With the economy weak and stagnant, opportunities for black businesses to get a foothold in commercial activity are few and far between. This is even more so the case for black business startups, for which the easiest and perhaps only way to break into the economy is by winning a slice of a government contract.
And so the pressure is on to increase what are called "set-asides" for businesses owned by designated groups from the 30% currently in the preferential procurement regulations to something much larger. After the infamous step-aside resolution, public procurement is shaping up to be a hot debate at the ANC national conference in December. It is a central pillar of the Radical Economic Transformation (RET) playbook, which continues to oppose Cyril Ramaphosa's dominant faction.
At the KwaZulu-Natal ANC provincial conference, President Cyril Ramaphosa promised delegates that the new Public Procurement Bill, which is under discussion in Nedlac, would bear the province's name as a tribute to how hard it has campaigned on the issue.
The province's policy position is a radical one. It wants public procurement spend to reflect the demographics of the province. So, for instance, of the province's R18 billion infrastructure budget, 96% of it should go to companies owned by previously disadvantaged groups in line with the size of the black African, Indian and coloured population in the province.
It is also no coincidence that the construction mafia – which has shut down building sites to demand 30% of the contract value – originated in this province, where procurement is an issue that dominates all others.
Said Ramaphosa when closing the KZN conference:
"This public procurement issue that you continue to raise, we have listened and heeded, and the legislative process is under way and will be concluded. And if you like, its sub-name can even be 'the KZN-inspired public procurement process of empowerment'."
Preferential procurement regulations that are in place now require companies that win large contracts over R30 million to sub-contract 30% to small and medium enterprises belonging to designated groups, where feasible. At the ANC's conference in 2017, a resolution was taken to increase the quota of "set asides" which has not yet been acted upon.
A new Public Procurement Bill is under discussion in Nedlac. It doesn't specify numbers but commits the finance minister to determine a preferential procurement framework. The framework must include a preference points system in the scoring of tenders and a share of contracts for specific categories of people.
It also suggests that preference be given to businesses located in townships or in a particular municipality or province.
Preferential procurement is spelled out in the Constitution. Government procurement, it says, must be "fair, equitable, transparent, competitive and cost-effective". The Constitution also says that organs of state are not prevented from making policy to provide for "categories of preference in the allocation of contracts; or the protection of advancement of person, or categories of persons, disadvantaged unfair discrimination".
This is where the notion of setting aside an allocation of contracts for designated groups comes from.
But it is difficult to simultaneously meet the competing objectives of value-for-money and transformation. The vagueness of existing regulations has led to irrational, expensive and nonsensical consequences.
The worst of the unintended consequences has been the rise of the construction and procurement mafia, who have used the 30% rule to extort contracts, and sometimes just money, from established businesses. There are many others too. Preferential procurement, for instance, has compelled Eskom to buy equipment for its power plants – manufactured by a sole supplier – via a middleman because of that person's locality, which happens to be near a power station.
It is also very likely why in the case of murdered public official Babita Deokaran, the Tembisa Hospital was buying medical supplies and equipment through dodgy middlemen who live in its vicinity on the East Rand in the first place, rather than from the equipment suppliers directly.
In the construction sector, the requirement to apply the 30% rule and sub-contract to local business is now built into tenders by state entities at the outset. Even where a client does not specify that local sub-contracting must apply, the risk of not doing it is too high so firms now do it as a matter of course. Contractors warn of the consequence of this on pricing; with awareness, they may have to pay for the same service twice if the local sub-contractor cannot deliver according to specifications.
There is obviously a price to be paid for black economic empowerment and transformation. In the first wave of BEE back in 1990s, which saw the creation of the tycoons like Ramaphosa, Saki Macozoma and Tokyo Sexwale, private companies were the ones who paid the most.
In the second phase – the phase of the charters – business bore the cost again. While empowerment partners bought their stakes with vendor financing, firms had to dilute their ownership, which came at a cost to shareholders.
The third phase of BEE was all about winning tenders. As corruption flourished, society and taxpayers picked up the tab as the government paid massively inflated prices for shoddy work and work that often wasn't done at all.
We are now in a phase where the government's only tangible solution to economic inclusion hinges on government procurement. Local procurement requirements mean that tenders are sub-contracted and supplier contracts split into several smaller entities, with each player needing to make a margin. This raises prices and the time it takes to complete projects, especially when building infrastructure.
With so little growth in the economy and BEE charters all done for now, state procurement has become one of few tools to drive economic inclusion. But it carries a price and is a heavy tax on the economy.
This opinion piece was written for News24 by Carol Paton .jpg)
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