BEE premiums set to explode
15 May 2024
Tomorrow, the Public Procurement Bill is scheduled to be put to the vote in the National Assembly, where the ANC majority is expected to pass the new system for managing R1.1 trillion in annually tendered government contracts. Thereafter, it will await the president’s signature.
When it comes into force, the Public Procurement Bill will allow for companies to be excluded from offering their products and services to the state, even if they are better and cheaper than those offered by their competitors. That adds to wasteful expenditure.
The incoming system will also add to uncertainty in the tender process, which can be exploited by corrupt public-private partners at the public’s expense through criminal activity.
The Bill will not only cover the existing R1.1 trillion public procurement spend, but also the additional costs of new programmes. The most important of these is the NHI Fund, which “will purchase healthcare services on behalf of the entire population” in time, according to its sponsors. The NHI Fund is just one of thousands of public entities that collectively spend roughly 15% of GDP and are required to comply with public procurement rules.
Treasury official Willie Mathebula described the Public Procurement Bill as providing for “BEE Premiums”. Currently, BEE premiums have a nominal “cap”, as Mr Mathebula put it, but under the colloquially termed “BEE Premium Bill”, those “caps” will be removed and replaced by a system of “set-asides” and “pre-qualification criteria”.
That means procurement officials will be allowed to exclude any business that is owned by majority white people, or men, or people who are not MK veterans, among other criteria that can be picked by discretion, for any tender – even if those companies offer better products at a lower price.
Mr Mathebula explained that this was needed because the current system “does not go far enough” in providing for BEE preference.
Treasury refused to acknowledge, however, that under the constraint of limited resources the payment of BEE premiums means there is less money available to pay for social grants, better service delivery, and tax relief.
In a country where an estimated 1.7 million malnourished children are physically stunted, it is hardly a surprise that the BEE premium programme for millionaires and billionaires was promulgated without any transparency about its cost. However, the refusal of Treasury to supply basic information is a clear violation of South African law.
Procedure
The Public Finance Management Act requires that new laws that impose significant costs on provincial governments by giving them additional responsibilities must be accompanied by an estimate of those costs. Without such estimates, new laws would create “unfunded mandates”, which are illegal.
IRR Legal alleged that Treasury was creating precisely such an unfunded mandate under the Public Procurement Bill. Treasury initially denied the charge, saying that the enactment of the “BEE Premium Bill” would create no additional costs to provinces. However, under pressure, Mr Mathebula conceded that this was not true and that the Bill would in fact impose new costs on the provinces; but he referred to the “unfunded mandate” requirement as a mere “technicality” that could be met at any time in the process.
The South African public is disserved by this response, as it never had the chance to meaningfully respond to the expected cost of the “BEE Premium Bill”.
In the build-up to another procedural flaw, Treasury provided data from a survey of 18% of public procurement spending since 2017, which showed that majority black-owned companies received R588 billion, or 63%, of total expenditure to the private sector.
Treasury elsewhere called this data source “representative” of public procurement more broadly, which if true means that majority black-owned companies have received more than R3 trillion since 2017 from taxpayers.
IRR Legal pointed this out to Treasury. On 10 April and again on 10 May Mr Mathebula promised to address this point in writing in response to IRR Legal’s specific questions. However, he has still failed to do so. He is also refusing to hand over a recording of a meeting where this was discussed between IRR Legal and Treasury.
This is no surprise. Treasury’s data refutes the reasons given to justify the “BEE Premium Bill”.
Substance
Racially exclusive set-asides are socially abrasive, magnify mistrust between people of different races, and embolden the practice of racial realpolitik. It profits criminals of all races and those who spread the belief that life is an inevitable contest of force across racial groups. The “BEE Premium Bill” multiplies that inhuman view by R1.1 trillion, and rising, annually.
Polling by the Social Research Foundation indicates that roughly one in four South Africans think that the entire R1.1 trillion in tender contracts should be set aside for one race group exclusively. However, two-thirds would prefer merit to come first, regardless of race.
The Zondo Report advocated prioritising “maximum value-for-money” over race in public procurement. The primary reason is that it found that confusing the issue of “value-for-money” by adding conflicting objectives made the procurement system hard to manage, which allowed criminals of all races to exploit it. In the mid-2010s Treasury estimated that up to 40% of all procurement was corrupt waste.
Despite being the majority, advocates for the “maximum value-for-money” approach have not spoken up with sufficient potency to win the day. IRR Legal did manage to draw some significant concessions, including an 11th hour amendment to introduce the requirement that all procurement contracts “must” be evaluated for “cost effectiveness”.
However, the bigger picture on the “BEE Premium Bill” is a failure for accountability, transparency, and the kind of common sense that millions exercise every day when they spend carefully to get maximum bang for their buck.
Said IRR Legal Executive Director Gabriel Crouse: “Tomorrow is going to be the ugliest day in the fiscal history of this young rainbow republic.”
Issued by Gabriel Crouse, IRR Legal Executive Director, 15 May 2024
