As criminal networks claim tenders, Treasury says BEE procurement rules had unintended consequences | Fin24


Ismail Momoniat, Treasury’s acting director-general.

  • Treasury says that preferential procurement rules have produced irrational outcomes and are costing the economy.
  • The regulations came about in 2017 after lobbying by RET supporters.
  • A new procurement bill is under discussion at Nedlac, but includes a number of similarities. 
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Acting director-general of the National Treasury Ismail Momoniat says that preferential procurement has been applied in a way that has produced irrational outcomes that are costing the economy.

In 2017, new regulations on preferential procurement said that all contracts above R30 million should contain a local sub-contracting element of 30%, where feasible. The regulations also made it possible for state entities to set aside a portion of contracts for specific groups previously disadvantaged by apartheid. 

Preferential procurement has its roots in the Constitution, which says that public procurement, while being competitive and cost-reflective, can also be used to empower previously disadvantaged groups.  

The 30% rule and the requirement that state entities use “local” companies as suppliers might have driven extortion in the construction sector, giving local “business forums” a legitimate claim on government projects. The 30% slice of procurement was one of the central tenets of the radical economic transformation (RET) playbook. 

READ | From AK-47s to business forums: This is how SA’s ‘construction mafia’ is winning

The regulations were introduced during the second Zuma administration and signed into law by then-finance minister Pravin Gordhan.

Momoniat says it is hard to say which came first: the 2017 regulations, or the demands by criminal networks – that were already present – for tenders. Because the regulations did not define carefully what was intended, state entities used their discretion. 

Said Momoniat:

“When you don’t specify things in detail, people use discretion, and you get the worst outcomes; that is why it is beholden on government in the future to spell out the details.”

The absence of a definition for “local”, for instance, has led to ward councillors and communities insisting that when a project is undertaken in their ward, those who live in the ward should be the sole beneficiaries.

“For us local never meant wards or municipalities. We always thought that was unconstitutional. Our view was that everyone in SA should be able to compete,” he says. 

Another unintended outcome was the requirement that state entities procure goods and services from Original Equipment Manufacturers through a local supplier, inserting a middleman into the process. This requirement has been particularly expensive for Eskom, which buys much of its equipment from OEMs. Momoniat said that Treasury has now given Eskom a three-and-a-half year exemption from the Preferential Procurement Act. 

“Some of the consequences are nonsensical. It is fine to do preferential procurement when talking about small tenders but not if you buy an aircraft or a generator that will be imported. We have to be clear that no preferential procurement can apply to imported goods. We want state entities to buy from OEMs directly,” he says. 

In February the 2017 regulations were declared invalid by the Constitutional Court because the Minister of Finance did not have the authority to make such regulations, which should have been left up to the entities themselves. But the court said that the regulations would remain in force until February 2023. 

The Treasury has drafted a new Public Procurement Bill, which is under discussion at Nedlac. The Bill states that the Minister of Finance must provide a framework for preferential procurement, including allocating a portion of contracts to designated groups. 

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