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A bottomless pit? Increasing the BEE burden yet again… – Anthea Jeffery

It’s no secret that South Africa’s per capita income growth has been negative in recent years. And expecting things to change, by doing the same thing over again and again, is simply defined as madness. And while the country’s end goal should be inclusive growth, uplifting the bottom line, the current process is not delivering results. One of the key areas of distribution of wealth is through black economic empowerment policies. And Anthea Jeffery reminds us in her piece below what Pravin Gordhan said in 2010 – BEE policies have not worked, and have not made South Africa a fairer and more prosperous country’. But despite these remarks, National Treasury has recently expanded BEE preferences in procurement, putting a further burden on those looking to do business with the state. And more worryingly, as stated by Jeffery, the supposed trickle down of such policies to the wider population is not a reality. And one wonders if such a move will only further line the pockets of the few. – Stuart Lowman

By Anthea Jeffery*

Preferential procurement is one of the most costly elements in BEE. It has often resulted in the doubling (or more) of the state’s procurement costs, as both finance minister Pravin Gordhan and ANC secretary general Gwede Mantashe have pointed out.

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.

The state, said Mr Gordhan in 2009, was paying far more for everything than a private business would: ‘R40m for a school that should have cost R15m, R26 for a loaf of bread that should have cost R7’.

In 2012 Mr Mantashe echoed this concern, saying it was ‘unacceptable’ for the government to pay R20m for a school that could have been built for R5m, or R27 for a bottle of water that normally cost only R7.

In 2016 similarly large BEE mark-ups came to light in the Tshwane metropole, where small black businesses were able to buy light bulbs from supermarkets at R80 per bulb and sell them on to the municipality at R300 per bulb. The BEE middlemen who managed to obtain such contracts added no value, as Noseweek reports, but seemed to be ‘connected to powerful senior officials…who dished out orders in return for cash, overseas holidays, and payment of their children’s school fees’.

BEE procurement has thus become a major factor in price inflation and corruption, the overall costs of which are massive. In the words of Kenneth Brown, chief procurement officer at the Treasury until December 2016, around 40% of the state’s R600bn procurement budget is currently tainted by ‘inflated prices and fraud’.

Against this background, the National Treasury has long resisted demands from the black business lobby to expand BEE preferences in procurement. Recently, however, the Treasury has at least partially succumbed to this pressure.

From 1st April, less than three weeks away, the ceiling for the application of the 80:20 formula (under which 80 points out of 100 are awarded for price and 20 for BEE status) will rise from R1m to R50m. This is an increase of almost 5,000%. It is only for contracts above the R50m level that the 90:10 formula will continue to apply, with 10 points out of 100 awarded for BEE status and 90 points on price.

These changes are contained in the Preferential Procurement Regulations of 2017. The regulations were gazetted by the Treasury in January this year, under the Preferential Procurement Policy Framework Act of 2000, and will take effect next month.

Affirmative Action

However, having yielded on this increased ceiling for the 80:20 formula, the Treasury has found another way to fight back against the risk of inflated pricing. The regulations now also state that, unless the tenderer scoring the highest points (on either the 80:20 formula or the 90:10 one) can provide a ‘market-related’ price, the tender may not be awarded to it at all. This is an important safeguard.

However, the regulations also introduce compulsory sub-contracting requirements for contracts worth more than R30m, wherever this is ‘feasible’. These rules – in combination with the pricing provisions – could put considerable financial pressure on many companies wanting to do business with the state.

A company tendering to supply textbooks, workbooks and the like to schools, for instance, must provide ‘a market-related’ price to secure the tender. However, if the contract is worth R30 million or more (or if the relevant organ of state demands this on a smaller tender), the company must sub-contract ‘a minimum of 30% of the value of the contract’ to small firms which, in general, must be at least 51% black-owned.

These BEE firms may not be able to add much value to the goods they supply. They may nevertheless expect to earn a middleman’s fee for buying at wholesale prices and selling on to the company at higher prices. But the company itself must charge a ‘market-related’ price if it wants to secure the tender. Must the company then simply absorb the additional costs these BEE middlemen may generate?

Read also: Anthea Jeffery: Time to take Mining Charter from BEE to EED

The sums involved could also be considerable. In the 2017 Budget Review, the finance minister put the value of state procurement at R500bn a year. The government thus hopes that the 30% sub-contracting rule will transfer R150bn of this total expenditure into the coffers of small black businesses. Effectively, the government seems to be asking established companies to absorb much of the costs of this transfer.

At the same time, established companies may battle to secure any government tenders at all under another clause in the new regulations. This clause gives all organs of state, from national departments to municipalities and various state-owned enterprises, the power to set ‘pre-qualification’ criteria for the tenders they invite. If a company fails to meet these criteria, its bid cannot be considered at all.

These pre-qualification criteria may include ‘a stipulated minimum BEE status’ for the tendering firm. This opens the way for all state entities to follow Eskom’s lead in demanding a higher level of BEE ownership (say, 51%) than either the generic codes or the sector charters require.

The black business lobby no doubt expects to do well out of these new procurement regulations. However, the faltering economy will pay a heavy price for them. So too will 8m unemployed black South Africans, who will battle even more to find sustainable jobs.

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

At the same time, relatively few black South Africans are likely to benefit from the new procurement rules. This is evident from the IRR’s most recent survey of public opinion on BEE, which was carried out in September 2016. The results show that only 9% of black respondents have themselves benefited from BEE tenders, whereas 91% have not.

Finance Minister Pravin Gordhan

These results are very much in line with those obtained in a similar IRR opinion poll, carried out a year earlier in September 2015. At that point, some 12% of black respondents had benefited from BEE tenders, whereas 88% had not.

These outcomes confirm the accuracy of Mr Gordhan’s assessment, made in 2010, that ‘BEE policies have not worked, and have not made South Africa a fairer and more prosperous country’.

The black business lobby understandably refuses to acknowledge this fatal weakness in BEE. The ANC and its communist allies generally ignore it too, as they have a powerful ideological interest in sustaining ‘empowerment’ policies that undermine the free market and expand dirigiste state control.

However, stricter BEE rules, like those found in the new procurement regulations, will not make the system work better for the poor. South Africa has been chasing down the wrong empowerment path for almost a quarter of a century now – and it is time to call a halt.

  • Dr Anthea Jeffery, Head of Policy Research, IRR. The overall results of the IRR’s 2016 field survey on BEE and other transformation policies are soon to be published in @Liberty, the IRR’s policy bulletin. You can follow the organisation on Twitter @IRR_SouthAfrica
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