New BEE laws will make corruption worse in South Africa

The Centre for Development and Enterprise (CDE) has warned that corruption in South Africa could become significantly worse if new public procurement regulations are passed.

In a statement which was submitted to the National Treasury, the CDE said the government’s draft General Public Procurement Regulations presented serious concerns.

Under the draft regulations, procuring companies for tenders under R20 million would be required to set aside a portion of their total procurement spend for designated groups.

To qualify for these set-asides, businesses would then have to show that they are 100% owned by people from said designated group.

For tenders between R20 and R100 million, bidders would need to demonstrate that at least 40% of prior procurement was spent on businesses with 51% or more black ownership.

For contracts over R100 million, winning bidders would be required to subcontract at least 25% of the contract value to firms which are 100% owned by members of designated groups.

The CDE stressed this was not a complete rejection of the proposed regulations, as it welcomed reforms which promised greater transparency, such as a new procurement dashboard.

However, executive director Ann Bernstein explained that the preferential procurement framework could have disastrous consequences on both the cost and the efficiency of public procurement in South Africa.

“Two questions should govern any reform of public procurement,” Bernstein said. “The first is whether reform makes the system simpler. Systems should be as simple as they can possibly be.”

“The second is whether it will improve value for money, such as the state’s ability to buy the right goods and services, at the right time and price, so public services can actually be delivered.”

Bernstein explained that simplicity was a powerful tool for reducing corruption, as overly complex regulations would make the detection and prevention of corruption much more difficult.

However, she said these new preferential procurement regulations failed on both fronts, potentially opening the system up for rampant abuse.

Not aligned with existing BEE regulations

CDE warned that the passing of these draft regulations could actually undo the past two decades of gains made from South Africa’s Broad-Based Black Economic Empowerment (B-BBEE).

The organisation said key aspects of the proposed reforms did not align with existing B-BBEE frameworks, and even disregarded them entirely in some places.

For instance, companies which are 90% black-owned would not qualify for the set-asides, while many companies which had been fully compliant with B-BBEE would be excluded entirely.

This would severely handicap black-white business partnerships, which CDE said would incentivise companies to misrepresent their B-BBEE compliance, an illegal practice known as “fronting”.

“A set-aside procurement is guaranteed to ensure that procuring entities will generally pay more than they need because that is the natural consequence of reducing the pool of eligible bidders,” Bernstein said.

“Set-asides are inherently inefficient and should not be used. To the extent that they are to be implemented, however, it is essential that the ‘100% owned’ requirement be dropped in favour of ‘majority-owned’.”

With regard to compulsory subcontracting, Bernstein said the smaller pool of qualifying subcontractors would grant them much higher bargaining power.

This would lead to much higher costs, as well as weakened accountability, which would allow politically connected intermediaries to squeeze these companies for higher fees.

According to Bernstein, however, the worst of the proposed reforms is the 40% prior procurement prequalification, which she said is not embodied in the current B-BBEE Codes.

“The requirement asks whether companies were pursuing an empowerment goal that government itself had not deemed necessary until these regulations were passed,” Bernstein said.

“Prequalification should not be allowed as a procurement method. It will be expensive, messy, and impossible to apply rationally as currently drafted.”

The CDE recommended that the National Treasury, at a minimum, abandon the 40% prior procurement qualification, which it said completely overrides the past two decades of B-BBEE compliance.

It also called for the compulsory subcontracting model to be scrapped, and for the set-asides to at least be revised from “100% ownership” to a more general “majority ownership”, if they are not dropped entirely.

“The fastest way to empower the largest number of black South Africans is to have a state that works,” Bernstein said. “Not one mired in corruption. South Africa’s government needs value for money, which will help all citizens.”