Has Treasury Been Captured By The Black Business Lobby?

 

 

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Draft preferential procurement regulations recently gazetted by the National Treasury suggest that Pravin Gordhan’s department has finally been captured by the black business lobby. The Treasury has long resisted demands for increased preferential procurement, saying this leads to inflated prices and leaves less revenue available to meet the needs of the poor. But now its regulations (published for comment by 15thJuly) propose major increases in BEE procurement in various ways.

Under the Preferential Procurement Policy Framework Act of 2000 (the Act), a 90:10 formula currently applies to tenders worth more R1m. According to this formula, 90 points are allocated on price and 10 points for BEE status, which means a BEE firm can charge 10% more and still get the contract. Under the current rules, an 80:20 formula applies to contracts below R1m, so allowing BEE firms to charge 20% more and still win the tender.

The regulations seek to raise the ceiling for the 80:20 formula from R1m to R100m, an increase of 9 900%. This will greatly expand the scope for price escalation. It may help a relatively small group of BEE business people, but it will also hurt the millions of poor South Africans dependent on the government for vital goods and services.

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Worse still, the BEE price premium paid by the state is often much higher than 10% or 20%. Mr. Gordhan himself acknowledged this in 2010 when he said that the government was paying more for everything than a private business would: “R40 million for a school that should have cost R15m, R26 for a loaf of bread that should have cost R7.”

In 2012 ANC secretary general Gwede Mantashe voiced a similar concern, saying: “This thing of having a bottle of water that you can get for R7 procured by the government for R27 because you want to create a middle-class person who must have a business is not on. It must stop.”

Read also: Anthea Jeffery: Ratcheting up the BEE rules, yet again

However, as the regulations show, BEE procurement (like other BEE requirements) is not being halted. Instead, it is being ratcheted up yet again.

Under the regulations, “a minimum of 30% of the value of the contract” will also have to be sub-contracted to small black firms whenever the value of the contract exceeds R30m, or the tender stipulates this requirement.

These provisions will further increase the scope for uncompetitive tender awards, especially as the 30% sub-contracting requirement is a “minimum” which could in practice be far exceeded. A tender could thus stipulate, for example, that 90% of the contract’s value must be sub-contracted to small black businesses, which might have limited capacity to supply the required goods and services efficiently.

Under the regulations, South Africa’s most experienced and cost-effective companies could also be barred from contracting with the government at all. This could happen if a tender includes, as a “pre-qualifying” criterion, a minimum BEE score (of, say, 90 points or more), which many companies will battle to attain under the revised generic codes which took effect in May 2015.

Affirmative Action

The same could occur if an organ of state sets 51% BEE ownership as a pre-qualifying criterion (as Eskom already does for coal suppliers, despite the mining charter’s 26% requirement). If a 51% BEE ownership criterion is stipulated, then a tender from a firm with BEE ownership below this level will not qualify for consideration at all, irrespective of how cost-effective that tender might be. That the firm in question has met the 25% BEE ownership requirement laid down in the generic codes will also be irrelevant.

In keeping with this general thrust, the regulations further make it clear that the “functionality” of a tenderer – in other words, “its ability to provide goods or services in accordance with the tender specifications”– is an optional extra. Hence, it needs to be considered only “if” organs of state stipulate this as a requirement in their tender invitations.

The regulations contradict the Constitution, which requires that state procurement be “transparent, competitive, and cost-effective”. Though some degree of preferential procurement is allowed, this must be rationally and reasonably connected to the objective of “protecting or advancing persons disadvantaged by unfair discrimination”. The regulations do not satisfy this test, for what they propose will inflate prices, erode quality, reduce growth, and decrease jobs – all of which will leave the poor worse off than before.

The regulations are also inconsistent with the doctrine of the separation of powers. The Constitution vests the capacity to make new law in Parliament, not the executive. But executive law-making is the hallmark of the regulations, which change the current preferential procurement system in several substantial ways.

Read also: Anthea Jeffery: BEE doesn’t work, but EED would

In addition, the regulations give the officials responsible for awarding state contracts an extraordinary degree of discretionary power. They could change procurement criteria at will – even from one contract to another – so creating enormous uncertainty. The current rules, though often disregarded, at least provide a clear framework. By contrast, all these additional discretionary powers will vastly increase the scope for arbitrary decision-making. They thus contradict the rule of law, the “supremacy” of which the Constitution also guarantees.

The regulations will make it harder for Mr. Gordhan to hold public spending in check, even though this is vital if South Africa is to avoid being downgraded to junk status. They will also make it harder to ramp up economic growth, which requires government reforms to boost business confidence and reduce the regulatory burden.

Moreover, though the regulations have many damaging ramifications, no “socio-economic impact assessment” (SEIA) of them has been done. This contradicts the SEIA system introduced last year, under which no legislation or significant regulation may be put forward for adoption unless it is accompanied by a final SEIA report on its likely effects on growth, employment, and other core national priorities.

What the country needs most is not this supposed “quick fix”, but rather targeted measures to overcome key barriers to upward mobility. These barriers include:

  • a meagre economic growth rate (now less than 1% of GDP, instead of the 6% or more required);
  • one of the worst public education systems in the world;
  • stubbornly high unemployment rates (currently at 67% among the youth);
  • accelerating family breakdown (which now sees some 70% of black children growing up without the support of both parents);
  • pervasive government inefficiency;
  • a struggling small business sector unable to get ahead in an environment of low growth, poor skills, and suffocating red tape; and
  • a mistaken reliance on affirmative action, which (like similar policies all around the world) generally benefits a relative elite while bypassing the poor.

If the government is really “obsessed with empowering black South Africans”, as deputy president Cyril Ramaphosa said earlier this year, it is time for it to abandon the false promise of BEE and start tackling the real obstacles to a better life for all.

By Anthea Jeffery*

Dr. Anthea Jeffery is Head of Policy Research at the IRR and author of Patents and Prosperity: Invention + Investment = Growth + Jobs, published this week by the IRR and available on the IRR website.
Dr. Anthea Jeffery is Head of Policy Research at the IRR.

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