Zondo Commission opens Overton Window on preferential procurement

5 July 2022

The publication of the Report of the Zondo Commission – or to give it its full name, the Judicial Commission of Inquiry into Allegations of State Capture, Corruption and Fraud in the Public Sector Including Organs of State – is a potential landmark for South Africa.

This is not because it has revealed much that is new, as a good deal of its content was known or at least suspected. Nor is it even a matter of showing how these pathologies are connected to the country’s national malaise. Rather, it is because the report has the authority of a respected jurist behind it. South Africa’s most senior jurist in fact.

What Zondo has done – and this is the potential part – is to open the so-called Overton Window. Things that might have seemed impossible or at least unpolitic to say have now been placed on the public table.

This is crucial. The report may lead to charges being preferred against particular individuals. Some ill-begotten wealth may be reclaimed (though that’s doubtful). But the real possibility the Zondo Commission has opened up is in the realm of ideas. Should South Africa’s thought leaders and its people care to do so, the Commission provides a basis for assessing solutions for the future that could be radically different – radically, in the sense of going to the root – from what has gone before.

Procurement

Central to the whole state capture phenomenon was procurement: how the very considerable public sector spend was skewed to benefit a select group. Not many South Africans would defend doing so on broad principle. But couch it in particular terms, and the response may be somewhat different.

According to the Constitution, the procurement of goods and service must be done in ‘accordance with a system which is fair, equitable, transparent, competitive and cost-effective.’ The Constitution then goes on to make specific provision for preferences to be extended to particular groups in the granting of contracts (for example, in respect of ‘the protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination’).

If the question posed above should be rephrased to ask whether it is permissible to skew state spending so as to create a social benefit beyond the goods or services required, a goodly proportion of South Africans would no doubt be in favour of it. This – in theory at least – is supposedly what animates ‘preferential procurement’, or Broad-Based Black Economic Empowerment (B-BBEE, formerly Black Economic Empowerment) policy in public procurement.

‘Pay a little more to selected suppliers and society as a whole will benefit.’

Abuse

In practice, this has proven controversial. The abuse of state procurement and enrichment through doing so has been a long-standing issue. It even spawned its own vocabulary, notably the term ‘tenderpreneur’: an operator who gets rich off doing ‘business’ with the state, with the strong odour of underhandedness surrounding it.

Another description for this is rent-seeking; taking advantage of others’ productive activities to secure a cut (a ‘rent’) without adding much value.

This was always the risk with South Africa’s empowerment policy, particularly as it related to procurement. It used the historical context of deprivation and injustice and the exclusion of black people from economic opportunity and corresponding language to rationalise it. For many, this immunised it from criticism, or reduced criticism to a preface declaring enthusiastic support for the idea, and a plea to ‘do it better’. But since it was being funnelled through a highly politicised and increasingly corrupt state, it resulted in the pathologies that the Zondo Commission dwelt upon.

This was recognised long ago. A 2007 analysis by Daron Acemoglu, Stephen Gelb, and James Robinson, which can be found on the Treasury’s website had this to say:

‘In discussing the benefits of BEE we included the social benefit of the avoidance of populism and noted that individual firms could not benefit from the whole extent to which they helped to provide a social benefit. In addition to social benefits however, there may be social costs of BEE. A clear one is that [Narrowly-Based] BEE via the forging of links between firms and politically connected people may lead to rent-seeking and the introduction of regulations and policies that favour existing incumbents. This can reduce market competition and innovation and it can also distort government policy. This may appear as benefits on firms’ balance sheets because it increases profits, but it is obviously a cost for society and likely reduces economic growth.’

Empowerment conflated with other goals

This is more or less what has happened. Empowerment was also often conflated with other goals, and instances of it are noted explicitly in the Commission’s Report. The first volume provides an account of procurement issues at South African Airways. It notes that a 30% ‘set aside’ rule had been announced by then President Zuma and was used to provide opportunities to ‘BEE enterprises’ as part of an ‘aggressive transformation’ strategy. But the set aside was actually intended for ‘purchasing from small to medium enterprises, cooperatives as well as township and rural enterprises.’

This, the Commission said, was ‘a very different proposition’. ‘It is far more conservative and reasonable.’ The airline’s Board demanded that the 30% set aside on BEE grounds be implemented, despite the absence of proper Treasury guidelines.

The Zondo Commission Report took up the issue further. It referred to the ‘inevitable tension’ between the economic (value-for-money) imperatives and the social ones (racial preferencing). Its evaluation was essentially one of common sense:

‘There are of course many cases, one hopes the vast majority, in which the award of the tender satisfies both objectives of the Constitution but undoubtedly there are other cases, some of which may well be high-value tenders in which one or other of these two objectives must be preferred, and it is in such cases that the [current] legislation fails to give guidance.

‘In the view of the Commission the failure to identify the primary intention of the Constitution is unhelpful and it has negative repercussions when this delicate and complex choice has to be made, by default, by the procuring official.

‘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.’

In simple terms, the Commission’s view was that where conflict arise between cost effectiveness and race preference, it is the former that should prevail.

And it’s hard to fault this. Given the trauma through which the country has been, the escalating scale of social needs and the increasing call on the state’s resources to respond, value for money cannot be anything other than non-negotiable. This is the logical conclusion of the long-running controversy about whether preferential policies that benefit a small elite can be justified in the face of severe mass need. Where prosperity is increasing and where opportunities are expanding, they might be justified, but not under current circumstances.

This is an issue that needs to be addressed urgently, and the Zondo Report has raised it for public consideration. This is an opportunity that should not be wasted.

Terence Corrigan is the Project Manager at the Institute of Race Relations, where he specialises in work on property rights, as well as land and mining policy. A native of KwaZulu-Natal, he is a graduate of the University of KwaZulu-Natal (Pietermaritzburg). He has held various positions at the IRR, South African Institute of International Affairs, SBP (formerly the Small Business Project) and the Gauteng Legislature – as well as having taught English in Taiwan. He is a regular commentator in the South African media and his interests include African governance, land and agrarian issues, political culture and political thought, corporate governance, enterprise and business policy.

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