Preferential Procurement

While it might be trendy and exciting to debate whether the appropriate economic term is radical economic transformation (RET) or inclusive economic growth, one cannot argue that there is one inescapable vestige of apartheid so pronounced in our society that it is beginning to tear our country apart –  this is the economic exclusion of the black majority. The key factors driving economic exclusion of black people, other than historical reasons, have always been the inability of the economy to create sustainable economic opportunities for black people – be it decent jobs, business opportunities or otherwise.

The extraordinary low levels of economic growth that we have witnessed in the recent past can only mean that socio-economic transformation will continue to stagnate and the exclusionary and divisive trajectory will continue. The highest recorded economic growth in the past five years was a meagre 2.5 per cent in 2013 and in 2016, we recorded the lowest at 0.3 per cent. With the growing population numbers, the shrinking cake will never be enough for all of us. If we do not diligently advance RET, our country will not be in a growth trajectory.

During the early 2000s, the economy grew at a higher rate, however, we did not see any creation of significant employment opportunities, neither did we see the creation of sustainable economic
and business opportunities for black people worth mentioning. This is because of the skewed structure of our economy which favours big and white-owned businesses.

In the words of Dr Thami Mazwai, “regardless of how educated you can be and regardless of how entrepreneurial you are, until the structure of the economy has altered, you will be trying your luck for nothing”. Sadly this has been the story of the black majority for the past 23 years.

We are very clear as the Black Management Forum (BMF) that in order to achieve sustainable inclusive economic growth there needs to be a concerted effort to develop and implement structural deconcentration policies.

Focus should be on SMME development as a strategic intervention to help diversify and grow the economy, so we can achieve the requisite high levels of economic growth necessary to create much-needed job opportunities to accelerate and advance socio-economic transformation.

In Japan, the SMME share of employment is 70.2 per cent; its contribution to GDP is 50 per cent and its share of total exports is 53.8 per cent. It’s no wonder the unemployment rate in Japan is 2.8 per cent and their average Gini coefficient is 0.31.

On all accounts you could argue that the Japanese economy is anchored and driven by SMMEs. Contrast the Japanese economic indicators with South Africa, where the overall unemployment rate stands at 25 per cent and rises to about 36 per cent (if individuals who are no longer actively looking for work are included in the calculation).

Youth unemployment constitutes 73 per cent of the total unemployment figure. The Gini coefficient is hovering around 0.69 and the participation of SMMEs in international trade leaves much to be desired.

It is an undisputable fact that SMMEs play a pivotal role not only in transitioning poor performing economies to high growth and innovative economies, but they also contribute exponentially in creating employment, poverty alleviation and reducing income inequality and generally contributing to the total economic activity of the country.

While there is ample evidence to suggest that the South African government is fully cognisant of the importance of SMMEs, judging from the the creation of the Department of Small Business Development and a variety of development support structures, the reality is that we have been paying lip service to this sector. The biggest mistake we have made in the past twenty three years is to separate public procurement from SMME development.

The South African SMME sector is nowhere close to where it’s suppose to be in terms of its share of employment creation and contribution to the GDP. Researchers estimate that Small and Medium Enterprises (SMEs) – this is excluding the micro enterprises – contribute 18 to 20 per cent to the Gross Value Added (GVA). Not surprisingly, data on employment creation and export participation is scanty. Contrary to popular belief, white people own and operate more than 50 per cent of these formal SMEs and black owners share the balance.

About 90 per cent of micro or informal businesses are owned by black people. If ever there was a time to priorities the development of the SMME sector, it is now.

The National Development Plan (NDP), rightfully so, projects that by 2030 the SMME sector in South Africa will generate 90 per cent of all new jobs. This bold projection contained will remain a pipe dream until government takes its responsibility seriously and works towards the development of high performing, competitive and export-orientated SMMEs.

The starting point in developing a thriving SMME sector is the recognition of this sectors massive purchasing power which is estimated to have more than R500-billion for procurement per annum. This certainly could be used to change the current economic power relations.

If public procurement were to be used appropriately, backed with enabling procurement legislation, it can help a great deal in improving the ability and capacity of small to medium sized companies.

The bottom line is to create sustainable and decent work opportunities. It will transform traditional SMMEs into modern SMEs which have the potential to grow into large enterprises – producing high quality and high value-added products for both the local and export markets.

The current procurement legislative framework is designed to be more administrative than designed to strategically drive  economic development and transformation. It follows therefore that the latest procurement regulations, although touted as progressive, would fall short of advancing the socio-economic transformation agenda as they tinker with a flawed legislative framework.

While there are limitations in the Preferential Procurement Policy Framework Act (PPPFA) the regulations could have been more progressive.

For instance, Regulation 4, which introduces pre-qualification criteria for preferential procurement, stipulates that state organs may set a pre-qualification criteria targeting small businesses or minimum B-BBEE status for a particular tender. The government has thus made it a choice to pre-qualify a tender – and not a requirement.

This means transformation will depend on the willingness of the individual procurement or supply-chain officer to pre-qualify a tender.

The second case in point is Regulation 9, which deals with the 30 per cent sub-contracting as a condition of tender – and government has mischievously communicated this as a set-aside and we know its far from just that. This would have been a very progressive clause as the bulk of government procurement goes to big businesses, emphasising no interest to transform or contribute to the growth of this country.

They would have been forced to at least sub-contract 30 per cent of the contract value to black businesses who happen to be small businesses.

To add insult to injury, the legislator inserts a qualifying clause stating “where feasible”, again making it not compulsory.

Our long-held view is that the public procurement system should include a contribution towards the reduction of racial income inequality, contribution towards diversification and job creation and the development of an innovative and competitive SMME sector.

This can only be achieved when public procurement is not only used as a means to buy goods and services but as the bargaining tool to unlock private sector procurement opportunities and break the current economic power relations. In Singapore and Thailand they endeavoured to create these linkages through specific programmes: Multi-National Corporations-Local Industry Upgrading Programme (MNC-LIUP) and Board of Investment Unit for Industrial Linkage Development (BUILD (Thailand)).

In both cases, the aim was to develop and strengthen SMMEs so that they could serve as suppliers to Multi-National Corporations (MNCs) and corporates.

In Indonesia, they have what they call bapak angkat literally translated as ‘foster father’, where they stimulate relationships between SMMEs and public enterprises. The limitation is that it only focuses on the public sector to the exclusion of private enterprises, particularly the multinationals.

Over and above prioritisation of SMMEs and black-owned SMMEs in public procurement, every big business or multinational that has been given work by government, must be given a responsibility to develop one or two SMMEs in their sector, as a condition of contract.

This will help achieve the above-stated public procurement objectives, but more importantly it will achieve supplier diversity and will contribute towards achieving competition in the market. It will help deal with the oligopolistic market structure and diversify our economy.

But even more importantly, it will help our economy grow to levels never seen before and create much-needed employment opportunities as well as reduce poverty and inequality.