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The Public Procurement Act, which President Cyril Ramaphosa signed into law on Tuesday, will have disastrous consequences for the ability of state-owned enterprises (SOEs) to procure equipment and services from original equipment manufacturers, unless they are effectively exempted from several of its provisions.
One of the factors that crippled SOEs like Transnet and Eskom during state capture, and for several years afterwards, was procurement provisions that required them to procure through an array of middlemen that met requirements such as being located in a particular geographical area or previously disadvantaged individuals.
The act will apply to all government departments and state entities. It establishes a unified public procurement system across government and introduces new preferential procurement measures to express the Constitutional requirement for social transformation.
The preferential procurement provisions are largely similar to those introduced by the Jacob Zuma administration that were later overruled by a court on a technicality that the minister of finance had exceeded his powers.
This has been rectified in the new act.
Preferential procurement policies
According to the act, all procuring institutions must develop and implement a preferential procurement policy. The policy must protect and advance “persons or categories of persons disadvantaged by unfair discrimination”.
These categories include black people, women, black women, people with disabilities, black people with disabilities, military veterans, persons within a particular geographic area, small enterprises owned by any of the categories mentioned, and youth and co-operatives.
The designated groups will be given preference through:
- Set-asides, which set aside parts of a contract for particular groups. The finance minister determines the set-aside threshold in consultation with the line minister.
- Pre-qualification allows only designated groups to bid for the particular contract. The threshold for this is set by the minister of finance in regulations.
- Sub-contracting parts of larger contracts to designated groups, if feasible.
The Public Procurement Act also gives the Minister of Trade and Industry the power to designate certain products for local production. When designated, state institutions must use locally-made products in procurement. A waiver may be granted if the goods cannot be locally procured.
A procuring institution may also provide measures to promote beneficiation and innovation, job creation, labour intensity in production, and the development of small enterprises in a particular geographical area.
Regulations to the act by the minister of finance, which have not yet been drafted, will prescribe thresholds for set-asides, sub-contracting, pre-qualification, and measures that promote job creation and so on.
A procuring entity can request an exemption from any provision of the act under a range of special circumstances, but also if “it is uneconomical to comply with any provision of the act”.
Zero indication
The Treasury has not indicated whether it would consider exemptions for SOEs, particularly those that fall under Schedule 2 of the Public Finance Management Act. These include Eskom, Transnet, SA Airways, and the Airports Company of SA, among others.
Transnet and Eskom have both previously appealed to the government for exemption from preferential procurement. They have complained that requests to the Treasury for deviations have been time-consuming.
Under the new act, the Minister of Finance must deliberate on requests for exemptions within 30 days of receiving all the correct documentation.
In public hearings on the Act, held in September last year, Transnet appealed for a “more flexible approach” explaining that prescripts “had resulted in Transnet contracting with ‘middlemen’ that add a high mark-up resulting in increased acquisition costs”.
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In the past, concern has also been expressed about the economy-wide effect of preferential procurement prescripts.
The IMF, for instance, has warned that the SA state pays a 20% premium for goods due to preferential procurement. Last year, a study by Harvard academic Ricardo Hausmann into SA’s ailing economy found weak state capacity, driven by preferential procurement and cadre deployment, to be at the root of the problem.
The Zondo Commission into state capture warned that preferential procurement measures had provided greater opportunity for corruption.
The Constitution and the Public Finance Management Act require that state procurement meet the test of value for money.
In the Commission report, Zondo warned against a failure to balance the two competing requirements of price and the use of state procurement to advance social transformation.
Said the report:
“Ultimately, in the view of the Commission, the primary national interest is best served when the government derives the maximum value-for-money in the procurement process, and procurement officials should be so advised.”
Chief Justice Raymond Zondo as well as anti-corruption lobby groups have expressed concern the Act will not prevent corruption in public procurement.
