Is the proposed preferential procurement policy destined to be another poorly-conceived piece of black economic empowerment (BEE) legislation that fails to fulfil its objectives?

I found myself asking this deeply troubling question. This question is informed by a torrent of criticism that is being hurled at the recently-published preferential procurement policy regulations, which are part of a raft of sweeping proposed regulations contained in a 102-page document drafted by the National Treasury.

If adopted, the regulations will make the Public Procurement Act (PPA) enforceable, potentially sparking a third wave of BEE driven primarily by giving preferential access for black South Africans to government tenders.

Previous waves of BEE saw a tiny politically-connected black elite accumulating wealth on the back of acquiring minority stakes in mostly JSE-listed mining, banking, and insurance companies. But little of this wealth trickled down to the broader black population.

The National Treasury has given the public until the 15th of June to submit its input on the proposed regulations, which have been in the works since PPA became law in July 2024. The PPA replaced the old Preferential Procurement Policy Framework Act (PPPFA).

The procurement regulations published by National Treasury are meant to complete the transition from PPPFA to PPA. However, it appears the transition is going to be a drawn-out process due to wrangling over the regulations.

The fight is about who gets the crumbs or lion’s share of the annual R2.7 trillion state procurement spending. The organised white business is fighting to protect its ultra lucrative tenders while organised black business wants to increase its slice of the state procurement pie.

The stakes are high and each camp is jostling to influence the final makeup of the state’s tendering rules. The noise coming out from both camps about the regulations is loud and none of them are happy about the regulations -- not at least in their current form.

The National Treasury, which is caught between the two camps, is trying to draft tendering rules that strike a balance between protecting government to ensure it gets value for money when buying goods and services while enabling BEE implementation through increased access for black people to state tenders.

Chapter 4 of the PPA contains measures like tender set-asides and sub-contracting, which prescribe ring-fencing exclusive tenders or a percentage of sub-contracted work for black or women bidders.

With buying power of R2.7 trillion, equivalent to 30.3% of SA’s GDP, the state has firepower to influence and coerce markets and industries to accommodate black people.

But the Democratic Alliance-run City of Cape Town is unhappy with the new preferential procurement policy. The municipality was the first state institution to come out swinging against the public procurement regulations, just a few days after they were published. It announced that it would resume its Constitutional Court (Concourt) challenge against the PPA.

At the heart of the city’s lawsuit, filed in June last year, is Chapter 4 of PPA, the section of the legislation that regulates preferential procurement. The municipality argues the legislation was pushed through in Parliament without adequate public consultation and participation.

Cape Town mayor and DA leader Geordin Hill-Lewis was recently quoted in media reports as saying the PPA will increase red tape and slow down service delivery.

Last year, Hill-Lewis argued that existing procurement rules were onerous and delayed procurement of critical goods and services, sometimes by up to a year or longer.

The City of Cape Town’s lawsuit has received support from anti-BEE trade union Solidarity and media house AmaBhungane Centre for Investigative Journalism, which have joined as applicants. These applicants want the Concourt to declare the the PPA invalid and unconstitutional on the grounds that Chapter 4 of the Public Procurement Bill was never canvassed with the public.

The Black Business Council (BBC), the main mouthpiece for black business community in South Africa, has criticised the Concourt challenge and labelled it “anti-BEE”.

While the BBC is critical of the lawsuit against PPA, it also has its own deep reservations about the proposed regulations.

Last week, Gregory Mofokeng, BBC’s Vice President, told a colloquium hosted by UNISA Graduate School of Business Leadership, that the lobby group was disappointed by the proposed thresholds for tender set-asides.

According to the regulations, the tender set-asides can only be applied on contracts with a value that does not exceed R20 million. However, tenders earmarked for subcontracting and valued at R100 million or more can subcontract at least 25% of the work to black or women suppliers.

Black dwarfs, white giants

Mofokeng questioned the wisdom of limiting the threshold for tender-set asides to R20 million and said the BBC will make a submission for the threshold to be raised to R1 billion.

He warned that if set-asides are not applied on high-value tenders, this could place a permanent “ceiling” that confines black-owned businesses to dwarfism that kills the prospects of black businesses catching up with more established and larger white-owned companies.

He further warned that if PPA was not favourably drafted and implemented to promote BEE, this will set back black people by another 50 years before the legislation can be amended again.

Regulators also have concerns about the legislation. One of those skeptic regulators is Tshediso Matona, BEE Commissioner, who also spoke at the colloquium.

Matona said there was a misalignment between the proposed preferential procurement policy and the overall BEE policy, which uses a scorecard to measure the impact of BEE across five areas such as ownership, management control, skills development, enterprise and supplier development (ESD), and socio-economic development (SED).

He cautioned the regulations placed too much emphasis on black ownership, raising the risk of incentivising unethical companies to engage in fronting, whereby they use black-owned businesses as fronts for securing tenders. Matona is worried that this procurement-inspired fronting may create superficial black empowerment and tokenism.

His concerns about PPA’s over-emphasis on ownership are in direct contrast with the objectives of BBC, which supported a preferential procurement legislation that elevate black ownership in government tendering. The BBC lobbied very hard for the PPPFA to either be amended or repealed because it was using a tender scoring system that focused more on price competitiveness instead of black ownership.

For example, tenders valued at less than R50 million were evaluated on the 80/20 preference points system, whereby 80 points were allocated for a bidder’s price competitiveness and 20 points for their BEE rating.

Tenders valued at more than R50 million were evaluated and awarded on the 90/10 points system, whereby 90 points were allocated for price competitiveness and 10 points for BBBEE rating.

So, if a bidder out-priced its competitors and had a higher BEE rating than its rivals, it usually won the tender. This tender scoring system riled black bidders, particularly those that had lower BEE ratings than white bidders.

Many black suppliers rejected the BEE verification system. They argued it was flawed and that BEE certificates should not be a requirement for tendering. The BBC supported this position and called for black ownership to be considered instead of BEE certificates.

But Matona disagrees with doing away with BEE certificates. He says the law needs to clarify how the ownership of black bidders is going to be verified.

Given the concerns raised about the proposed tender regulations, drafters of the legislation have no option but to go back to the drawing board. I suspect we are not likely to see the full implementation of PPA anytime soon.

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