GOVERNMENT PROCUREMENT- TOOL OF REDISTRIBUTION IN SA

1. GOVERNMENT PROCUREMENT-TOOL OF REDISTRIBUTION IN SA Isac G Smith

2. Presentation Layout • Motivation for study • Government’s redistributive role • Procurement as tool • International evidence • Procurement within SA context • Challenges/Proposals

3. Motivation for study • New government inherited system of extreme poverty and inequality • Some sections of population deprived of wealth • Rectification of past injustices- various policy interventions • Focus on Blacks, women and disabled • 15 Years have passed • Had interventions made a difference • Focus on one aspect: Public procurement policy

4. Government’s redistribution role • 3 Channels (Van der Berg: 2006) • Government budget • Pro poor spending (grants) • Free primary health • Housing • Rule- maker by setting rules for access to market opportunities • Market operator by being major employer of labour through size of procurement • Procurement Policy • All 3 channels relevant

5. Public procurement relates to: • establishing and documenting what is required; • inviting the private sector to bid for goods and services/construct or maintain infrastructure; • awarding contracts to successful bidders, • monitoring what was contracted was delivered • paying contractors for executing their contracts Watermeyer, Jacquet and Letchmiah (2000 )

6. Why use procurement as a tool ? • Bolton (2005) • Opportunity to develop growing enterprises • Withhold government contracts from those involve with unfair labour practice • Foster creation of jobs • Watermeyer (2002) • Stimulate economic activity • Protect national industry against foreign competition • Protect the environment • Promote increased utilisation of disabled in employment

7. Procurement as a tool Conditions for efficient implementation • S217 of Constitution, 1996 • Fair • Cost effective • Transparent • Competitive • Equitable • Green Paper on Public Sector Procurement Reform (1997) • Measurable targets • Processes must be verifiable • Auditable

8. Malaysia Rationale Similar history to South Africa Wealth in the hands of Chinese minority Political power in hands of Malay majority USA Rationale Black people historically marginalised Deprived of economic activity Support necessary to fast track minority businesses Comparative overview

9. Malaysia (Lee; 2008) Intervention (1969) New economic policy Institute preference system 100% small contracts reserved for Malay businesses 30% of other projects also reserved 70% of other projects open for bidding to market Malay business received handicaps USA (Sonfield: 2005) Intervention (1967) Minority business 51% owned by minority groups (MBE) 5% of all public contracts reserved for MBE’s Established Office of MBE Provided business support and loans Private corporations develop own empowerment program MBE co-coordinating groups developed Comparative overview

10. Malaysia (Lee: 2008) Impact of intervention Scale of government procurement 25% of GDP (2003) Large % allocated to Malays Considerable growth in small business owned by Malays Extensive preferences lead to political corruption Entrepreneurial activity of Malays declined Evidence that Malay contractors sell contracts USA (U.S. Small Business Admin(2001)) Impact of intervention Public and private programmes proved effective MBE’s fastest growing segment of USA economy MBE’s generated 591b dollars in revenue in 1997 MBE’s owned 18% of all business in 2002 (7% in 1982) Critics regarded preference system as reverse discrimination Comparative overview

11. Public procurement – SA: pre 1994 • State Tender Board was procurement authority • Procurement Centralised • Executed in terms of State Tender Board Act (1969) • Preferences of up to 40% granted to local manufactured and designed products (State Tender Board directives, 1991)

12. Public procurement – SA: 1995-2002 • Provincial Tender Boards - Independent • 10 Point Plan on Procurement (1995) • Green Paper on Public Sector Procurement Reform (1997) • Preferential Procurement Policy Framework Act (2000) (PPPFA)

13. Public procurement SA: Preference system • Point System based on price and socio-economic goals • Contracts less than R500 000, 80/20 system • Contracts more than R500 000, 90/10 system • Maximum premium paid to promote socio-economic is either 11.1% or 25%

14. Preference system: Practical example The Education Department invited tenders for the provision of computer software. • Company A, an 100% empowerment company, offers the software for R350 000. • Company B, which has no empowerment component, offers the software for R300 000. 00 • 80/20 preference point system applies • Points calculation B’s tender A’s tender Price = 80 67 Preference = 0 20 Total points = 80 87 • The tender awarded to A , • It scored the most points • Additional costs of R50 000 (financial premium)

15. Public procurement – SA: 2003 onwards • National Treasury issue policy shifting procurement power from Tender Boards to Heads of government departments.(2003) • Provincial Tender Boards were abolished (State Tender Board still in place) • Promulgation of Broad Based Black Economic Empowerment Act (BBBEEA) • Currently government departments are still applying (PPPFA) • Alignment of PPPFA and BBBEEA still underway

16. Economic appraisal of government procurement in SA National expenditure (billions) • Total Expenditure over 10 years- R3 720b • Procurement expenditure over 10 years- R565b (15.2%)

17. Economic appraisal of government procurement in SA Western Cape Provincial Government Expenditure (billions) • Total Expenditure over 7 years- R176.36b • Procurement expenditure over 7 years- R54.26b (30.77%)

18. Economic appraisal of government procurement in SA Western Cape Department of Health (billions) • Total Expenditure over 7 years- R60.96b • Procurement expenditure over 7 years- R23.94b (39%)

20. Economic appraisal: Opportunity costs • Implementation costs • Distinction between “general goods and services” and infrastructure procurement • Processes followed by National Treasury • Processes followed by Construction Industry Development Board • Understanding and application of procurement policy by Heads of Government Departments

21. Economic appraisal: Opportunity costs • Costs attached to corruption • Rent exists in protected contracts • Malaysian experience relevant • Politically connected firms face 23% less competition (Jascisens and Rumba) • Less transparent procedures • Connected firms receive larger procurement value • Auditor-General report on government officials dealing with government

22. Economic appraisal: Opportunity costs Possible Financial Premium (based on national expenditure over 10 year period)

23. Economic appraisal: Western Cape data

24. Challenges/Proposals • Data insufficient to say with confidence that PPP objectives were met • Opportunity may be to high compared to value attained • Preferential procurement now subsection of BEE scorecard- is it enough • Need to learn from Malaysia/USA experiences • Possible set asides • National Procurement Office? • Adequate performance system required

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