30 June 2009
Johannesburg — WHEN the broad-based black economic empowerment scorecard was introduced it was hailed as a "carrot rather than stick" approach.
Non-compliant companies would not be directly penalised but would pay a commercial price because they would be excluded from commercial opportunities.
But as the empowerment process got under way, the state in effect excluded itself from the rules. In tender procedures it still favours price above all in the award of contracts.
Administered by the Treasury, the Preferential Public Procurement Framework Act , which guides state procurement processes, prescribes a 90:10 weighting in the assessment of tenders. Ninety points are for price, and 10 are for black economic empowerment (BEE) and local content. (With contracts valued below R500000, the weighting is 80:20.)
The state also excluded itself from the broad-based empowerment principle in procurement processes. So while private sector firms' empowerment profiles are assessed in terms of seven elements of empowerment in the BEE codes of good practice -- shareholding, management transformation, employment equity, preferential procurement, skills development, enterprise development and corporate social investment -- the Treasury considers only the equity profile of a company when it awards tenders.
This has spawned an intermediary sector of empowered importers bringing in goods from abroad -- often cheaply from China -- adding a margin that still undercuts the price of locally produced goods, and securing government contracts on the basis of competitive price and BEE status.
These import agents often employ only a handful of people, add no value to the local economy and add to SA's current account deficit problem, laments Stavros Nicolaou, chairman of the Local Pharmaceutical Producers Trade Association.
His own company, Aspen , has lost out to import outfits on lucrative state contracts on a technicality. While the group is empowered at holding company level, government procurement rules consider only the empowerment status of the entity -- such as a subsidiary -- tendering for a contract. So while Aspen has a 25% black shareholding, employs 3000 workers and has a strategic position in SA's manufacturing landscape, particularly given SA's formidable disease burden, it takes a back seat to small importers bringing in pills on the cheap from India.
Essentially, the lag in revising state procurement rules means the procurement act is at odds with two of the state's key policy directives -- the BEE code and the national industrial policy framework.
Heavy equipment manufacturer Bell Equipment last year missed out on a contract for a heavy machine put out by the Richards Bay municipality. Bell had thrown free spares into the deal, which, if taken into account, would have made its tender cheaper than that of a competing importer. It still lost out.
Measured against the type of outcomes the state wants to see through industrial development, especially for creating jobs, Bell is a model company. The heavy duty equipment manufacturer's operations are remarkably labour intensive.
The potential for job creation is considerable. And so is the job multiplier effect. The company employs 2500 people, but its operations sustain 30000 more jobs at about 300 local suppliers of Bell components. However, Bell's contribution to the job market "counted for nothing" in the tender award, Harris says.
Local manufacturers are bitter . They are competing on an unequal footing with global manufacturers who benefit lavishly from state support, while the Treasury is dead set against funding industrial development support in SA.
The same department and other state entities buy heavily subsidised product from importers with no qualms. While the consumer and the taxpayer win, manufacturers and employees are having mud kicked in their faces -- at a time when the government has put job creation and poverty alleviation through industrial development at the centre of the national agenda.
Nicolaou argues it is justifiable to pay a premium of between 15% and 20% on locally manufactured goods, based on local manufacturers' contribution to the economy in terms of taxes paid, jobs created and their linkages with up- and downstream industries. This is what the Department of Trade and Industry advocates in its industrial policy action plan. It remains to be seen whether the Treasury will amend the procurement act to harness state money to support government policies.
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