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Procurement, and more specifically preferential procurement, is arguably one of the most critical indicators of and contributor to the success or otherwise of the government's strategy on broad based black economic empowerment (BBBEE).
Successfully implemented preferential procurement can facilitate redistribution of income, skills development and transfer, enterprise development and can contribute towards sustainable job creation.
According to the ICT Empowerment Charter Working Group, research conducted on JSE Securities listed entities in 2003 revealed that of the R515 billion that was targeted to reach BEE accredited companies, R500 billion did not reach them. Of this misdirected R500 billion, an estimated R200 billion could have reached the pockets of black persons, either in the form of salaries, profits or dividends paid to black owners and stakeholders.
Although state owned enterprises (SOEs) have, over the years, been largely instrumental in spearheading preferential procurement and transformation, SOEs continue to be faced with growing challenges as they strive to accelerate meaningful participation by blacks in the mainstream economy and economic growth. Linked to these challenge is the inherent imperative to promote uniformity in interpreting government's preferential procurement policy as well as the development of black small medium and micro enterprises (SMMEs) through the public sector procurement system.
At the heart of these challenges, lies the vexing practice of fronting which militates efforts towards a transformed and prosperous socio-economic landscape.
The State Owned Enterprises Procurement Forum (SOEPF) fully appreciates that a delicate balancing act of stimulating sustainable national economic growth, on the one hand, and fulfilling the national imperatives of economic transformation, on the other, is required if it is to attain its set objectives.
Using procurement (strategically) as a vehicle to effect Economic Transformation in South Africa – a position paper by the State Owned Enterprises Procurement Forum (SOEPF)
The enemy in Chief arrived long before 1994 in the form of poverty. Watching this whole injustice ravaging our civil society with such a despicable rancour while we proudly boast everyday about the greatness of the resources of South Africa has is an absolute shame to all of us, including big business. How can we triumph this scuffle and obliterate these indomitable adversary?
It is clear that although some advances were made in the last 15 years, the majority of black people of this Country remain poor and service delivery remains elusive for them. Of course there are many reasons for this; including a lack of resources, skills, basic education etcetera which by their nature will take time to eradicate. However, there are basic administrative, structural and inefficient processes that unnecessarily exacerbate these issues. Procurement is one such area that can make a meaningful contribution in the fight against poverty and unemployment.
Understanding therefore the strategic value of the procurement of goods and services as a catalyst for poverty alleviation, Infrastructure Development, Investment and Wealth Creation is the beginning of wisdom. Moreover, the role that procurement plays in creating barriers to entry for SMMEs and even directly contributing to poor service delivery in government (due to bureaucratic processes) cannot be over emphasised.
Any self respecting honest person would agree that procurement (better known as tenders in government) has changed the way we do business in South Africa and had a dramatic (direct) impact on the economy since 1994. In some instances we experienced positive changes in the economy, like transformation, albeit for the few. We even saw prices for consumer goods (except food) decrease due to increased imports. In other instances we experienced negative changes like corruption, fraud, deception, fronting and things like these. Even our political environment changed forever, primarily due to questionable procurement practices.
Government (including Parastatals) spend billions of rands every year on procurement. In fact, it is widely reported that capital expenditure alone would exceed 700 billon rands within the next 5 years; remember that this excludes private sector procurement (big business). We also know that no less then least 60% of the capital expenditure would be spent in foreign countries. The figure could go as high as 80% if manufacturers are approached directly to provide the goods and services needed (that is cutting out the middleman). The 20% balance would normally go for construction sub-contracting and labour to South Africans.
This demonstrates that SOEs and Government Departments have sufficient buying power to be able to change the life of ordinary citizens.
So why then is South Africa struggling to use this magnificent buying power to improve the life of ordinary people? The answer is actually much easier then many people realise. The procurement function is in a state of desperation, and many procurement officials do not understand what they need to do. Because of this confusion, partly caused by legislation and bureaucratic policies and procedures, inefficiencies are introduced. Also, the Procurement Officials are not strategic so their significance is downplayed and as a result nobody really manages their performance. Many senior decision makers (including politicians) do not understand the way procurement (i.e. contracts & tenders) influences just about everything they do. The role of the Procurement Manager or Buyer is not well understood, and not exploited for the benefit of the Country. Procurement as a function in Government and in some SOEs is used as an “audit or administrative function” as opposed to a strategic driver for the business. Until such time that Procurement Officials are held accountable for economic growth and job creation, it is unlikely that much will change. In fact, in all probability, we are likely to see an even bigger gap between the “haves” and “have nots”; primarily because we will continue to be a net importer of goods and services.
A few years ago, SOE procurement officials identified Procurement as an area that needed urgent government intervention. This culminated in the establishment of a body of procurement managers (i.e. The State Owned Enterprises Procurement Forum – SOEPF). Although this was well received and supported, implementation and co-operation between officials often stifled plans to make this work. Of course this can be attributed to the lack of understanding by key decision makers on the strategic value that Procurement can bring to SOEs and Government in general. Key issues include:
Major cost savings – through economies of scale
Saving costs is one of the primary objectives for SOEPF. We often hear of a lack of resources in government to complete certain projects. However, the procurement function in government is not effectively used to drive down costs. Other then tendering (which does not necessarily guarantee cost savings and is often abused), there is nothing that SOEs and Government is doing to save costs. For example, SOEs do not collaborate with one another when goods and services are procured to gain economies of scale. Also, there is no programme to share resources with each other (e.g. loan each other certain equipment or services that others may not be using at a particular time). As a result, smaller SOEs pay large premiums for certain goods and services. Another classic example is the cost of advertising incurred by Government and SOEs, through print media – rationalising this area could bring immediate savings to the State. The list goes on.
The cost of doing business with Government and SOEs even affects SMMEs and business in general. Currently, systems are such that any company (including SMMEs) are required to register as suppliers at each SOE, Government Department and Municipality in order to supply goods and services. There are over 500 of these institutions. The cost (paper, transport, postage, telephone etc) to register runs into millions of rands. Another example; SMMEs go through several due diligence audits per annum from different state institutions – this is unnecessary because state institutions should in fact share these reports, thus allowing the SMME to be audited once, which would result in manpower cost savings for the SMME and audit fees for the SOE. These are few examples demonstrating inefficiencies within our systems.
Supplier Development Initiatives
There is lack of co-ordination and a common, uniform approach to the establishment of a more effective ongoing supplier development programme. Importantly, many SOEs are doing some form of supplier development in isolation from one another. This is a major concern, in that these Suppliers are often dependent on the entity that developed them, forcing them to remain small players. As a result, SOEPF has been at pains to get some form of agreement between SOEs for them to work together and to develop supplier jointly. This has been spectacularly unsuccessful so far, particularly because of a lack of understanding and political will.
Job creation & Local Manufacturing
Collectively, SOEs spend a considerable amount procuring goods and services from foreign companies. An analysis conducted by SOE procurement executives (on 7 SOEs), revealed that at least 40% - 60% of total operational expenditure is spent on foreign entities. This is significant, given that SOEs are due to increase this expenditure dramatically for the capital expansion programme, which we estimate will increase procurement from foreign entities. The lack of a collective approach by SOEs to analyse this expenditure and come up with a uniform process to increase local manufacture (and thus increase and accelerate job creation) places a real risk on the sustainability of South Africa and the ability of the Country to fight poverty. How do we expect to fight poverty when we fail to create an industry that can supply us with goods and services?
Sharing of best tactics, practise and information
SOEs and Government Departments, particularly in the procurement space are reluctant to share information on procurement. It is common cause that sharing information on best practices in any subject improves efficiencies. This sharing and curving of strategies should improve intelligence gathering, eradicate duplication, central advertising platform and proper coordination and improve the skills levels. The common reporting and monitoring of all targets by SOEs should assist a great deal in identifying opportunities for improvement and where there is poor utilisation of state resources among SOEs. At the very least, a failure on the part of SOEs to coordinate and share information on procurement activities would result in a duplication of effort, which by it self results in additional costs for the common shareholder (which is the State).
B-BBEE
It is extremely deplorable that the disparity is not closing between different classes in this resourceful country. In the main, the black people are politically very strong but economically non-existent.
In some instance, black people are their own enemies. We created many laws, which are noble but impractical and in many instances contradictory. This of course created major challenges in that honest procurement officials remain confused and are unable to empower because of legislation that should have been designed to empower. In other instances, crooked procurement officials look for loopholes within these many laws to commit fraud and corruption while others use these laws to stifle black empowerment.
We created laws like the PPPF Act which places price above everything else (90% weighting). This was the ideal vehicle for those who import cheap goods from China and other Countries. That simply “killed” the local manufacturing industry (e.g. clothing). We also redrafted the BBBEE Act, which is mostly noble and commendable, but conflicts with the PPPF Act, thus confusing the procurement officials. Also, the BBBEE Act is open for abuse in that ownership is no longer considered relevant. In the Economic Cluster, we have several other policies such as NIPP and CSDP which are all noble, but confusing to the procurement official and mostly not implementable. Often these policies are an additional cost to the procuring organisation, which South Africa does not benefit from because of poor management. SOEPF has always engaged Senior Government Officials on the issue of procurement and how procurement officials can be used to help achieve Government’s overall objectives. This has largely been ignored. Again, it might be a question lack of understanding of the procurement function.
Professionalising the Procurement Function in South Africa
Almost weekly we hear of procurement irregularities from Senior Government Officials. SOEs and Government are faced with serious reputation issues, mainly due to poor tender and contract management (procurement). Issues concerning corruption, fraud, fronting, and cancellation of tenders are common. This by itself suggests that procurement (unlike the doctors, lawyers, engineers, accountants etc) lacks a notable professional body that pronounces on issues and maintains high ethical standards and skills. This perhaps explains why our politicians find themselves exposed because of inexperienced, poorly skilled procurement officials who fail to provide guidance to our office barriers.
Conclusion
It is clear from our discussion that there is work to be done and that procurement can contribute significantly to the development of this Country. Furthermore, it is equally clear that all procurement officials should begin to go through a “vetting” process, much as we do it with engineers, doctors, lawyers and accountants. This will ensure that we begin to recognise procurement as a profession and thus its officials as professionals.
Also we should begin to accept that procurement can no longer operate at a junior or middle management level, but that it should in fact be strategic, reporting to the Chief Executive or Head of Department. This will ensure that procurement officials begin to be held accountable for driving company strategies. Equally important, buying should never be price (lowest cost) based, but all the issues affecting the economy (including job creation) should be taken into consideration when any goods and services are procured. This will certainly begin to help in the fight against poverty.
This strikes a chord of the book Art of War especially chapter 3 that “The best strategist often wins the enemy without going to the battle” people don’t eat, wear and shelter rhetoric, sophistication, intellectualism, philosophy and all the gobbledegook. They simply want to sleep and wake up in the morning with dignity and humility. The solution is simple good pedigree decisions that dispel lack of determination, will power, fear and sluggishness? The solution is simple. All it needs is leadership.
Fantus Mobu
Chairperson: State Owned Enterprises Procurement Forum (SOEPF)