• by Marina Penderis (johannesburg)
• Monday, October 05, 2009
• Inter Press Service

The first decade of South Africa’s black economic empowerment (BEE) policies saw the creation of a predictable list of politically connected beneficiaries, featuring names such as Patrice Motsepe, Cyril Ramaphosa and Tokyo Sexwale. Now new regulations may see other companies — including white-owned business — enter the BEE stage.

However, the government’s draft preferential procurement regulations — which aim to bring the legislation governing state procurement in line with that relating to broad-based economic empowerment — may also inadvertently make it more difficult for some small black-owned companies to win government contracts.

To redress the racial inequalities caused by the country’s apartheid and colonial segregation policies of the past, the ruling African National Congress (ANC) government has passed a plethora of laws, including the Broad-Based Black Economic Empowerment Act of 2003.

'Previously, to qualify for preferential procurement, you had to have a black shareholder or member in a company. With the new draft regulations, they look at your BEE contributor status which includes more than ownership,' explains Steven Hawes, a researcher at empowerment rating agency, Empowerdex.

In line with the Preferential Procurement Policy Framework Act of 2000, the South African government has so far used a point system when allocating contracts, awarding points out of 100 based on different criteria. Between 10 and 20 points (depending on the size of the contract) are determined by historically disadvantaged ownership status.

'Historically disadvantaged' refers to people who were excluded in the past from economic and other opportunities on the basis of racism and sexism.

With the new draft regulations the point allocation will change. Instead, those 10 to 20 points will be based on seven criteria set out in the Broad-based BEE Act. Of these, ownership is only one criterion.

'Technically someone who doesn’t have (historically disadvantaged) ownership, but who is strong in the other (broad-based BEE criteria), can trump someone with ownership only, so it’s a good thing,' argues Kevin Lester, a lawyer and BEE consultant.

Lester is, however, concerned that the draft preferential procurement regulations may make it unintentionally difficult for small black-owned companies to compete for government tenders, as they may not be able to afford the expensive, newly-required compliance.

While black-owned micro-enterprises with a turnover below five million rand (645,000 dollars) are automatically acknowledged as having a 100 percent compliance with the broad-based BEE requirements, companies whose turn-over is any larger than that need to undergo verification. Lester is concerned that some of the companies who just fall into that category may find it difficult to pay for that.

'Complying with other elements is not something you can do for free. There is this whole process of verification, very similar to audit, unless you are a small company with a turnover below five million rand,' Hawes points out.

Nonetheless he says: 'If one accepts the current version of BEE as valid, the proposed new legislations should drive it more readily because it opens government expenditure to more competition and encourages more competition accordingly.'

Government spending is a lucrative arena, with the South African government set to spend about 787 billion rand on public infrastructure projects alone over the next three years, according to figures released as part of this year’s government budget. Accordingly, the effect that the proposed new legislation will have on state procurement elicits some strong responses.

'Black business is actually angry. There is an outright rejection of what is proposed, because there is no incentive whatsoever for a company to do anything about BEE,' says Jimmy Manyi, newly-appointed director general of the government’s labour department, who has been president of the Black Management Forum (BMF) since 2006. The BMF promotes socio-economic transformation.

He would prefer to see a proportion of the government’s procurement budget set aside for black business. 'Obviously the people must meet the criteria of functionality. Give opportunities to people who have the necessary capability or who can put together the necessary capability.'

The South African constitution demands the creation of a government procurement system that is fair and transparent and which, at the same time, gives preference to persons who had been disadvantaged by past unfair discrimination. However, the unfair discrimination in question is not racially specified in the constitution — it could also refer to women, the disabled and other disadvantaged groups.

The Preferential Procurement Policy Framework Act referred to that constitutional obligation in terms of historically disadvantaged individuals, without specifying race exclusively. By the time the Broad-based BEE Act came into being, the issue of race had, however, become a more prominent concern.

Lester says at the time he heard anecdotes of officials registering companies picking up an increase in the transfer of shares from husbands to wives. The aim was to benefit from the status of having a historically disadvantaged owner.

'A possible reason why BEE became such a big agenda item was because of substantial abuse,' he comments.

When the treasury department briefed the standing committees on finance and appropriations on the draft preferential procurement regulations in parliament recently, it indicated that the new preferential procurement regulations are designed to remove inconsistencies in current procurement practices and address high levels of fronting.

Fronting is when token black people are appointed to beef up a company’s BEE compliance.

Changing preferential procurement regulations to take into account criteria other than ownership may help to address corruption. A report by the South African auditor general debated in parliament in August this year revealed widespread abuse of position by civil servants who were doing business on the side with their own departments.

However, Manyi believes this is not the purpose of the preferential procurement regulations: 'I think corruption is a separate matter. Corruption can be generated wherever. Nobody can condone it, but this is not a corruption busting matter. This is about aligning procurement with broad-based BEE.'

© Inter Press Service (2009) — All Rights Reserved. Original source: Inter Press Service