Business organisations, anti-corruption groups and political parties are gearing up to participate in parliamentary hearings this week on the draft Public Procurement Bill, which aims to prescribe a framework for an overhauled preferential procurement policy.
It is expected to introduce regulations and policies that strike a balance between ensuring that the government gets value for money while promoting broad-based black economic empowerment (BBBEE) and industrialisation.
The responsibility of the state to use procurement as a lever to advance BBBEE and economic development tends to be overshadowed by massive corruption in state procurement.
Corruption has been cited as one of the reasons the Financial Action Task Force (FATF) placed South Africa on its greylist in February, along with inadequate preparedness to detect and combat money laundering, terrorism financing and other sophisticated financial crimes.
The state spends R800bn annually buying goods and services — equivalent to about 17,4% of GDP. That is enormous buying power, which makes the state a lucrative source of business. At the same time, government tenders are a major source of corruption and malfeasance.
In 2016, the Treasury’s former chief procurement officer Kenneth Brown revealed that 40% of the government’s annual spending on goods and services was being lost to fraud in the form of inflated prices from suppliers, many of whom were middlemen inserted into procurement transactions to comply with preferential procurement policy.
The problem of price gouging was again raised last year by Eskom non-executive director Mteto Nyati, who appealed for preferential procurement regulations to be reviewed to exempt parastatals from sourcing goods from middlemen — who also supplied pirated spare parts that led to the breakdown of Eskom’s power stations.
Nyati said there were instances where it made commercial sense to source goods directly from original equipment manufacturers (OEMs) rather than middlemen, to improve the financial and operational performance of parastatals.
While no-one can dispute that corruption has devastated the state’s capacity to deliver quality services to citizens, there is also a realisation that BBBEE has failed to empower millions of historically marginalised people. There is constant butting of heads about how to contain corruption, given that BBBEE and preferential procurement policies have been used by the corrupt to fleece state coffers.
These disagreements over measures to take to protect the fiscus from tender corruption are expected to dominate hearings of the standing committee on finance on Tuesday and Wednesday. The deadline for written submissions is midday tomorrow.
Anti-graft groups and political parties will be interested in aspects of the bill on curbing tender fraud. Business organisations will be represented by different factions contesting the approach that should be taken to implement a preferential procurement policy.
Some groups will push hard for the policy to focus on advancing BBBEE, while others will appeal to MPs to enact less onerous legislation on companies wanting to do business with the state.
To fight corruption, the bill proposes the establishment of a public procurement office (PPO) within the National Treasury to hold institutions accountable when purchasing goods and services.
The PPO would have far-reaching powers, including debarring unscrupulous suppliers, carrying out investigations and searching the premises of procuring institutions and bidders suspected of involvement in corruption, fraud, price fixing and falsifying information.
Debarred bidders or suppliers would be given an opportunity to appeal to a public procurement tribunal.
The proposed bill aims to repeal in its entirety the Preferential Procurement Policy Framework Act (PPPFA), which was introduced 23 years ago to empower black and local suppliers through state procurement.
Although the PPPFA is a product of section 217 (1) of the constitution — a key clause of our country’s founding document that calls for the advancement of historically marginalised people — it is blamed for stifling BBBEE, thereby doing the opposite of what it was meant to achieve.
Opposition to the PPPFA has led to the emergence across the country of organised violent groups, dubbed “extortion syndicates” or “business forums” by the media, which show up armed at construction sites demanding that 30% of projects be subcontracted to their companies.
These groups don’t think twice about disrupting construction projects or storming tender briefings to threaten officials and rival bidders to force them to accede to their demands.
The aspect of the PPPFA that riles black suppliers and the so-called “business forums” is the preferential points scoring system that institutions such as parastatals, government departments and municipalities employ to evaluate and award tenders.
Price competitiveness may in future play second fiddle to black ownership and subcontracting when tenders are adjudicated and awarded
The tender scoring system adjudicates tenders on the strength of bidders’ price competitiveness and their BBBEE ratings.
Tenders valued at less than R50m are evaluated on the 80/20 preference points system, whereby 80 points are allocated for a bidder’s price competitiveness and 20 points for their BBBEE rating. Tenders valued at more than R50m are evaluated and awarded on the 90/10 points system, whereby 90 points are allocated for price competitiveness and 10 points for BBBEE rating.
So, if a bidder outprices its competitors and has a higher BBBEE rating than its rivals, it usually wins the tender. The groups opposed to the PPPFA-inspired tender scoring system complain that it places heavy emphasis on price competitiveness, an aspect of the system they believe favours white-owned companies, which often win tenders ahead of them.
They also question whether BBBEE is being measured properly, saying that BBBEE scorecards are prone to rigging and manipulation to create an impression that companies are more transformed than they really are.
Due to this heightened mistrust, there has been a strong push by black lobby groups for the existing tender scoring system to be scrapped and replaced with a bid evaluation system that places heavier weighting on black ownership and subcontracting to black suppliers.
This means that price competitiveness may in future play second fiddle to black ownership and subcontracting when tenders are adjudicated and awarded.
Chapter 4 of the proposed bill, which deals with preferential procurement policy, seems to indicate that the Treasury has yielded to the pressure exerted by black suppliers and business forums.
The existing preferential procurement policy will be overhauled to make it a requirement to include local participation, tender set-asides and subcontracting to boost the allocation of tenders to black people, women, youth, people with disabilities and SMMEs based in townships and rural areas. Tenders will also be set aside for suppliers based on their provinces or municipalities.
Once the bill is passed into law, the Treasury will develop regulations to clarify the composition of weightings in the tender scoring systems, which will be used to evaluate bids.
With BBBEE policy having been in the doldrums for more than a decade after the blockbuster BEE equity transactions involving JSE-listed companies dried up, the proposed procurement legislation could usher in a new wave of BBBEE that leads to the emergence of new, super-rich blacks benefiting from the government’s R800bn annual procurement spending.
But before new wealth is created, the proposed bill must pass constitutional muster.
• Ntingi is founder of GetBiz
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