The lesson we need to learn from Eskom – BEE is a luxury we can ill afford

3 April 2019

Let’s get one thing straight – BEE isn’t free.

Scarcity is the fundamental problem of economics. Resources have a myriad of uses – and there’s just not enough to go around. Many societies have collapsed due to a failure to allocate these resources to these uses in a sensible way.

Far from being an abstract problem, this is one everyone faces on a daily basis. One of the key strengths of the free market is that individuals are perpetually confronted with constrained resources. If you’ve struggled to balance your personal budget, you are, no doubt, keenly aware of this fact.

Government is no exception to this rule, which why procurement procedures need to aim towards identifying the best value for the limited resources the state is able to extract from tax payers.

BEE, in terms of the Preferential Procurement Policy Framework Act, represents a key departure from this fundamental economic principle. After all – the whole point of instituting BEE is to ensure that businesses and state entities are required to divert money and resources from suppliers who may have been selected on grounds of being the cheapest or highest quality.

Having found that this project is not proceeding as quickly as it would like, Government has gradually been tightening the screws. In terms of the newest iteration of the PPPFA regulations, state-controlled entities are now empowered to pre-emptively disqualify firms if they do not meet BEE requirements.

In contrast to earlier procedures – which would at least allow most firms to compete (if at a disadvantage) – many have now been disqualified from consideration altogether.

Naturally, this is to the advantage of the firms who are allowed to bid. If this were done on grounds other than racial representivity – and done by anyone other than government – these exclusionary tactics would be considered anti-competitive. Now, they are merely “transformative”.

Regardless of what politicians may have named this phenomenon, its fundamental effects remain the same. With less competition, firms are under far less pressure to supply quality services at affordable prices.

We’re spending more, so what are we getting in return?

In essence, BEE requires government and private actors to use their resources to take on an additional burden – forcibly transforming society to conform to government’s vision of perfect racial ratios distributed uniformly across all 50 million-plus of South Africa’s inhabitants.

This is no small task – and it would be very surprising if it did not represent some drag on the natural development of the South African economy. It is concerning to note, however, that many of B-BBEE proponents, whether inside or outside of government, have not – it seems – considered what these downsides may be.

Surely, if we’re going to apply a policy for 15 years (and counting), we should have some idea as to what it costs?

BEE may well benefit the economic disenfranchised in many cases. Even given that fact, however, it is not at all clear that we should implement it at any cost, despite the political rhetoric of the day.

Though the costs are diffuse and hard to calculate – this does not mean that they do not exist. Would we be willing to pay, say, R100 billion per year for the results we’re getting from BEE? Would we be willing to pay double that? Or quadruple? More?

It is clear that these questions are not being asked. These pre-requirements have, for instance, been incorporated and/or applied by a number of dysfunctional municipalities. Rand West City local municipality has, for instance, been struggling to pay its employees on time, but despite this fact, has duly incorporated pre-qualification criteria into its tender policies.

Eskom is, perhaps, the best illustration of the absurdity of these policies – and much has been written on it as a result. This trend has shown no signs of abating and despite the serious financial constraints it faces, it continues to divert valuable resources to the grand BEE-project.

See, for instance, tender MPGXC005364R1, issued on the 19th of March this year. This tender, for boiler washing and brickwork at Hendrina Power Station, automatically disqualifies any companies who do are not certified to be Level 1 B-BBEE. Prequalifications are even being applied liberally to mission critical contracts, such as fire protection services.

These prequalifications are particularly grating in light of the fact that Eskom has recently made use of a number of international firms for, amongst other things, attempting to get a handle on the full extent of the challenges it faces.

It is not immediately obvious why we should, on the one hand, impose arbitrary race-based criteria to exclude South African nationals from offering their services to Eskom, only to go around hiring Italian engineers at the next turn.

Eskom might well represent the biggest impediment to vitally needed economic growth and development in South Africa – and it is not clear why we should not, in the interest of all, immediately do away with policies which represent threats to its financial or operational sustainability.

Quite apart from the obvious threat that Eskom poses to the economy, there is good reason to believe that these inefficiencies, which have been made pervasive by the effects of BEE policy, may represent an impediment to South Africa’s economic growth.

Considering the lacklustre state of the South African economy, it is doubtful that this strategy serves in any way to help the economically disenfranchised. After all, what good does it do to limit the growth of the economy that they desperately need to enter into and participate in? Often for the benefit of a relatively small group number of wealthy companies and professionals?

Even the most ardent proponents of BEE would be forced to admit that it entails a very real and very tangible economic trade-off. Any of the multiple avenues by which BEE imposes costs could be used to illustrate this point. If, to use only one example, the economic efficiency of BEE compliant firms were a given, the BEE scorecard wouldn’t serve any purpose.

The cost is real. At best, we can discuss whether it’s worth paying.

For instance, if we don’t fix Eskom as quickly as possible – with the help of the best and cheapest suppliers – what will that mean for real, inclusive socio-economic development?

Should municipalities empower specific companies, or ensure that quality services are extended to all of their inhabitants?

The reasons for instituting BEE seem to be calculated – but in political terms, not economical. Due consideration may reveal that it is a luxury we can scarcely afford in these difficult times. It is not even clear BEE has not achieved what it has set out to do. Rather than giving access to the economy to the disenfranchised, it might have hampered natural integration and natural economic development. This, in turn, could have benefitted all of the public and not just, as often happens, a handful of wealthy elites.

Municipalities, Eskom, South Africa as a whole – all are experiencing real and serious scarcities of resources. And when you don’t manage to balance the budget? Well, then it’s time to cut the luxuries.

Daniel du Plessis, Sakeliga