SA’s new widely hailed Public Procurement Act could fuel State Capture 2.0 - Daily Maverick
Gabriel Crouse
The new Public Procurement Act has been widely hailed as the law to end State Capture. However, once implemented it could make corruption worse.
After the Public Procurement Act (PPA) was signed by President Cyril Ramaphosa almost two weeks ago, 13 out of the first 15 articles that I tracked in the media were generally or totally positive about the new law.
This comes amidst all the renewed Ramaphoria optimism in the GNU South Africa. But will the PPA really stop State Capture 2.0? Or could the law make corruption even worse?
For a sense of perspective, government spending is in the region of R1.2-trillion per annum, or above 12% of GDP. The overworn phrase “State Capture” is about capturing this money. The PPA replaced the law that has been governing this annual flow of public money for the past 24 years, making the PPA the biggest legislative change over the wealth flow in the country in more than a generation.
For all that, and the initial burst of positive stories, most of which merely parroted the presidency’s press release, the PPA has already receded almost totally into the background of public analysis. Odd, given its historic nature.
Maybe that is at least partly because real experts know that some of the PPA’s advertised big changes have been overhyped. For example, there is a new “Public Procurement Office” (PPO) tasked with “investigating” offences to do with the new law. It has been sold as a sort of brave knight that is about to swoop down with the proverbial sword of justice to smite tenderpreneurs.
But, and this is a big but, there is a list of offences under the new law that the PPO cannot investigate, and the list includes almost everything relevant you can imagine. The off-limits offences range from someone “knowingly” giving “false or misleading information”, to someone who “conspires to commit extortion or a corrupt, fraudulent, collusive or coercive or obstructive act related to procurement”; to causing a “loss of public assets or funds as a result of a wilful act or gross negligence”.
In other words, the PPO cannot investigate anyone taking money, talking about taking money or lying about money. Fans might think the PPO is ultra-dashing, but the knight is sitting on a hobbled horse wearing blinkers – and it is the knight wearing blinkers, not the horse.
Tenderpreneurs are not scared, they are laughing.
That PPO could, at least on select occasions, be worse than useless. The Constitution provides for the exclusion of some unlawfully obtained evidence, which raises the prospect of the PPO investigating corruption, thereby directly violating the Act and thus rendering key evidence inadmissible in court. That would give looters a get-out-of-jail-free card on a nasty technicality.
That would be the worst-case scenario, but even in the best, the PPO is not much different from the current Office of the Chief Procurement Officer, which found that 30% to 40% of public procurement was wasted to corruption, before it began a slow slide into obscurity and now #rebranding.
So much for the new office. What about the new law? This is where the generational change to the R1-trillion+ per annum spending will happen, specifically regarding BEE premiums.
In the current system these “premiums” are nominally “capped”, to use the language of senior treasury official Willie Mathebula, but Treasury called that too “limited”, and so the caps will be removed by the PPA.
Instead, BEE premiums will be paid out first through a system of “set-asides” where tens of thousands of officials around the country get to decide on a case-by-case basis whether a particular tender should only go to businesses from one “designated group” or another.
The “designated group” candidates include “black people, black women, women, black people with disabilities, people with disabilities, military veterans” and more, including any group being subclassified by geographic location, and with the caveat that “military veterans” must be from MK or Apla. (In one parliamentary session, the idea that Apla would be able to take advantage of this drew open laughter, so really “military veterans” just means MK).
Which group is allowed to get some of the R1-trillion+ on any given occasion will be decided by a practically anonymous official near you.
These “set-asides” have already been given a halted trial run in a simpler form, through now-invalidated regulations, but under the PPA they will be more deeply embedded − in law, in extent, and in complexity.
Of course, there will be some cases where the best business for the job happens to be from the “designated group”, but every time the “set-aside” makes a difference, it does so by disqualifying the best business, allowing the tender winner to charge extra, which is how the BEE “premium” gets paid.
The PPA requires even more contracts to go through its “prequalification” section than through the “set-aside” system. In this “prequalification” system, BEE premiums are awarded by applying set-asides not against private businesses directly, but rather against those businesses’ suppliers or subcontractors, or both at the same time, again by thousands and thousands of officials.
The PPA separately requires an even greater number of contracts to go through a “subcontracting” system that says companies “must identify and select subcontractors as prescribed” by officials.
That is a generational triple-tiered change. There are three major problems:
BEE premium transparency
The first is that the set-asides make it even more difficult to know how much is being paid on BEE premiums.
If the annual BEE premium budget is R1-million, or R1-billion, or R10-billion, or more, the public deserves to know how much was spent last year and how much will be spent next year.
Both fans and critics of BEE have turned a blind eye to the simple numbers question for over two decades – how much do BEE premiums cost? They have never appeared on the budget, which violates the Constitution.
IRR Legal argued this repeatedly in parliamentary proceedings, and, to the credit of its drafters, the PPA was amended to require that “cost-effectiveness … must” be “evaluated” in all contracts, which means calculating the cost of BEE premiums at least in theory. However, this will be much more difficult under the triple-tiered set-asides than ever before.
Nothing as complicated as the PPA has ever been tried, let alone succeeded. It is like the Medupi and Kusile of accounting – combined and multiplied by a trillion.
BEE premium cost
The second problem is that BEE premiums are likely to go up. This is by design. Treasury described the current premium allocation system as too “limited”.
That is unaffordable; BEE premiums should be zero.
BEE premiums take away funds that are badly needed to fund service delivery, maintenance, social grants, public debt management, and tax relief – particularly on VAT, petrol, and paraffin, which disproportionately hits poor people – and directs that public money towards people who are already relatively well off, e.g. business owners and managers who reap the premiums.
It should be clear that businesses reaping premiums are just doing what short-term profit maximisers do around the world: see the gap, take the gap. Those businesses are not the problem – the problem is the legal incentive for rent-seeking instead of value-add.
State Capture
What happens when a major line item on the budget is shrouded in mystery? Looting happens.
This is not particular to any race, country, or era. Looting takes place everywhere confused accounting is tried.
For a local example, the masters of apartheid created slush funds for propaganda charm offensives, death squads and so on, and those slush funds were abused by looting crooks. #Muldergate, for those who can remember that round of State Capture, followed the same universal rule of slush funds.
The Zondo State Capture Report recommended “maximum value-for-money” in all procurement, as opposed to confusing BEE premiums being paid out at the discretion of so many officials. Frustratingly, the PPA does the opposite, multiplying the slush fund discretionary scheme dramatically across the R1-trillion+ annual flow.
Add the NHI, which calls on the government to buy all the country’s medicine in a few years – among other new initiatives to grow that R1 trillion+ flow – and the picture of State Capture 2.0 starts to resemble a tsunami that overshadows past problems and future promises while a few brave “captains” righteously surf their little ministerial canoes on its surface.
Hang that picture up on the wall for a moment’s reflection. Is it realistic? Is it fantastic?
Besides the universal rule of slush funds, look back at the last 15-odd years, during which even ANC leaders said the old BEE premium system was not so onerous, and judge them on the numbers: black unemployment has roughly doubled; close to 2 million children are stunted from malnutrition, and the economy has not grown one iota per capita in real terms.
None of those measures changed much when the leadership of the country changed − “improved” − in 2017, and some got worse. The ocean matters more than the captains; the wave matters more than the canoe. It is about to get much, much wilder.
Gabriel Crouse is a Fellow at the Institute of Race Relations