How new BEE rules will make a select few crazy rich

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The South African Institute of Race Relations argues that the proposed new BEE rules means that preferred companies will be able to charge far more for a bigger chunk of government contracts on offer.

Draft Preferential Procurement Regulations of 2016 were published in the Government Gazette on 14th June 2016, under the powers conferred on the Treasury by the Preferential Procurement Policy Framework Act of 2000 (the Act).

Public comment on the proposed regulations was due no later than 15th July 2016, with the IRR arguing that the period was too short to meet the constitutional requirement for proper public consultation.

In an article published on Politicsweb, the IRR argued that ultimately, government will have to spend more on preferential tenders, leaving less revenue to spend on service delivery elsewhere.

Proposed changes

The IRR said that under the Preferential Procurement Policy Framework Act of 2000 (the Act), a 90:10 formula applies to tenders worth more than a specified threshold (currently R1m).

According to this formula, 90 points are allocated on price and 10 points for the BEE status of the tendering firm. This means that BEE firms can charge 10% more than others and still be awarded a contract.

Under the current rules, a 80:20 formula applies to contracts below the specified threshold, so allowing BEE businesses to charge 20% more and still win the tender. However, these authorised BEE weightings, of either 10% or 20%, have often failed to prevent the much higher price escalations, the IRR said.

Once the threshold for the 80:20 formula is raised to R100 million, as the regulations envisage, the scope for price escalation will greatly expand.

“This may bring additional benefits to a relatively small group of BEE business people, but it will also impose great costs on poor South Africans dependent on the government for vital goods and services. For the more the government spends on preferential tenders, the less revenue it will have left over to spend on service delivery elsewhere,” the institute said.

Content of the regulations

The Act authorises a 10% BEE weighting for contracts above a certain threshold and a 20% BEE weighting for contracts below that threshold. That threshold was initially set at R500,000, which limited the number of state contracts to which the 20% preference would apply.

That threshold was doubled to R1 million in 2011.

Under the proposed regulations, the threshold is now to be increased a hundred-fold, or by 9,900%, to R100 million.

“This means that a 20% BEE preference will apply to virtually all state procurement contracts worth less than R100 million. A 10% BEE preference will apply to contracts valued above R100 million. [Clause 5, Regulations]

“This will vastly increase the number of government contracts in which BEE firms will be able to charge 20% more and still be awarded the tenders. Based on previous experience, actual price escalations will often be significantly higher than this,” the IRR said.

No obligation to consider “functionality”

The institute noted that the regulations define “functionality” as meaning “the ability of a tenderer to provide goods or services in accordance with specifications set out in the tender documents”. [Clause 1, Regulations]

A tenderer which cannot comply with such basic requirements should not be considered for any state contract at all, the IRR said.  ‘Worryingly, however, the regulations do not require that tenderers be evaluated for functionality. Instead, they make it clear that organs of state may choose whether to embark on such an evaluation or not.”

According to the regulations, “if” an organ of state decides to evaluate a tender on functionality, then it must do so on the basis of “objective” evaluation criteria that are clearly specified in the invitation to bid. [Clause 4, Regulations]

“However, as this conditional wording makes clear, there is no obligation on any organ of state to include an evaluation of functionality in any tender, no matter how big the price or how important the project may be,” the IRR said.

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