The world is changing fast and to keep up you need local knowledge with global context.
In a groundbreaking working paper, Harvard’s Growth Lab supports a controversial stance: eliminating Broad-Based Black Economic Empowerment (BEE) from State-Owned Enterprises (SOE) procurement, especially at Eskom, to combat load-shedding. This echoes previous recommendations from the Zondo Commission. Despite resistance, the argument emphasises prioritising value-for-money over BEE. As South Africa grapples with public procurement reform, the question looms large: Will the nation heed the Harvard advice and cut through the red tape, or persist with policies potentially exacerbating power shortages and unemployment?
Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.
Scrap BEE in procurement – IRR, Zondo, and now Harvard all agree
By Gabriel Crouse
The last campaign I ran at the IRR was to scrap BEE at Eskom, particularly in procurement, in order to combat load-shedding. A new working paper from Harvard’s ‘Growth Lab’ has come to the same conclusion: if you want to put the lights back on, cut BEE out of SOE purchases.
Before getting into the details, a key caveat. Near the start of the year Dr Frans Cronje predicted that there would be no load-shedding in the build up to the 2024 election on Alec Hogg’s show. I made the same claim last year on Two Crickets in a Thorn Tree. Load-shedding is very easy to pause quickly, for a bit, in a no-growth economy. But ending load-shedding means keeping the lights on and the economy growing at the same time, permanently. That is as different from pausing load-shedding as paying a bribe is from paying a salary.
The key paragraph, on page 77 of the Harvard working paper, by economist Ricardo Hausmann et al, is quoted here [emphasis added]:
‘The state faces major burdens in preferential procurement rules that undermine core functionality in the pursuit of black economic empowerment and localization aims. These overly broad systems should be revisited as there are more effective ways to include previously disadvantaged groups in all parts of the economy and to promote local production, including SMMEs. The evidence suggests that preferential procurement — through its costs on state performance — may be doing much more harm than good for the intended beneficiaries. Instead, procurement should be strategically used to support early-stage industries with potential to compete in international markets (see Chapter 4 for examples). In the context of collapsing state capacity, any secondary and tertiary goals should be set aside urgently to unburden public entities to serve their core functions. Thus, we recommend continuing to expand the relaxation of preferential procurement requirements on all SOE procurement, including and especially within the procurement of electricity system investment in generation, transmission, storage, and distribution. This is a necessary condition for South Africa to better achieve its ultimate goals of empowerment and inclusion, though more direct and effective measures will be needed (see Chapter 2 for findings on spatial exclusion).’
This recommendation came first from the Zondo Commission, which observed the clear tension between BEE and ‘value-for-money’. ‘Ultimately’, the Zondo report concluded [with added emphasis], ‘the primary national interest is best served when the government derives the maximum value-for-money in the procurement process and procurement officials should be so advised.’
Trade-off is simple
I have passed that advice on to Treasury, to cabinet ministers, in Parliament, at the Union Buildings, on radio and TV, in newspapers, at shebeens and religious tea parties, and at Yale, repeatedly. The trade-off is simple. Cut BEE to keep the lights on.
But in my experience, the richer and more powerful one is the more ‘confusing’ this trade-off becomes. In boardrooms, among professors, parliamentarians, and when debating the chief of the Black Business Council, the conversation usually gets to a point where those who can afford private, automatic generators cannot understand the existence of any trade-off between BEE and value-for-money whatsoever.
Furthermore, I have experienced a direct correlation between what political scientists call ‘incumbency’ and the likelihood that someone will allege ‘racism’ in response to the Zondo-IRR-Harvard message that cutting BEE is worth it to grow the lit economy. The most intense racially indexed insult was directed at Judge, now Chief Justice, Raymond Zondo, by Lindiwe Sisulu.
Days after the Zondo report recommended unambiguous prioritisation of value-for-money over BEE in all procurement, Sisulu wrote:
‘The most dangerous African today is the mentally colonised African. When you put them in leadership positions or as interpreters of the law, they are worse than your oppressor. They have no African or pan-African inspired ideological grounding. Some are confused by foreign belief systems.
‘In America these interpreters are called the House Negroes…When it comes to crucial economic issues and property matters, the same African cosies up with their elitist colleagues to sing from the same hymn book, spouting the Roman Dutch law of property.
‘Today, in the high echelons of our judicial system are these mentally colonised Africans, who…are only too happy to lick the spittle of those who falsely claim superiority.’
What happened to Sisulu after she called independent black South African judges mentally colonised ‘house negroes’? President Cyril Ramaphosa promoted her from Minister of Sanitation to Minister of Tourism.
Reddest tape of all
This fits with Ramaphosa’s broader agenda to cut a little red tape, just not the reddest tape of all – BEE in public procurement. That’s the red tape our billionaire president knows best, and rather than cut it, he’s unspooling more. The public procurement bill in the last twelve months toped R1.1 trillion, but amazingly (and unlawfully) the BEE premium cost is not even budgeted.
Early in 2023 the DA had a street rally in Joburg to end load-shedding, which included the call to cut BEE to make existing limited resources go further towards plugging the energy gap. I went to the Joburg CBD that morning to watch thousands gather to support the call.
The day was billed, by the DA, as the beginning of their campaign to lead an opposition coalition into power by 2024. As far as I can tell no other political party stepped up to join them in leading street-level protest against extra payments to Eskom suppliers based on race amidst load-shedding.
The only ‘argument’ from the other side were chants calling the DA racist, bizarre placards saying, ‘Luthuli house is not your playground’, and repeated, overt threats of violence.
The Zondo-IRR-Harvard commonsense plea to cut BEE to fight load-shedding and joblessness is not met with counterargument, but insults and threats. It is, however, met even more often with silence.
Any political party that joins the DA in this cause will, because it didn’t get there first, cede some credit to the DA. So there is a selfish reason for political parties to stay on the sidelines. I would say there is an even bigger selfish reason to speak up, namely the material benefits, but it takes a bit of big-picture vision to see that point and get on board.
Similarly, any journalist covering this issue who writes ‘black economic empowerment’, ‘BEE’, or ‘race law’, or gets specific about existing preferential procurement regulations, will likely be insulted as a mental coloniser, or worse, mentally colonised. So there is a temptation to keep the terms vague and slide along.
The Harvard authors are not too shy to say ‘black economic empowerment-related requirements for procurement and private energy projects raise costs at a time when every effort to get projects operating is necessary’.
South African journalists should not be shy either. Kudos to News24 and Carol Paton for telling it straight under the headline: BEE-focused tenders and cadre deployment causing state collapse – Harvard economists.
More importantly, there is a temptation among those given access to Ramaphosa and his inner circle not to ask the president, ‘Why do you persist in making the connected rich people (of all colours) richer through BEE while the lights are off and catatonic joblessness persists? How long do you plan on continuing to do this? How much worse must it get, Mr President, before you will cut that red tape, sir?’
These questions matter because the Harvard report is badly wrong on one account. Having been part of a campaign that partially contributed to some temporary BEE exemptions, and having studied and celebrated Sakeliga’s Constitutional Court win on the same issue, I know that there was once some ‘relaxation of preferential procurement requirements on all SOE procurement’, as the Harvard study says, a couple of years ago. But the thought that this trend is ‘continuing’ is badly off.
Today, Parliament’s Standing Committee on Finance is meeting to discuss the Public Procurement Bill, which is going to make things much worse. It will reintroduce pre-disqualification criteria that block companies from even naming their price if they are the ‘wrong’ race. It makes exemptions from BEE in the public interest harder, or practically impossible to get. It multiplies the number of distracting ‘secondary and tertiary goals’ by, as one Cosatu representative calculated it, over a million permutations. Yes, it is so bad that at the last parliamentary meeting we were joined by Cosatu in publicly pushing back against the Public Procurement Bill.
This question – are we as a country going to implement the Zondo-IRR-Harvard advice, or not? – is existential. Since we live in a democracy this question could be decided next year if it is put top of mind at the next election. But that will only happen if journalists and politicians who have lived load-shedding-free in their fabulous airconditioned homes and offices are willing to publicly ask: ‘Is BEE for the rich worth the brunt borne by the poor?’
- Eskom suffers $1.2 Billion loss, and more to come
- Solar revolution sparks economic hope in South Africa amid escalating load-shedding
- SA’s shocking skills shortage crisis and Visa red tape strangle economic growth, jobs, and investor confidence
*Gabriel Crouse is a Fellow at the Institute of Race Relations (IRR). He holds a degree in Philosophy from Princeton University.
This article was first published by Daily Friend and is republished with permission
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.