995 and came into effect on December 4, 1997, for a period of 25 years. The agreement, thus, lapsed on December 4, 2022.

America’s National Regulatory Commission subsequently informed Westinghouse that it had withdrawn its authorisation to supply Koeberg with nuclear fuel.

Koeberg uses Westinghouse fuel, which is manufactured in Sweden with inputs from the US, in its Unit 1 reactor, while fuel sourced from Framatome of France is used to load Unit 2.

Eskom chief nuclear officer Keith Featherstone has indicated that the Westinghouse fuel required for the current Unit 1 outage, which began in December and has been extended to incorporate the replacement of the unit’s three steam generators, is on site for use when the unit returns to service. The outage is expected to continue until early June.

The fuel for the Unit 2 outage, which is scheduled to begin in October, and which will also be extended for the much-delayed replacement of its steam generators, is not yet on site, but is being manufactured by Framatome and is expected to be delivered by May.

However, Eskom will need to secure additional fuel for Unit 1’s mid-2024 refueling and is, thus, considering various options in light of the previous US authorisation having been withdrawn.

Featherstone says Eskom’s preference is to continue with it two-vendor strategy and for Westinghouse to continue to supply fuel for Unit 1, as the process involved in qualifying a new fuel supplier is a long and involved one.

In addition, while Framatome fuel can be loaded into Unit 1 it is not the preferred option, as only one-third of the core is loaded with new fuel during a refueling outage and significant testing would need to be undertaken to verify that a “mixed core” combination is safe to operate.

“It can be done and it’s a lot simpler than bringing in a new fuel supplier . . . but we would prefer to sort out the issue and get the fuel from Westinghouse if we can,” Featherstone explains.

The DMRE claims to have initiated negotiations for the conclusion of a new standardised Nuclear Cooperation Agreement with the US in 2018 and reports that both countries have resolved to expedite the process, while engaging on measures to ensure continuity of cooperation during the negotiations.

While denying any immediate supply crisis, the department acknowledged that “urgent resolution is needed to allow Westinghouse Electric Company to provide fuel supply”.

“The DMRE is working with other government departments to expedite the negotiations of the new Nuclear Cooperation Agreement with the USA.

“We are confident and strongly believe that there is commitment between the parties to conclude the new Nuclear Cooperation Agreement to ensure mutual economic benefit between the two countries.”

Engineering News editor Terence Creamer discusses the National Energy Crisis Committee's planned initiatives for dealing with the country's electricity crisis; the proposed declaration of the energy crisis as a State of Disaster; Eskom's Generation Recovery Plan and the focus on getting units at the Kusile power station in operation again; what President Cyril Ramaphosa might outline in his State of the Nation next week; and if a State of Disaster will help the country overcome the electricity crisis.

Consulting Engineers South Africa (Cesa) has expressed some reservations with a proposal that a National State of Disaster be declared to tackle South Africa’s long-running electricity crisis.

While not rejecting the proposal entirely given the urgent need to address the “serious crisis”, CEO Chris Campbell cautioned that “people with ill-intent” could abuse the declaration, as was the case when a State of Disaster was implemented during the Covid pandemic.

“Should we go down that path, what controls and oversight will be in place to make sure that there is no abuse of that situation?” he said in response to a question posed at an event convened for Cesa president Olu Soluade to deliver the voluntary association’s annual presidential address.

“We certainly need to create a sense of urgency . but we need to put in place the controls and oversight to make sure that it doesn't become an opportunity for abuse.”

Campbell expressed support for the short-, medium- and long-term plans that had started to emerge out of the National Energy Crisis Committee, or NECOM, which he said had been formulated with the support of various engineers, who had provided input either through engineering associations or through organised-business and company structures.

“A huge amount of knowledge and research has gone into breaking the plan up into bite-size bits, as opposed to promising all of it in the next six months.”

He stressed, however, that resolving the loadshedding crisis was not a technical challenge alone and would also require various regulatory and social interventions, including intensified efforts to address criminality and sabotage.

In his address, Soluade said Cesa members stood “ready to commit to making a difference” in addressing both the energy and infrastructure challenges, which were “stretching our resilience to the maximum”.

“We are calling on government to commit to increased and informed spending on infrastructure as a key economic driver.

“Government needs to overcome the current supply-chain and procurement issues as well as the skills challenges our country faces. Additionally, the pace at which this happens needs to be accelerated,” Soluade asserted.

He argued that pending public procurement legislation also needed to make a clear distinction in the way the procurement of infrastructure was treated relative to the purchase of general goods and services.

The Public Procurement Bill, he indicated, offered the opportunity for a “fundamental shift in principle and in law to ensure that value for money was equated to the quality of services procured in the infrastructure delivery process”, rather than a least-cost approach.

“We believe that the correct approach should be to include the total cost of lifecycle ownership – cheap simply does not last and puts lives at stake.

“The impact of an inadequate design, that only equates to two percent of the lifecycle cost of a project, can have a catastrophic impact on operations and maintenance costs, that equate to approximately 60% to 70% of the total lifecycle cost, over the pursuant 30 years.

“What our country is currently experiencing is the results of years of inadequate supply-chain and procurement management focused on least cost procurement,” he argued.

Data from a survey the National Association of Automotive Component and Allied Manufacturers (Naacam) conducted in January indicates that the recent months of prolonged loadshedding have resulted in a substantial drop in monthly production and turnover among its manufacturing members.

In addition to this, the rolling blackouts are placing new business opportunities for auto component manufacturers at risk, while workforces are being placed on short time, vehicle assembly production lines are being stopped, and machinery is being damaged owing to electrical surges.

The auto sector is one of South Africa’s key industrial sectors, says Naacam executive director Renai Moothilal.

It delivered more than 4% of the country’s gross domestic product in 2022, with the component sector alone exporting a record R69.2-billion worth of goods, and employing more than 80 000 people in manufacturing jobs.

The results from Naacam’s survey indicate that most component manufacturers face loadshedding at their plants, despite the fact that some of these companies have loadshedding curtailment agreements in place with their various municipalities.

“South Africa has been encumbered with loadshedding for more than a decade, however, over the last two quarters, the prevalence and quantum of loadshedding have increased dramatically,” says Moothilal.

“Incidences of stage 6 implementation – up to 12 hours per day of no electricity – are having a negative impact on the sector and will ultimately harm the automotive sector’s contribution to the economy in the short- and long-term.”

Moothilal says while Naacam members are taking steps to limit the impact of loadshedding, many of the solutions require new investment – money the sector simply does not have.

This is placing strains on companies’ cash and balance sheets, already under pressure after Covid-19.

“The impact of this is a significant worsening of the global competitiveness of the South African automotive industry,” says Moothilal.

You Can’t Build 99% of a Vehicle

Survey respondents were spread across all major automotive hubs in South Africa.

Around 73% of respondents indicated that they face loadshedding at one or more of their plants, with a further 12% noting that while they do experience loadshedding, this is not the case at all of their plants.

The stage at which plants begin to face loadshedding varies by company and region.

The bulk of respondents (64.14%) reported being impacted directly by loadshedding only from stages 5 to 8.

That being said, there are respondents that face electricity disruptions from stage 1 onwards (14.13%), putting vehicle supply chains at a degree of risk.

A vehicle assembly process is continuous, and the customer cannot assemble 99% of a vehicle, explains Moothilal.

“This fact is especially worrisome as loadshedding appears set to move to some level of permanence this year and the next.”

Positive cases have emerged with several respondents having agreements in place with their municipalities or industrial development zones (IDZs) to limit loadshedding at their operations.

These include curtailment agreements under which companies reduce their electricity consumption under certain stages, in lieu of loadshedding.

A third of respondents have this type of agreement in place.

Naacam’s assessment of the loadshedding status of vehicle assembly plants ­– Naacam members’ customers – reveals that these plants are either in an area zoned for no loadshedding, or that they have curtailment agreements in place.

However, overall vehicle production is still being affected as there is no standard agreement in place for all component manufacturers.

“A complete sector approach is needed, especially at the Tier 1 supplier level, given the quantum of jobs and technology investment at risk here,” says Moothilal.

“We can’t assume that because vehicle plants are protected from loadshedding, all is good. Lose the Tier 1 component manufacturers and you lose the sector.”

Moothilal adds that...

Financial services firm Absa's Purchasing Managers Index (PMI) was at 53 index points in January, almost unchanged from the 53.1 index points in December, as a decline in the employment and new sales orders indices to levels below 50 were offset by higher business activity and inventories returning to positive terrain.

The significant, and surprising, improvement in the business activity index relative to the previous month was encouraging, despite many respondents still flagging loadshedding as holding back production and new sales orders dipping lower in January. Should this translate into actual production growth, it would be a promising start to the year for the struggling sector, Absa noted.

"The business activity index surged to 56 in January from 45.2 in December. While encouraging, it remains to be seen whether this can be sustained in the coming months, as many of the respondents flagged loadshedding as a drag on production.

"Continued activity growth would require a sustained improvement in demand and, most likely, a move to less intense stages of loadshedding. Therefore, the increase in the expected business conditions index was encouraging," Absa said.

While the new sales orders index had proved surprisingly resilient in the final two months of 2022, the January reading of 49.9, down from 53.8 in December, points to no change in demand in the first month of 2023. As export sales remained unchanged at a fairly high level, the deterioration was likely caused by weaker domestic demand, the bank noted.

The employment index, after the unexpected surge to 54.3 in December from 45.7 in November, dipped back below the neutral 50-point mark in January, to 48.4, which suggests that any improvement in staffing levels at the end of the year was temporary.

Meanwhile, the inventories index more than recovered from December’s sudden drop to below the neutral 50-point mark and rose by 6.8 points to 53.1, which is its best level since August 2022. The index was up from 46.3 in December and higher than the 51.9 registered in November, Absa said in its report.

Additionally, the supplier deliveries index declined to the lowest level in two years, at 57.6, down from 65.8 in December, albeit remaining well above the neutral 50-point mark, which was unusual prior to the pandemic.

"The fall could have been owing to more efficient supply chains resulting in faster delivery times, because the index is inverted and faster delivery times result in a decrease. However, it could also be linked to the downtick in new sales orders, with less demand for inputs resulting in more responsive deliveries," the bank said.

Following a steady decline, the purchasing price index booked its biggest increase since March 2022 to 69.3 index points, up from 64.4 in December, but lower than the 75.9 in November. However, the index remains low relative to its long-term average. The uptick in costs could possibly be linked to measures to offset the impact of loadshedding on production.

The rand exchange rate was, on average, slightly stronger to the dollar compared to December, but the Brent crude oil price was higher. The resulting uptick in the fuel price will put further pressure on costs, especially for businesses using diesel generators, Absa added.

Meanwhile, the index tracking expected business conditions in six months’ time rose by 8.9 points to 63.8, which is the best level since early 2022. Given the poor potential for the domestic economy to accelerate demand growth for factory goods, this was likely driven by better expectations for the global economy.

Further, there are more signs of the European economy avoiding a near-term recession and the reopening of the Chinese economy providing a further boost to global demand, Absa highlighted.

New-vehicle sales increased by 4.8% in January, to 43 509 units, compared with the same month last year.

New-passenger-car sales gained 2.9%, to 31 072 units.

The car-rental industry showed strong support for the new-passenger-car market and accounted for 16.2% of sales in January.

Sales of bakkies, small trucks, vans and minibuses increased by 10.4%, to 10 622 units.

Medium-truck sales grew by 2.9%, at 461 units, with heavy-truck and bus sales increasing by 9.9%, to 1 354 units.

New-vehicle exports saw a decline of 1.8%, to 20 536 units.

Naamsa | The Automotive Business Council describes January’s sales numbers as a “weak performance” in line with a “depressed economy” facing ongoing structural challenges and cost-of-living increases.

“The same challenges that confronted the economy and the automotive industry in 2022, such as persistent loadshedding, high inflation and interest rates, as well as currency depreciation, have all been carried over into 2023.”

Despite vehicle exports performing weaker in January compared with the corresponding month last year, Naamsa believes that the momentum remains upward going forward.

“Notwithstanding the impact of the economic downturn, as well as the ongoing geopolitical conflict risks, there are signs of the European economy avoiding a near-term recession, while the reopening of the Chinese economy would provide a further boost to global demand in general.

“Prospects for vehicle-export growth remain optimistic on the back of further new model introductions by major exporters in the domestic market.”