What's Treasury thinking?

John Kane-Berman asks why new BEE rules are being pushed that will further inflate state procurement costs.

Gordhan's Treasury licenses extravagance in new charter for fronting "traitors"

At a time when Finance Minister Pravin Gordhan has promised to shrink the budget deficit, the National Treasury's chief procurement officer is processing "preferential procurement regulations" that will license hefty increases in government procurement expenditure. While Mr Gordhan is also supposedly committed to restraining public sector pay rises, the new regulations loosen the constraints on procurement expenditure by all organs of state.  

The most important component of the proposed new regulations is that the ceiling below which tenders are permitted to have a 20% loading for Black Economic Empowerment (BEE) status will rise from R1 million to R100 million. This means that a company with BEE status can put in a tender costing 20% more than companies without such status, and still win the contract. For contracts worth more than R100 million, they can load the price by 10% and still beat non-BEE companies.  

The tenders apply to spending on infrastructure as well as other state expenditure. The government spends almost R200 billion a year on goods and services, while the public sector infrastructure budget amounts to nearly R275 billion a year. There are mouth-watering opportunities here for black companies. The additional expenditure authorised by the BEE loading will run into billions of rands.  

The regulations were published on 14th June, and the treasury is now processing public comment on them that was invited for a deadline of 15th July.

Two years ago the Black Business Council complained that the government had failed to use the state's "massive buying power" to "create" black industrialists. The new regulations are a major effort to meet that demand.

Given the sums involved, the regulations are likely to stimulate even more "fronting" by blacks on behalf of whites than already occurs. The rise from R1 million to R100 million in the 20% cut-off point will put many more white companies without BEE status at a big disadvantage in tendering for government contracts. Their obvious remedy - and perhaps for some their only means of survival - will be to seek black partners to act as fronts.   

Fronting will also be encouraged by the proviso that where a contract is worth R30 million or more, at least 30% of its value must be subcontracted to small black firms. Another proviso is that the company submitting a tender need not have the "functionality" to perform the contract. "Functionality" is defined to mean "ability to provide goods or services in accordance with the tender specifications". However, it is left to the discretion of the organ of state calling for the tender to stipulate whether or not "functionality" is required.

This is an invitation for "tenderpreneurs" to establish companies whose only "functionality" is to find the companies - or the front companies - to do the actual work stipulated in the contract. It is a win-win situation for the tenderpreneurs, for BEE, for white businesses with black fronts, for professional services firms designing BEE schemes, and for BEE ratings outfits. The biggest (but not the only) losers will be taxpayers and those dependent on poor public services or who have to put up with gimcrack houses and other shoddy goods.

Two years ago "fronting" was made a criminal offence punishable by a maximum of ten years' imprisonment or a fine of 10% of turnover. Last month Chief Justice Mogoeng Mogoeng described blacks who fronted as "traitors". Sandton and other places are nevertheless well stocked with professional services firms able to set up deals that sidestep the law.

South Africa ranks among the top countries for the transparency of its budgeting process.     

Mr Gordhan will therefore presumably have no difficulty in setting forth the costs of the new procurement policy in his Medium Term Budget Policy Statement in October. Since the government adopted guidelines for assessing the economic impact of legislation last year, the treasury has no doubt already done all the necessary sums.   

* John Kane-Berman is a policy fellow at the Institute of Race Relations, a think-tank promoting political and economic freedom.