There are some South African attorneys that of the view that the new procurement provisions in the new charter may be in contravention of the World Trade Organisation, such as that 70% of all mining goods and 80% of all services must be acquired from BEE entities. Whilst at the same time, many Mining companies will be grappling with how they meet the procurement and enterprise supplier development targets of the new Mining Charter due to the local content requirements, one cannot overlook the possibility that South Africa could be contravening the World Trade Organisation (WTO) rules.
In the multilateral trading system under the WTO, the most relevant agreements on compliance of Local Content Requirements (LCR) are the General Agreement on Tariffs and Trade (GATT) and the Agreement on Trade-Related Investment Measures (TRIMs). The TRIMs agreement prohibits the use of LCRs that requires a specific percentage or quantitative target of local goods purchases by companies, and has trade-balancing requirements that restrict the volume or value that a company can import to an amount related to the level of products it exports.
According to the WTO, by their nature, local content requirements emphasise preferential treatments for local suppliers vis-à-vis foreign goods and services providers and are therefore viewed by many countries as protectionist measures.
Members of the WTO, including South Africa, are therefore required to adhere to the rules under GATT and TRIMs, otherwise this part of the mining charter on local content may well be subject to challenge (through domestic court processes or international dispute resolution systems) for failing to comply with international investment and trade law obligations.
If this is going to be contested under the international dispute resolution systems, South Africa will not be the first to be brought under such scrutiny. Many developing countries which include Tanzania India, Nigeria, Indonesia and Brazil have put in place guidelines and acts that provide preference to local suppliers.
The Tanzanian government recently enacted the Local Content Regulations GN 3 of 2018 to address its challenges in the mining industry. Not only does it force licensees and contractors to use indigenous Tanzanian companies for the procurement of goods and services, but also requires a physical presence in Tanzania. This is also being monitored in terms of how it is being implemented.
In 2016, a WTO panel ruled on the US dispute against India concerning the use of local content requirements in the context of the Jawaharlal Nehru National Solar Mission (JNNSM) energy scheme. In the initial phases of the JNNSM, solar power developers were required to use certain types of solar cells and modules manufactured in India for power generation projects to ultimately sell that electricity to government agencies under a long-term agreement at a guaranteed rate.
The US complained that these domestic (local) content requirements violated India’s national treatment obligations under GATT and the TRIMs Agreement. The WTO panel found that the domestic (local) content requirements are trade-related investment measures violating the national treatment obligations under the TRIMs Agreement and the GATT. Promoting the use of more efficient, best price available intermediate goods in global markets for a country’s manufacturing needs, is the economic assumption underlying this WTO obligation.