Top procurement technocrat may face business opposition
By Andile Ntingi
Kenneth Brown, the country’s top procurement technocrat, will be a closely watched man over the next two years as he crafts a legislation that will have far-reaching implications on how the state’s gigantic purse is spent. This couldset him on a collision course with his colleagues and organised factions within the racially polarised South African business community.
At stake is the R460 billion that the national, provincial and local arms of government spend annually sourcing goods and services from suppliers, plus the R900 billion that state-owned enterprises are destined to spend over the next three to five years upgrading the South African infrastructure.
Brown, the publicity-shy National Treasury’s chief procurement officer who declined to be interviewed by GetBiz for this article, has been given a go-ahead by President Jacob Zuma to centralise state procurement under his Pretoria office as part of a strategy to put a lid on wastage and generate cash savings through exerting the state’s enormous bulk-buying power when negotiating prices of goods or services with suppliers.
Part of his brief is to develop an over-arching legislation that will make government procurement more competitive, cost-effective,transparent and corruption-free.
“The formula is problematic because it makes it difficult for black people to enter the market because it puts black-owned companies in a situation where they are easily under-cut by big companies like the way Coca-Cola priced Pepsi out of the market.”
But this is easier said than done as bruising battles await Brown. Within government circles, the Treasury is seen as a “snobbish super-ministry”, staffed with “arrogant” technocrats, as one GetBiz source described it. The arrogance label has been with the department since the days of Trevor Manuel, the longest-serving finance minister in South Africa’s history, and stuck like glue under Pravin Gordhan, who was moved by President Jacob Zuma in May to the Ministry of Cooperative Governance and Traditional Affairs. His successor, Nhlanhla Nene, is seen as a “down-to-earth” man, who will play a hard “prudent fiscal ball”, while maintaining harmonious relations with the forces that push for an inclusive economy.
Already plans to centralise procurement have come under fire from the Black Business Council (BBC), a mouthpiece for black businesspeople, which has labelled the mooted move as tantamount to “centralisation of state corruption”.
The BBC is also going after the Preferential Procurement Policy Framework Act (PPPFA), a source of irritation for the business body that it is calling for the Act to be scrapped and replaced by a legislation that encourages broad-based black economic empowerment (BBBEE) and an accelerated industrialisation of the resources-dependant South African economy.
BBC officials have been speaking combatively against the PPPFA, arguing that it has maintained the apartheid economic status quo as it condemns black suppliers to junior “sub-contractors” to white South African firms and foreign multi-national corporations that take a lion’s share of lucrative state contracts. In its manifesto earlier this year, the ANC said 70% of goods and services should be procured from black suppliers, indicating that the BBC has support from the ruling party. BBC’s support extends as far as the Department of Trade and Industry, Small Business Development Department, National Empowerment Fund, State-Owned Enterprises Procurement Forum (SOEPF) and the Progressive Professionals Forum, led by vocal black empowerment activist Jimmy Manyi.Trade union federation, Cosatu, is also likely to rally behind the BBC as it too embraces broad-based BEE and the substitution of imports with locally manufactured goods.
“I just hope that he (Brown) is able to resist the extreme pressure that Zuma’s buddies in the BBC are able to exert. I also think we could have a defensive constitutional challenge on any of these reforms.”
Essentially, opposition to PPPFA is a broadside attack on a controversial National Treasury tender awarding formula that uses a scorecard criticised for placing disproportionate emphasis on price than BEE when tenders are scored and awarded. The formula, written by Treasury’s procurement specialist Jan Breytenbach, is based on a 90:10 ratio, with 90% accounting for the price of the scorecard and black empowerment10%.
“The formula is problematic because it makes it difficult for black people to enter the market because it puts black-owned companies in a situation where they are easily under-cut by big companies like the way Coca-Cola priced Pepsi out of the market. And because the formula is based on price, it also encourages suppliers to import cheap goods from places like China and supply them to the public sector, undermining efforts to grow our manufacturing sector,” Fantas Mobu, chairperson of the SOEPF, told GetBiz.
As a result of the muscling out of black businesses in the procurement space, many BBC supporters are clamouring for “set asides”, which are essentially government contracts awarded to black-owned and female-led businesses without competition from established white companies and multi-nationals. Public procurement has become a new battleground for economic transformation and black empowerment, with a jittery Business Unity South Africa (BUSA) set to butt heads with the BBC over the proposed changes to the procurement legislation. The BBC broke away from BUSA in 2011, labelling the organisation a torch-bearer of big business and white commercial interests to the detriment of black business.
The headline-grabbing deals that fuelled the first and the second wave of BEE in the late 1990s and early to mid-2000s have dried up to obscurity, hence public procurement has become a target of wealth creation by black fortune hunters and BEE moguls.
BEE rating agency Empowerdex estimates that R359.6 billion worth of deals involving JSE-listed companies, financed mainly through debt, were concluded between 1994 and 2010, but the 2009 global economic recession decimated some of these investments, leaving black investors with a heap of debt and investments that are under the water.
The push by the BBC to have the PPPFA repealed is likely to be frustrated by constitutional challenges stemming from the fact that South African public procurement is governed by regulations borne out of Section 217 of the Constitution. The section stipulates that public entities must procure goods or services in a way that is “fair, equitable, transparent, competitive and cost-effective”, while leaving room for “preference” in the allocation of contracts, as well as “protection or advancement” for those “disadvantaged by unfair discrimination”.
Paul Janisch, a BEE consultant at Caird, has been writing scathingly in his blog about the BBC’s call for the repealing of the PPPFA, warning that any move to have the policy removed could face litigation as a replacement legislating could be based on awarding tenders on the basis of “race alone” and flouting Section 217 of the Constitution that promotes “fair, equitable, transparent, and competitive” bidding for tenders.
“I just hope that he (Brown) is able to resist the extreme pressure that Zuma’s buddies in the BBC are able to exert. I also think we could have a defensive constitutional challenge on any of these reforms,” Janisch wrote on his blog on 5 February this year.
He also argues that the “set asides” could be abused through collusion between black businesses and corrupt government officials to inflate costs of tenders.
“You must understand that the BBC operates at the highest levels in government departments so they could influence what gets set-aside. This could be certain types of high-end items that the BBC’s members have exclusivity over. They could collude and ensure that an inflated price is set for each bid,” wrote Janisch.
Article first published by www.getbiz.co.za