Business South Africa (BSA) Submission to the Parliamentary Select
Committee on Finance: Preferential Procurement Policy Framework Act 5 of 2000
Business South Africa has been concerned about the inconsistency of application of procurement process by government departments at all levels, national, provincial and municipal. This could be remedied by making the Preferential Procurement Policy Framework Act (PPPFA) applicable in respect of all procurement by government departments at all levels. Also, although parastatals have generally maintained more consistent procurement practices overall, consistency in respect of awarding preference points in tenders remains a concern.
The implementation of preferences as required by the PPPFA has (in its practical application) as its sole focus black equity ownership. This is often linked to small business development, localised resources, women and youth involvement etc. These principles are often used to exclude tenderers from being eligible at all. Procurement agencies are simply not geared to apply these criteria to achieve several socio-economic objectives simultaneously and considerable confusion reigns. As we understand the philosophy behind the government's Broad-based Black Economic Empowerment (BEE) strategy (as embodied in the Department of Trade and Industry (dti) document and Bill) a single focus on ownership was not intended. We would therefore submit that the PPPFA, or its application, should be brought in line with the proposed broad-based principles to incorporate ownership, employment equity, procurement from black companies and corporate social investment.
Existing preferential procurement legislation is not being used to full effect in relation to local content (South African) industry development and employment. In particular, BSA does not believe the following areas to be sufficiently implemented:
- Local content (Section 12(1)) and specific goals tied to related RDP socioeconomic objectives (Section 12 (3)) in terms of the PPPFA regulations;
- Utilisation of the dti's power to designate sectors for exclusive local procurement in terms of Section 12 (1), which is currently only used to temporarily designate several sectors (clothing, textiles, leather and footwear);
- Provisions in terms of Targeted Procurement Framework to consider local content/use of local resources (TP (APP4)).
Additionally, some practices fall outside the legislative framework:
- Some parastatals and government structures are practising set asides or step-in mechanisms, with the development of some practices predating the PPPFA;
- In some cases, parastatals have received exemption from National Treasury, but this may need to be reviewed if state owned entities are expected to fall within the Supply Chain Management Framework Guidelines.
The current situation may be related to a range of issues including:
- Significant changes in the procurement policy landscape since 1994, with a period of limited guidance prior to the enactment of the PPPFA in 2000 and consequent inconsistent tendering rules;
- Uncertainty around the timing of the shift away from the State Tender Board system;
- Recent Primary focus of Black Economic Empowerment (BEE) has been equity ownership (and in some cases small business development) as defining preference, and considerable confusion in respect of the relative priority of virtually all other socio-economic objectives tied to procurement;
- Although government resources have been invested in the training of procurement officials, it appears that the results of these efforts have been inconsistent (possibly due to turnover of officials in some cases) and where awareness does exist, it is sometimes inadequate;
- Lack of coherence and co-ordination in the actual procurement practices of public entities; many have not gone beyond a commitment to implementing the relevant legislation and have not developed their own coherent procurement procedures in line with the legislation and their specific mandates. Public entities frequently appear to apply the legislation based on subjective interpretation, creating considerable uncertainty amongst tendering parties.
Private sector preferential procurement has, to some extent, followed government leadership. This has shifted slowly but inconsistently with an emphasis on BEE ownership and,, in some cases, small business development, rather than local content, employment or environmental considerations.
BSA believes that the PPPFA and regulations need to be amended urgently. Preference should be based on "productive procurement". That is, a more broad-based BEE approach is necessary in line with the proposals in the dti broad based strategy, to ensure that the benefits of tender preferences are spread more evenly through the South African economy. A more broad based approach will also provide incentives to fill the human resource gap that is one of the legacies of apartheid. The suggested scorecard serves as a suitable tool in this regard and should be phased into procurement policy based on the following criteria:
It is the understanding that the central government and particularly Treasury is advocating the first criterion and will support it through the Public Finance Management Act (PFMA) and the Municipal Finance Management Bill. Ensuring the latter criteria, business can provide suggestions, thereby fulfilling its role in the partnership with government to attain broad based transformation.
The prolonged transitional period with regard to the procurement regime is causing undue uncertainty. This has been compounded by the following:
- The fact that the PPPFA is just a framework that is interpreted differently by every organ of state applying it.
- The earlier notion that a "compliance office" would ensure standardisation over all spheres of government did not materialise. There is no other recourse for plaintiffs than the court; a "compliance office" or procurement "ombudsman" could have addressed this need.
- The shift in responsibility from the tender boards to the accounting officers in departments has further opened up the rules and regulations for differential interpretation. Although the idea behind the PFMA and the soon to be promulgated Municipal Finance Management Bill is sound, the chances of procurement being applied consistently are remote.
- The problem of diverse interpretations in the various tiers of government/organs of state/geographical areas is such that compliance with the different rules necessitate changes in company structures. Business believes that this is an unintended consequence that is problematic for established companies, and a serious obstacle for emerging companies.
- The delay in finalising the Supply Chain Management Framework Guidelines and regulations (especially with regard to tender preferences) is causing much confusion and extremely inconsistent application of tenders by government departments at all levels.
BSA is aware that requests for a tender that do not comply with the relevant legislation, or tender awards which were made in contravention of legislation or in violation of a request for tender, often go unchallenged. This is because such interventions are regarded as potentially harmful to the relationship between companies and the relevant government departments (who, after all, remain potential clients). Regrettably such reluctance could result in prejudicing local industry and other socio-economic objectives. Consequently, it is suggested that consideration be given to appointing an ombudsman with appropriate powers to deal with all disputes regarding tender conditions. The ombudsman could also serve as a sounding board for government departments who may wish to seek clarity in advance regarding the appropriateness of certain criteria. The brief of the ombudsman should include that of safeguarding local content, industry development and employment to ensure the consistent issuing and application of tender conditions and broad-based BEE.
BSA is supportive of further reinforcing conditions supporting local content, quality, labour and environment (as embodied in the Proudly South African Campaign) in all government and parastatal tendering processes and BSA is of the view that greater procurement in line with these principles can greatly contribute to South Africa's socio-economic transformation.
Some of the reasons for this view are as follows:
- Consideration of local content in relation to supply chain or value matrix development has the potential to generate considerable multiplier effects;
- Local content provisions can encourage productive investment and can reduce the "warehousing" and reduction of local productive capacity;
Ensuring local content is tied to empowerment can encourage broad-based and productive investment, rather than a layer of middlemen or a small elite;
- Consideration of quality in procurement is seen as key in order to ensure that South African production becomes increasingly competitive. Additionally, in public sector procurement there should be an obligation to ensure that public funds are spent in a suitable manner that does not result in health or safety threats or wastage due to poor quality goods and services;
- Consideration of labour and environmental standards can help to ensure that economic growth is not achieved at the cost of the rights of workers or future generations. A drive towards improved labour and environmental standards may also have the added benefit of enhancing export opportunities, as compliance with fair trade requirements is increasingly becoming a significant factor in gaining market access.
BSA is also concerned about the inconsistent levels of annual capital spending by government departments and parastatals. This has been the case for many years, but has deteriorated since 1994. The problems around procurement have to some degree contributed to delays in government spending. Apart from the delays in decision making because of uncertainty amongst officials, several disputes around the interpretation of procurement rules have resulted in High Court actions. In all cases (as far as infrastructure procurement is concerned) the courts have overruled tender boards and applied the letter and spirit of the PPPFA. As far as we are aware, the total amounts involved are in the order of R350 million. It may be prudent to do a regulatory impact assessment in relation to this matter.
Net investment by parastatals declined by R38 billion in the period 1991 -2001~ Government has maintained its net investment levels in nominal Rands but the quantum has been small (R33 billion) and in real terms government actually destroyed capital. On average, over the period from 1991 to 2001, the private business sector accounted for all net capital formation with government and parastatals (when combined) contributing to net capital destruction.
It is striking to note that the very poor net investment performance of government and parastatal sectors is further exacerbated by the significant portion of ownership of the state of fixed capital stock of the economy. When government and public corporations are combined, the government owns 46 percent of the total fixed capital stock of the South African economy and yet actually added to net capital destruction.
BSA believes government should create a centralised system for gathering and storing procurement statistics. We support the efforts made by Treasury to track capital investment by the state, and hope that the system will allow government to understand the situation better and make more optimal decisions in this regard. Other role players, including business and labour will need to support the system with information, both in terms of providing, as well as verifying, information fed into the system.
BSA also believes it important to ensure that future multilateral and bilateral trade negotiations retain sufficient scope to use procurement as a tool for socio-economic development. In order to do this, it will be necessary to retain South Africa's current non-member status in the multilateral WTO Government Procurement Agreement. South Africa will also need to work (in alliance with like-minded WTO members) to retain policy scope in any multilateral agreement on Transparency in Government Procurement. It will be necessary to ensure that the United States of America / Southern Africa Customs Union (USA/SACU) trade agreement negotiations, currently underway, and any other future trade agreement negotiations, take into consideration the role of procurement in socio-economic development.
BSA is party to the Growth and Development Summit (GDS) Agreement, which includes strong support for local content in government and private procurement, as well as support for the Proudly South African Campaign. BSA is active in Nedlac; processes, which will aim to ensure that the agreements reached in the GDS will be implemented as speedily as possible.