Proposed law to protect local firms from unfair competition

Chess board; monopoly in business. [Getty Images]

An amendment to the Public Procurement and Asset Disposal Act seeks to limit local enterprises’ tenders worth less than Sh1 billion.

The amendments contained in a draft Bill argue that this will protect local firms from competition as grounds for the changes to be implemented.

The draft Bill which seeks to amend Sections 53 and 70 of the Public Procurement and Asset Disposal Act (PPDA), also proposes restrictions to the tenders awarded to international firms.

According to The Public Procurement and Assent Disposal (Amendment) Bill, 2023, for contracts more than Sh1 billion, which are awarded to international firms, 30 per cent of the tender’s value must be given to local companies.

This will be implemented through a joint venture, which gives local firms as much voice as the winning international bidder.

“The procuring entity must specify the goods, works, and services that will be carried out by the local firm in the joint venture procurement,” the draft Bill reads in part before the Parliament Budget Office.

It is hoped that passing the Bill into law will promote local businesses, stimulate economic growth and keep resources locally.

“Furthermore, it would encourage the development of local industries, create jobs, and contribute to the overall economic well-being of the community,” the draft Bill reads in part.

“If rejected, local firms will continue to face competition from foreign firms and may be overshadowed in public procurement processes.”

The Bill, sponsored by Kiambaa MP John Njuguna also anticipates individuals who may circumvent the law to register companies on behalf of foreigners or locals.

The Bill states that a person who registers a company on behalf of a non-Kenyan with the intention of benefiting from procurement under the section commits an offence and shall be liable upon conviction to a fine not exceeding Sh5 million or to a term of imprisonment not exceeding three years of imprisonment or both.

“A foreigner who registers a company on behalf of a non-Kenyan with an intention of benefiting from procurement under the section is liable to a fine not exceeding Sh5 million or to a term of imprisonment not exceeding five years or both,” the draft Bill states.

The draft Bill defines a local firm as one which is wholly owned by a Kenyan and dully incorporated in Kenya.

A foreign firm is defined as a company whose shareholding is more than 30 per cent owned or is wholly owned by a non-Kenyan and dully incorporated inside or outside Kenya.

“If this Bill is enacted into law, the sector to be affected will be the General Economic and Commercial Affairs sector (GECA),” says Mr Njuguna in the draft Bill.

Section 53(6) of the PPDA, 2016 states that all procurement and asset disposal planning shall reserve a minimum of 30 per cent of the budgetary allocations for enterprises owned by women, youth, persons with disabilities and other disadvantaged groups.

However, Mr Njuguna observes, the Principal Act does not make a distinction between local and foreign firms in relation to public procurement in Kenya.

“Any firm, regardless of its origin, can participate in tenders and procurements irrespective of the value or cost. The determination of whether a company is considered local or foreign is primarily based on shareholding (with majority shareholding being a key factor) and the country where the registration takes place, as outlined in the Companies Act of 2015,” says Mr Njuguna.

He borrows the changes from practices in other markets like India and South Africa. Mr Njuguna details that the Preferential Procurement Policy Framework Act (PPPFA) of South Africa establishes a preference point system to quantify the allocation of procurements between local and foreign firms.

“This system assigns points to bidders based on various criteria, including price, B-BBEE (Broad-Based Black Economic Empowerment) status, and specific socioeconomic factors,” the draft Bill states.

Under the PPPFA, the draft Bill explains, a procuring entity evaluates bids received for a particular procurement opportunity using the preference point system. The system consists of a set of factors against which bidders are scored, and the bidder with the highest number of points is generally awarded the contract.

The key elements of the preference point system in the PPPFA is the Broad-Based Black Economic Empowerment (B-BBEE) Status.

“This strategy tries to make it easier for black people to participate more widely in the economy and is notably designed to address the injustices brought about by apartheid,” the draft Bill says.

He further explains that the policy offers incentives to companies that support black economic empowerment in accordance with a number of quantifiable criteria, such as through majority or partial black ownership, hiring black employees, and contracting with black-owned suppliers, particularly preferential treatment in government procurement processes.

For India, the country has a Public Procurement-Preference to Make in India, a policy framework introduced by the Government of India to promote domestic manufacturing and support the country’s ‘Make in India’ initiative.

It is a part of the public procurement policy and aims to provide preference to domestically produced goods and services in government procurement processes.

“The procurement system in India does not have separate thresholds for local and foreign companies. Instead, it sets thresholds for certain categories of products and services, and these thresholds apply to all eligible bidders, irrespective of whether they are local or foreign entities,” the draft Bill reads.