Treasury goes all-in with BEE

John Kane-Berman on the new Preferential Procurement Regulations that will come into operation on April 1st

Unfortunately, this will be no April Fool

On 1st April this year, new Preferential Procurement Regulations will come into operation. One of their key provisions is to raise the ceiling for racial preferencing in the award of tenders from R1 million to R50 million. This means that up to 20 points out of 100 in the award of tenders by organs of state can take race into account, the other 80 points being awarded for price.

Even though the National Treasury, which gazetted the regulations earlier this year, may opt not to award the tender at all if the applicant cannot provide a "market-related price", the astronomical elevation of the ceiling represents a defeat for its attempts to rein in public spending. It is also a reminder that racial preferencing continues to be one of the defining components of the "radical economic transformation" whose meaning more than one political commentator is busy trying to figure out.

The April Fools' Day regulations also empower organs of state to decree that companies tendering for contracts worth more than R30 million must subcontract at least 30% of their value to small firms that are at least 51% black owned. Organs of state are further empowered to set "pre-qualification criteria" for tenders above this amount.

Such criteria may include a minimum black economic empowerment status. This opens the way for all organs of state to follow Eskom's lead in requiring 51% (or more) black ownership. The recent "voluntary" deal that seven listed construction companies signed with the government shows that they are positioning themselves accordingly.

Current expenditure by national and provincial government on goods and services is budgeted at R222 billion for the 2017/2018 financial year. Add in local government and 715 state-owned entities, and total current spending will probably be double that. Public sector infrastructural spending over the next three years is budgeted at R947 billion.  

Clearly, there is plenty of money to be made - at least in theory. Which makes it a bit odd that  Murray and Roberts, which once bestrode the construction scene like a colossus, is divesting itself of its South African building and infrastructure business - until one remembers that the FNB/BER civil construction confidence index has dropped from 59 out of 100 two years ago to 35 in the last quarter of last year.

The minister of economic development, Ebrahim Patel, says that the recent "voluntary" agreement is "a ground-breaking model" for "massive transformation" that will also benefit many small black businesses. Bullying companies to divest themselves of shares, even if they have not all (yet?) gone as far as Murray and Roberts, is the easy part. More difficult will be getting infrastructure spending, notoriously tardy, up to the level required.    

One likely consequence of the enhanced preferencing requirements is that "fronting" will blossom. It will do so because it is a" win-win" situation for both the black front who signs the contract and the white builders who implement it, with the taxpayer picking up the tab. Some smart white companies will no doubt quit the field altogether. Those who stay and avoid fronting will be forced to become much more efficient in order to win contracts on price alone.

Black companies will benefit from contracts swung their way. The lucky ones will get paid on time. Many will struggle, the minister of public works, Thulas Mxesi, having recently admitted that late payment by government entities "is still a big issue".

Even those who survive the resulting cash-flow and other financial problems may find that in the long run racial preferencing has perverse effects. Instead of competing on price and surviving in a tough  market in which too many companies are chasing too few tenders and therefore supposedly driving prices downwards, they risk becoming less efficient than white counterparts who stay the course rather than quit.

The survival of the small black companies in particular will therefore depend on never-ending racial preferencing.  For them "transformation" and "empowerment" will mean more dependency on the state and more power for the state.   

* John Kane-Berman is a policy fellow at the IRR, a think-tank that promotes political and economic freedom.