Mathabo Le Roux
29 June 2009
Johannesburg — INDIAN pharmaceuticals group Aurobindo is taking SA's Treasury to court, claiming it lost out to local pharmaceutical companies in a 400m contract for antiretroviral (ARV) AIDS drugs, even though its tendered price for the drugs was cheaper.
The Indian giant, which is the biggest producer of ARVs in the world, claims in court documents that its tender was on average 30% cheaper than the locally manufactured products.
Almost 60% of the contract, which went out to tender last year for the supply of ARVs nationally for the two years from June last year to next May, was awarded to local companies Aspen and Adcock Ingram. The balance went to innovative companies. Court papers, seen by Business Day, allege contracts were awarded to Aspen, Adcock Ingram and MSD for products that cost up to 38% more than the tendered Aurobindo prices. In another instance, the tender for Efavirenz -- for which Aurobindo has the only registered generic product costing 120% less than the branded product, and which could have meant a R178m saving over the two-year contract period -- was not awarded, without explanation.
None of the parties involved wanted to comment on the matter, saying the case was sub judice, but it appears the tender award gave preference to local manufacturers in terms of SA's industrial policy.
In terms of the policy, the pharmaceuticals industry is one of the strategic sectors earmarked for government support to grow the sector. The industrial policy action plan, released in August 2007, moots leveraging ARV tenders to expand local capabilities, by giving preference to local manufacturers with tender awards.
When approached on the issue, Stavros Nicolaou, chairman of the Local Pharmaceutical Producers Trade Association, said playing fields in the international market were not level and Indian manufacturers -- the world's most competitive -- benefit from a vast bouquet of state subsidies, giving them a cost advantage of up to 30% over SA's pharmaceutical firms.
Moreover, while trade barriers on pharmaceutical supplies in major competing markets were at high levels -- Mexico and Brazil has import tariffs of 35% on pharmaceutical goods, India 36% and Iran duties of 50% -- the South African market was largely open, with no import tariff on finished product and raw active materials attracting duties of between 10% and 15%.
"With a local preference in tenders, it really is to level the playing fields against the Indians. It is not giving us a leg up," Nicolaou said.
The ARV tender award may also have been informed by a study done by the Industrial Development Corporation, commissioned by the Department of Trade and Industry, which calculated the contribution back into the economy of local manufacturers versus importers for every procurement rand spent by the government.
The study found that local producers' tax contribution, linkages with down and upstream sectors and job creation potential warranted the government spending more on drugs by procuring locally.
It was not clear from the study what the premium ceiling was, but Nicolaou estimated that a 15%-20% premium paid for locally produced product over imported product would still be justified in terms of the extra taxpayer burden, because of local producers' contribution to the economy.
The Treasury probably can defend the local bias in the tender award in terms of article 12 (1) of the Preferential Public Procurement Framework Act, which allows for government entities in the adjudication of tenders to give particular consideration to procuring locally manufactured products.
But SA's local bias may put pressure on bilateral relations with India -- a strategic trade partner with which SA plans to strengthen ties into the future.
Moreover, the court challenge may also throw a stick in the spokes of the wheel of state objectives to align government procurement legislation with the Broad-Based Black Economic Empowerment Codes of Good Practice, and industrial policy objectives generally, to boost local manufacturing.
The Treasury, led by Finance Minister Pravin Gordhan, said last week it would publish a revision of the state procurement rules for public comment soon.
The aim is to change the rules so that broad-based empowerment would inform tender processes rather than only the proportion of black ownership of a tendering firm, as is now the case.
The Treasury has also been instructed to put more emphasis on local content, to align procurement processes with the industrial policy, but also with the framework agreement on SA's response to the international economic crisis, which was agreed to in the National Economic Development and Labour Council this year.
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