NEWS: Construction Mafia: Why our procurement system is a middleman's playground

In her opinion piece , Carol Paton correctly located how supply-chain-focused "violence" - as distinct from say, rape, murder or common assault - had strong links with the interpretation of preferential procurement within the framework of the broad-based black economic empowerment policy.

Paton further suggested that state procurement was not only the most important avenue to drive black economic empowerment in the current moment, but also placed a "heavy tax" (in overpricing, intimidation and project delays) on the government, contractors and the public.

If the phenomenon of protection fee rackets, 30% for "business for a" and extortion ("the Delangokubona phenomenon"), was solely unfolding in public sector projects, then I would understand the "heavy tax" argument being made. That these disturbances also extend to private sector projects, suggests that this is a "society-wide economic phenomenon" rather than one arising out of government's only tangible solution to economic inclusion hinging on government procurement.

Furthermore, I argue in a recent UNU-WIDER paper, that rather than being a squabble over higher-than-usual "transaction costs" associated with "empowerment from below", the Delangokubona phenomenon is a political economy contest over "economic rents" between, within and among different classes of established and aspirant businesspeople.

Contested by a diverse set of groups, extending beyond just public procurement, or even the construction and mining sectors, economic rents are the "surplus or excess returns" contained in the price of whatever is exchanged, which are enabled by political mechanisms and outcomes that limit entry to certain markets, provide monopoly profits, subsidies, protective tariffs, or licences to specific firms. In the case of BEE, these "surplus returns" arise from demographic features of those who own and control the firms, which frames how they access preferential points or set-asides in public contracts or in earlier periods the conditions under which they partner with established white firms.

What Paton overlooks

What Paton overlooks is that across the waves and phases of "empowerment", BEE has not just been a "rent" for black entrants and aspirants, but also a conduit to "rents" (licences, subsidies, procurement and administered price opportunities inter alia) for white established firms because the institutions ("as rules of the game") positioned transformation as a reciprocal expectation to access a mining right, a telecoms licence or even a tolling concession. These examples are different as "allocation processes" to "procurement" but have similar to procurement, determined and framed private sector participation in black economic empowerment.

Paton suggests that the first phase was associated with the private sector carrying the "price of empowerment", yet many of the earlier deals in licensed and regulated sectors, were in some instances, associated with downsizing, restructuring and disposal of non-core operations and assets in overpriced and heavily leveraged deals sold to black players at a premium. Rather than only diluting value for existing white shareholders.

Shareholders and bankers got "rents" from BEE. Paton suggests that there is a "price" for empowerment and social and institutional change. I agree with her. Where I do not agree, is in who carried and continues to carry that price, and what the "Delangokubona" phenomenon tells us about this.

The "narrower phases of empowerment", from the Motlana-Macozoma-Sexwale-Ramaphosa phase to the charters and the "tender" phase, were all about "rents"– who got them, who did not and the "utility" of proximity to political authority and power. The "Delangokubona" phase is no different.

Local power brokers

What distinguishes it, is the informal infusion of a few features of interpretation to justify the use of violence to access "rent" opportunities. While in the past, formal mechanisms (forming consortia, scorecards, charter targets inter alia) were the avenue, now the social expectation of redistribution to local power brokers is enough. This, I argue, is a signal of policy failure in design and exposition of procurement regulations, which opens these to contest and informal adaptation.

Firstly, much of the Delangokubona approach involves "local" stakeholder groups requesting dialogue with contractors, traders, and firms, to articulate claims to firm and project-level cash flows. This, according to the acting director-general of the National Treasury, was never meant to imply "localities" in terms of wards or municipalities. This "federal" interpretation of BEE arises from a weakness of the 2017 regulations, which even if they were to be formally or stringently applied, would exclude many micro-enterprises.

Schedule 9 of the 2017 regulations, covers subcontracting where feasible in projects valued over R30 million, implying that every project valued in this way must at a minimum have R9 million in activities and services subcontracted to a designated firm or groups, with a corresponding CIDB grade (five and above) unless the subcontract is "chopped up" among a few EMEs, presenting monitoring and other quality assurance challenges for the main contractor.

Yet, if one looks at the CIDB database, it is clear that only the urban areas would have a "universe" of level 1 BEE firms with the necessary grade to benefit from this "rent", thus narrowing the type of black firms that can benefit from the policy. Even this is a particular interpretation, and the issue is that those contractors who are yet to achieve such a grade may be reliant on the "benevolence" of larger contractors or even local LED and supply chain functions, to get enough work under their belt to graduate from the lower grades. A chicken and egg scenario.

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Opportunistically, many business forums recognising this, reframe the "local" as a sphere of empowerment recognising this uneven spatial distribution of black engineering, building and civils capability, and make claims for "local" value distribution to rectify it. In so doing they shift the costs of such "rent distribution" to the main contractor in cost overruns and project delays, as Paton suggests, but also, more importantly, to the mass of ordinary working-class South Africans in delayed service delivery.

Delay the delivery of services

Secondly, the overpricing by middlepeople is not only about rents, which are not inherently anathema and can even be productive where mobilised behind clear institutional parameters that encourage reinvestment, productivity improvement, skills transfer and value addition. The overpricing arises not out of BEE per se, but out of a public procurement framework misaligned to our current stage of development.

If we accept that procuring a pen is not the same as procuring a water pipeline, then we recognise that our system treats them the same procedurally, creating a complex bureaucratic and administrative framework that "micro-parcels" in an environment where there is the illusion of "price discovery" in every bid for products procured frequently.

Add to these, delays in awarding contracts for numerous reasons, which delay the delivery of services and inadvertently inflates prices as contractors increase their mark-ups in anticipation of late award, payment and other risks associated with institutional weaknesses in supply chain and budgetary processes.

Paton is correct that some of these contracts are split into several smaller "margin-heavy" micro-contracts, with each player clamouring for their "rent". This, rather than solely being an outcome of the subjective price gouging, criminality, and opportunism of aspirant businesspeople, is a response to a procurement framework juggling an uneasy balance of a fixation on the price mechanism, weak contract management frameworks and poorly designed empowerment provisions.

It is encouraging, however, that the Draft Public Procurement Bill incorporates measures aimed at widening the scope of beneficiaries (SMMEs in high value procurement), opening space for manufacturers rather than middlepersons and advancing goods manufactured in the republic. This focus has the potential to align procurement not just to short-term rent capture, but the possibilities of unlocking productive redistribution that can unlock enterprise improvement, employment and value addition.

This opinion piece is written by  Ayabonga Cawe a development economist, sessional lecturer and policy advisor, it was first published on News24