Tebogo Makube | 14 June 2023
Preferential procurement regulations, which came into effect on January 16, give organs of state powers to determine their preferential procurement policies.
The 2022 Preferential Procurement Regulations, are a response to a constitutional requirement, in particular section 217(2), which bestows powers on organs of state to implement their own procurement policies.
The regulations are also in response to the Constitutional Court’s judgment in minister of finance vs Afribusiness NPC, affirming the right of organs of state to determine their preferential procurement policies.
The challenge with the regulations is that they do not provide the framework for determining preferential procurement policies — preference matters are lumped under specific goals. This falls short of section 217(3) of the constitution, which requires that national legislation prescribe a framework within which the preferential procurement policy must be implemented.
What is emerging from the supply chain management policies of different organs of state is a plethora of preferential points that are meant to be in line with achieving specific goals. One of the points is locality, which is subdivided into municipal, district and provincial boundary.
Points can be allocated to bidders if they reside in the municipality, and again if they are in the district, including the province. That is a clear case of double dipping.
The other preferential point is gender, which is confined to women. There is a danger of this preferential point creating a perverse incentive for fronting, with companies bringing in women to increase their chances of winning tenders.
That is not the type of empowerment envisaged by the government. Other points that are include are local content, youth, people with disabilities and women. These preferential points will be allocated in the evaluation and awarding of contracts.
The danger of allocating preferential points on the basis of locality is that it will lead to entitlement, cronyism and rent-seeking behaviour not linked to performance. Ideally, public procurement decisions should be based on competitive selection processes, which is inclusive of lawful preferential policy considerations.
Some of the preferential points are definitely unconstitutional and unlawful. Moreover, SA is a unitary state and no-one should be disadvantaged by locality, not be allocated preferential points or participate in procurement opportunities, anywhere in the county.
The theory of pork barrel spending provides interesting insights into this type of a social contract. It holds that legislators who bring home “pork” or tenders to their districts are better able to fend off potential challengers. This is cronyism. Procurement opportunities are mostly captured by the powerful and connected in society, not ordinary community members.
Therefore, pork barrel spending is about projects that are approved and allocated on the basis of personal relationships, where benefits accrue to small groups of people. It becomes worse in municipalities where bidders residing in the same municipality, which has issued the tender or tenders, demand to be awarded the tender or a share of the tender. This is also known as forced subcontracting, which is prevalent in the construction industry.
The demand for construction contracts by force on the basis of locality has led to the formation of “business forums” across the townships and rural areas. If the demands of these bodies are not acceded to, projects are deliberately stalled, though these are the areas most in need of service delivery.
At the centre of this challenge is the lack of a framework to guide the determination of preferential procurement policies. The end result is that deals are often made “under the table” with special interest groups, and some tenders end up being allocated to small groups of politically connected people. Yet this is public expenditure.
Individuals, associations or groups who benefit from pork barrel spending are almost certain to lack any incentive to grow and be competitive. This type of spending has no exit strategy because of perennial rent-seeking behaviour.
Pork barrel spending is costly to the fiscus because it is not cost-effective. Premiums are paid to allow projects to go ahead. It also decreases social welfare, as society pays higher prices for goods not associated with the costs of providing the service.
What is needed is a proper and well considered preferential procurement policy framework that will take into consideration the constitutional requirements, the economic needs of the country, and transformation.
Procurement must be linked to performance, and key to that is proper contracting and contract management. Contract management must be evidence based, and if the contractor is not performing adequately they should be reviewed periodically and appropriate remedies be instituted timeously.
In a country such as SA, procurement must facilitate development and not enrich a few connected people. There must be value for money for the fiscus, and companies with the capabilities and capacity to deliver must be allocated contracts on a competitive basis so that they also create jobs, procure locally manufactured goods and drive transformation.
All of these factors will have positive spillover effects on the economy, all other things being equal. It is hoped that the Public Procurement Bill will be the answer to the current challenges and provide a better framework for the determination of preferential procurement policies.
• Dr Makube, an advocate, is chief director: industrial procurement & development at the department of trade, industry & competition. He writes in his personal capacity.
‘Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER’.