The Centre for Development and Enterprise (CDE), a Johannesburg-based think tank, says that the National Treasury’s draft procurement regulations will be to South Africa’s detriment, hiking costs of goods and services, undermining the delivery of services, and enabling corruption.

This is set out in a new report from CDE, Buying Badly: How theDraftProcurementRegulationsWillRaiseCosts andDeepenCorruption . This is CDE’s submission on draft public procurement regulations, which would institute a sweeping regime of preferences.

Estimating the scale of procurement from the private sector at over R500 million, CDE said that “procurement should be one of the most important management functions in government”. It touched on almost every facet of governance, but it has been a “strategic failure” for the state, and often the source of corruption.

In its report, CDE proposed that reform to procurement should be run according to two considerations: whether it made the process simpler, and whether it would improve value for money. The new regulations were concerning in both respects.

CDE director Ann Bernstein explained: “Simplicity is one of the most powerful instruments available for reducing corruption. It is often complexity – discretionary decision points, opaque processes, and rules that are hard to interpret, administer, and monitor – that creates the openings for corruption.”

Bernstein added that some elements of the reforms, such as greater transparency in procurement and enhanced central reporting, were to be welcomed, but voiced concerns that “the core preferential procurement mechanisms in the regulations – set-asides, prequalification, and compulsory subcontracting – are likely to make procurement more expensive, less efficient, and more vulnerable to abuse.”

CDE said that while the regulations would not require that all tenders of under R20 million be reserved for “designated groups”, set-aside criteria that could be invoked sought to favour firms that were 100% owned by members of such groups. This would exclude even those whose ownership was overwhelmingly in the hands of such “designated” persons (a firm 90% owned by black people, for example) and firms that had striven to comply with empowerment policy. This “penalises partnerships between black and white businesspeople and strongly incentivises fronting”.

It would also ensure that procurement would incur costs above what is necessary.

In addition, firms seeking contracts valued at between R20 million and R100 million could be required to demonstrate in a prequalification process that at least 40% of their prior procurement was spent on firms majority-owned by black people. This was inconsistent with the Broad-Based Black Economic Empowerment (B-BBEE) Codes of Good Practice, which stressed the empowerment contribution of suppliers, but not necessarily ownership. The regulations also do not define “prior procurement spend”. .

“This is the worst kind of arbitrary, unilateral change in policy. Effectively, the requirement asks whether companies were pursuing an empowerment goal that government itself had not deemed necessary until these regulations were passed, and which is not currently embodied in the B-BBEE Codes,” Bernstein commented.

Moreover, compulsory subcontracting would be instituted for contracts exceeding R100 million. This would entail subcontracting a minimum of 25% of the contract value to firms entirely owned by members of designated groups. Institutions issuing such tenders would need to conduct feasibility studies. These would be expensive, time-consuming, and open to manipulation.

CDE argued: “Compulsory subcontracting may sound developmental, but in practice it will create a new class of gatekeepers. If there are only a few qualifying subcontractors, those firms will have enormous bargaining power. Main contractors will have to partner with them not because they are the best subcontractors, but because they are necessary for compliance.”

Together, these factors would make the system vulnerable to corruption, largely through its many discretionary decision points, such as whether qualifying suppliers exist and whether the ownership structure of a company is acceptable. “Every additional test creates another place where insiders can shape outcomes.”

CDE consequently called for the regulations to be redrafted. Set-asides should be abolished – and if not, the demands for 100% ownership replaced with a “majority-owned” requirement. The pre-qualification requirement should be abolished, as should the subcontracting demands. It also recommended that the authority to determine whether preferential procurement should not go ahead is granted “unambiguously” to the procuring institution’s accounting officer. 

Bernstein concluded: “The fastest way to empower the largest number of black South Africans is to have a state that works, not one mired in corruption and hamstrung by complicated time-consuming procurement processes that seek, first and foremost, to funnel resources to favoured constituencies. South Africa’s government needs value for money which will help all citizens.”

CDE’s analysis of the regulations is timely, given both the government’s fiscal limitations and the role that it played in the state capture phenomenon. This was detailed in the report of the Zondo Commission, which also argued that where a conflict existed between empowerment objectives and value for money for the public, the latter should prevail. The Institute of Race Relations has pointed out that South Africans are paying a “hidden tax” of between R100 billion and R150 billion per year. If South Africa switched to a system that emphasised value for money, not only would opportunities for corruption be diminished, but the savings could finance a cut in VAT, which would put money in the hands of the less affluent and act as a genuine stimulus to South Africa’s economy.