Cutting ‘preferential procurement’ will unlock billions more for service delivery

2 March 2022

There are two ways to increase the money in your pocket, and the same is true for municipalities in financial distress: increase (or simply collect) your income, and reduce (or optimise) your expenses.  

On the income side, municipalities have to collect what is due to them. This must be done on time, otherwise Eskom and waterboards can’t be paid. Then, after overheads have been covered, something must be left over to invest in service infrastructure, the stuff that enables municipalities to generate their own revenue.

The funding model for local government does need an overhaul. But in the meantime municipalities have to do what they can to avoid running out of cash. For a useful demonstration of how this is done, see what the DA and our coalition partners are doing in Tshwane.

But even if municipalities do collect revenue on time, most seem systemically incapable of spending this money to the benefit of residents and local communities. Why, for instance, do so many municipal contracts end in protracted litigation, or simply with the contractors walking off site? 

Why, despite their buying power, do most municipalities fail to pay market prices for basic goods like light bulbs and toilet paper, not to mention specialised items like transformers and water pumps? 

There’s an obvious answer, and a less obvious answer. We usually fixate on the Auditor-General’s tallies of irregular and fruitless and wasteful expenditure, and agree with her admonitions for tighter controls and better leadership.  

The less obvious answer, and one that is beyond the AG’s job to give, is that waste has been built into the system of government procurement by national legislation. This includes laws that mandate BBBEE and ‘preferential procurement’.

Municipalities are compelled to follow a set of complicated and confusing rules on how to prepare and award tenders, including a race-based points system. No one is exempted from these rules, and paying the premium it imposes, not even municipalities who can hardly get the basics right. 

The preference in ‘preferential procurement’ is for people doing business with government, not the people who rely on service delivery by government. It’s about who gets empowered by tenders, a relatively small group of people relative to government’s larger constituency. 

Holding all of this in place is the Preferential Procurement Policy Framework Act (soon to be replaced by the equally defective Public Procurement Bill). Regulations issued by the Finance Minister under this law have now been struck down by the Constitutional Court. 

This is an opportunity for a total reset (beyond merely issuing better regulations under the same defective law). National Treasury is very candid about how municipalities break the law, but what about the laws that break municipalities?

Preferential procurement shrinks the market of goods and services available to local government, making contracts less competitive, and more expensive.

But the problem goes far beyond price gouging, because municipalities have become so dependent on outside service providers, their internal capacity having been decimated by cadre deployment and restrictive employment laws. 

And so, preferential procurement has given life to an entire industry whose main business is to win government tenders. Once this goal is achieved, the actual work is often outsourced, or left to subcontractors. The middle-man’s margin is priced into the contract. Less is spent on service delivery in order to pay the middle man more. 

We can save an enormous amount of money if we dismantle this corrupt system. A policy change is needed, and National Treasury should lead the way: make price and the capacity to deliver the most important requirements for doing business with government, far less important than who owns the service provider.    

Imagine what can be done to supply reliable services and rebuild old infrastructure, if municipalities can use their buying power to pay market prices, and have their pick of the best available products and services. 

Such a change will enhance the developmental role of municipalities and help to restore local economic confidence. Ratepayers will be happy, but the biggest benefit will go to the poor and the vulnerable, folks who don’t have the means to escape rundown towns and villages.