/ 9 December 2011

New BEE threat for tenderpreneurs

New Bee Threat For Tenderpreneurs

A new black empowerment policy shake-up aims to oust fat cats and tenderpreneurs once and for all from the procurement landscape.

New preferential procurement regulations that came into effect this week have the potential to eradicate tender irregularities. One source estimated that as much as 30% of the economy is driven by state procurement activities.

For the first time government tenders will require bidders to present verified scorecards to prove their broad-based black economic empowerment compliance.

Keith Levenstein, chief executive of EconoBEE, said empowerment policy has shifted focus from black ownership to more broad-based benefits and a good score will take preference over black equity.

He cited the example of a black female-owned company: “If it wasn’t bothered to get a scorecard together, it would lose out on tenders, which could even go to a white-owned company that is BEE compliant.”

Acquiring a good scorecard could take time because key areas — such as skills development — must be established and funded, he said.

With the aim of eradicating fronting, bidders will not be permitted to subcontract more than 25% of any project to a company with a lower BEE score than they have.

“Previously, a white-owned company would get a black-owned company to bid on its behalf, or a black-owned company would win the tender and sell it for the highest possible sum of money,” said Levenstein.

Policy dictates that 90% of any tender bid worth more than R1-million be evaluated on the price component, whereas 10% will look at BEE scorecards in future. If a contract is worth less than R1-million it will be scored on an 80-20 basis. “If the price is roughly the same, the scorecard will determine the winner,” Levenstein said.

He said the process will be simpler because, in cases in which the price is the same, government departments previously used different methods to try to assess ownership credentials. Now it will be a matter of supplying a scorecard produced by a verification agency or an approved auditor.

But the Black Business Council expressed reservations about the new regulations. Its spokesperson, Sandile Zungu, said the council met Finance Minister Pravin Gordhan to discuss its concerns.

The new regulations, he said, are the antithesis of the broadening of empowerment in South Africa and the council advocates the use of the BEE codes of good practice instead of the Preferential Procurement Policy Framework Act.

The new regulations allow the department of trade and industry to set special local procurement targets for different sectors. This week the ministers of economic development, finance and trade and industry announced nine designated sectors and products that will need to meet certain local content targets to win government contracts.

The “first wave” of designations, identified and researched over the course of a year, include power pylons, rolling stock, buses, canned vegetables, clothing, textiles, footwear and leather products and set-top boxes.

Each designation stipulates a minimum level of local content for the relevant sector or set of products. More designations will follow next year.

Garth Strachan, chief director of industrial policy in the department of trade and industry, said extensive work has gone into assessing the capacity in each sector to meet demands. He said it is important to take into account that there are designated products and designated areas.

“The local content ceiling in each case required that we look at a series of factors, like security of supply and issues of competitiveness,” he said.

In some cases local content has a minimum target of 65%, in others it is 100%.

Business, government and labour signed an accord on local procurement last month and pledged to increase the purchases of goods and services from South African producers to an ambitious target 75% to try to boost industrialisation and create employment.

Ajay Lalu, managing director of Black Lite Consulting, said the procurement regulations do not enforce the 75% local-content target across the board. “The legislation has been institutionalised and allows for a formula — it doesn’t fundamentally change the way in which the government procures.”

He said local-content objectives are not included or rewarded in broad-based BEE scorecards.

But Strachan said the different sectors and products need to be assessed individually to set an appropriate target.