GABRIEL CROUSE | Finance minister should disclose BEE premiums - TimesLIVE
Gabriel Crouse
Finance minister Enoch Godongwana is scheduled to deliver the Medium-Term Budget Policy Statement (MTBPS) on October 30, a potential watershed moment. This could be the first time South Africans are told how much BEE costs in public procurement.
Some people love BEE, and some people hate it. Some think more public funds should be spent on BEE, others less. But one thing binds us all. Nobody knows how much BEE costs in public procurement.
The long-standing secrecy about BEE procurement costs is a problem to anyone who thinks that the people should decide how public money gets spent.
In contrast, the line-item for BEE “preference premiums” has never appeared on the public spending budget, so it is like a menu item that never shows up on the bill. Thus the public cannot decide whether it approves or disapproves of the invisible amount.
The existing secrecy about BEE procurement costs is a violation of South Africa's constitution, which states that the treasury system “must” unequivocally “ensure measures to ensure both transparency and expenditure control in each sphere of government” [emphasis added].
That means the state must provide past- and present-tense accountability for public spending — “transparency” — as well as future-tense accountability of how public funds will be spent — “expenditure control”.
Together, transparency and expenditure control are core to the MTBPS and budget speeches. Pretending that BEE premiums do not exist undermines both.
Acting chief procurement officer Willie Mathebula has explained many times that “preference premiums” exist, and that they “have been paid and will be paid in the future”.
That much is also clearly stated in the Preferential Procurement Policy Framework Act and the relevant regulations, which provide for what Mathebula called “caps” on BEE “preference premiums” of 25% for contracts below R50m and 11.1% for contracts above R50m.
In the incoming system, under the Public Procurement Act, which is not yet in force, the BEE premium caps are removed since they were deemed to limit “transformation” too much. Once the new system comes in, the caps will be replaced by “set-asides” that exclude companies from tender bids entirely based on race and other features.
The Zondo Report was also clear about the trade-off, writing: “There are of course many cases, one hopes the vast majority, in which the award of the tender satisfies both objectives,” namely preference and cost-effectiveness, “but undoubtedly there are other cases some of which may well be high-value tenders in which one or other of these two objectives must be preferred ...”
The Zondo Report advised prioritising “maximum value-for-money”, but what do most South Africans want?
The Institute of Race Relations commissioned a poll in October that gives some idea of the answer, but as there were only 600 respondents in this survey, which is a quarter to a half of the typical political survey size in South Africa, these results must be considered cautiously.
The relevant prompt was: “The government spends over R1-trillion per year buying goods and services. How should it decide who to buy from?”
Four options were given (I have added emphasis).
“The government should buy on a value-for-money basis, making sure to buy the best product from any company at the best price without overpaying.”
48% of all respondents, and 36% of black respondents, chose this option.
“The government should buy on a value-for-money basis, making sure to buy the best product at the best price. If two companies are tied, the black-owned company should get the contract.”
23% of all respondents, and 28% of black respondents, chose this option.
“The government should buy more from black-owned companies, even if it means paying more and getting less value for the same money.”
24% of all respondents and 30% of black respondents chose this option.
“Undecided”.
4% chose this option.
The first and second options involve spending R0 on BEE premiums, with the second using a racial tiebreaker (following a model in the US affirmative action system). 70% of all respondents, and 64% of black respondents, chose one of these options, setting BEE premiums at nil.
In September the Social Research Foundation fielded a survey that was twice the size where 35% of all respondents, and 35% of black respondents, agreed that “race-based procurement rules for tenders” should get “stricter”, while 55% of all respondents, and 56% of black respondents, agreed with an alternative statement that race should be done away with from procurement.
The results vary depending on what is asked. Around election time, for example, eNCA commissioned a poll with 3,000 households, in which respondents were given the hypothetical choice to “keep BEE in the interest of fairness” or to “relax BEE to entice foreign direct investment”, which is different since it does not focus on BEE in procurement and occludes the matter of direct cost. Still, 47% of respondents chose the former, and 43% the latter option.
Even with a pinch of salt, these results suggest a simple reason BEE premiums have never appeared on the budget: to avoid controversy.
There are other considerations. Treasury data reviewing the last R1.22-trillion of spending on its Central Supplier Database indicated that R289bn was spent on State Owned Enterprises (government departments also have to pay for electricity etc.); R140bn was spent on “not black-owned” businesses; R128bn was spent on “partially black-owned” businesses; and R587bn was spent on “51% or more black-owned” businesses.
That leaves the question of BEE premium costs wide open. But if it is extremely low, then the public might wonder why all the BEE paperwork related to procurement is necessary (except to make a few lawyers, accountants, and accreditation agencies rich).
If the premium cost is high, then the public might wonder if the money could be better spent elsewhere.
For context, an average premium of 5% would amount to R55bn, which is 12.3% of total value-added tax revenue, 60% of the general fuel levy revenue, 23.6% of total social grant payments, and 72% of total child grant payments.
Would it be better to redress apartheid by cutting the fuel levy, cutting VAT, doubling the child grant allowance, setting up an investment fund to finance small businesses, or building new schools ...Or should the money keep flowing at the same rate into BEE premiums?
Those questions cannot be politically debated if the public does not know the real amounts involved.
Gabriel Crouse is a Fellow at the Institute of Race Relations