Preferential Procurement Policy Framework Act: hearings

NCOP Finance

08 September 2003
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Meeting Summary

Chairperson: Ms Q Mahlangu (ANC)

Documents handed out:
National Treasury presentation on the Act and Regulations
City of Cape Town: Submission on the Preferential Procurement Act
Preferential Procurement Policy Framework Act B5-2000

The meeting offered concerned parties a chance to comment on the effectiveness of the Preferential Procurement Policy Framework Act. Submissions where made by the National Treasury, City of Cape Town and KZN Black Business Development Association. It transpired that better guidelines were needed for the Act's implementation, which currently lacked uniformity. There were insufficient mechanisms to monitor fronting ("rent-a-black" situations or cases of white men transferring companies to white spouses in order to obtain tenders). The point system for the awarding of tenders was too rigid and the calculations it required were too complicated. The Act's definition of a Historically Disadvantaged Individual (HDI) was also problematic and created loopholes.

Meeting report

The Chair said the object of the hearings was to give the public the opportunity to raise issues related to the implementation of the Preferential Procurement Policy Framework Act (PPPFA), which came into effect in August 2000 to regularise procurement by state organs and to bring state procurement procedures in line with the Constitution. The aim was to asses possible shortcomings and unintended consequences of the Act. After the hearings, a Committee Report with suggested improvements to the Act would be submitted to the Finance Minister.

National Treasury of South Africa


Mr H Malinga, Chief Director: Supply Chain Policy of the National Treasury, briefed the meeting on the history, purpose, application and goals of the Act (see document). He explained the Act's mechanism of points allocation in terms of the 90/10 system and 80/20 system, indicating the premiums Government paid in each case.

The Treasury raised the following points of concern about the Act:
- It provided no formulated means of applying policy (goals were set by officials without specific targets to be achieved);
- it lacked mechanisms to monitor fronting ("rent-a-black");
- there was no uniformity in how different state organs applied the Act;
- it was not aligned with the Black Economic Empowerment (BEE) Bill;
- the RDP goals the Act aimed to achieve could not be measured; and
- the calculations required to award points were too many and too laborious.

The Chair asked to what extent did the implementation of the Act achieve the objectives of the legislation, also regarding the empowerment of women and youth. Did the Treasury have a database in this regard?

Mr Malinga replied that some of the Act's objectives were being realised, but too many companies competing for Government tenders were still not black-owned. The phenomenon of special purpose joint ventures ("fronting") was a matter of concern. Furthermore, there were too many RDP objectives to consider and no clear national guidelines to guide the implementation of the Act. The definition of "Historically Disadvantaged Individual" (HDI) was problematic. It enabled people to find loopholes and enter into convenience arrangements, also known as "rent-a-black" situations. It would be possible to supply the Committee with statistics on the number of contracts that had been awarded to blacks and women, but the numbers could not be trusted.

Mr J Makgato (Chair of Finance: Eastern Cape) asked whether it was possible to do checkups after a tender had been awarded in order to ensure that it was not a rent-a-black arrangement (where the black participants were shed once they had received their money).

Mr Malinga answered that no such monitoring measures currently existed.

Mr S Asiya (Chair of Finance: Northern Cape) asked what strategies could be employed to prevent fronting or rent-a-black arrangements.

Mr Makgato asked if it was not the Treasury's duty to ensure people had a clear understanding of how the calculation of points worked. He said state officials were sitting ducks for litigation if they were not completely sure how to perform the calculations.

The Chair commented that people were interpreting the term "Historically Disadvantaged Individual" (HDI) as they pleased. She conceded that the broadness of RDP goals was a point of concern. She asked if the Treasury could indicate to what extent HDIs and women have been empowered through the Act.

Mr C Kruger (Deputy Director General: Specialist Functions - National Treasury) replied that the Treasury had held a number of workshops at which the Act's deficiencies had surfaced. The Treasury was working with the provinces to get a common interpretation of the framework of the Act. Statistics on empowerment through the Act could be made available, but the accuracy thereof could not be guaranteed. The Treasury did not have the capacity to audit contracts throughout the country.

Mr Makgato wanted to know why no points where allocated to the physically disabled and youth in terms of the current definition of HDI.

Mr Kruger answered that the Act's definition of HDI included women and people with disabilities. Youth empowerment could be made a very specific condition of a tender. He said the biggest disadvantage of the system was related to the training of government officials. There were about 25 000 officials in Government involved with procurement. New training materials needed to be developed to capacitate these officials. The BEE Bill and this Act had to be drawn together. It would be untenable to have different definitions of HDI in different acts.

City of Cape Town
Mr M Satekge, Director: Procurement of the City of Cape Town, said almost all the city's submission dealt with the need for greater emphasis on black economic empowerment in preferential procurement policies and legislation (seesubmission). He said the points system was not really working for Cape Town and suggested that it had to become more flexible. He explained that the Act enabled the white owner of a company to transfer ownership to his white wife, in order to qualify for tenders. He suggested that the definition of HDI should give different weightings to persons claiming preference on the grounds of unfair discrimination, for example by providing a framework for higher HDI points to be awarded for a black woman than a white woman. He also pointed out that it was currently too difficult to terminate a contract if it turned out to be a case of fronting. Furthermore, it was not clear whether the PPPFA permitted "closed tenders", i.e. tender processes in which specific parties were invited to tender, rather than the tender being made open to the public. The City of Cape Town was battling to work with the Act in its current form. The financial year was already halfway and it seemed unlikely that a 40% target would be achieved.

The Chair requested clarity on why the point system was so difficult to use.

Ms C de Villiers, Attorney: City of Cape Town, answered that the system was too rigid. It did not allow the city to advance HDIs as much as it wanted to. The point system enabled companies to undercut prices and constantly get contracts although they did nothing about black economic empowerment (BEE).

Mr Makgato wanted to know whether the above-mentioned transfer of ownership from a white husband to wife was legally done.

Mr Kruger replied that ownership transfer from a white male to his white spouse enabled a company to qualify for a 25% government premium. This was not currently unlawful. It was the rigidness of the Act that caused unintended interpretations in practice.

The Chair said the Act only allowed for fronting to be dealt with after the contract had been awarded. It was perhaps necessary to make provisions for fronting situations to be addressed much earlier in the process.

Mr Makgato asked Treasury to explain how it understood paragraph 3.2 of the City of Cape Town's submission. It stated that those who had suffered unfair discrimination in the past claimed preference - specifically black people, women and the disabled.

Mr Kruger said although it was currently legal for a white man to transfer his company to his wife, it remained a form of fronting. He said the Act's definition of an HDI included white women.

Mr Makgato disagreed with the Act equating white women with black women. The latter were disadvantaged through law, while white women's disadvantaged position was the result of social preferences. He added that some historically disadvantaged (HD) contract workers did want protection in terms of closed tenders.

Mr Asiya said the legislation needed amendment. It was not necessary to be apologetic regarding the issue of white women.

Dr E Conroy (NNP) said if both black and white women were disadvantaged, but a higher point was awarded to black women, it would follow that disabled white people had to get a lower score as well.

The Chair said white women should not be excluded totally.

Ms de Villiers said flexibility was needed. A company might have one black director and nine white directors, but more than 50% of the shareholders could be black. Government should be able to look into such aspects. Regarding "closed tenders"; she said sometimes there were only three suppliers in a country who were able to perform a certain specialised function. In such a case, a closed tender would be advantageous.

Mr Malinga pointed out that closed tenders could also lead to corruption.

Mr Satekge said his biggest frustration was to have two companies apply for a tender, one white and one historically disadvantaged. The point system would rate the white company 90% and the HD company 85%. The white company then had to get the tender. In such a case, the City of Cape Town would have preferred to be able to give the tender to the HD company, but such a step would clash with the Act and could result in litigation.

KZN Black Business Development Association
Mr J Naidoo, Chair of KZN Black Business Development Association, said his province did not have procurement policies, or the infrastructure to police them. Business was not represented in city councils. Nepotism, greed and self-interest were rife. He said the point system needed to be reviewed in order to reflect the degree to which people had been disadvantaged. Nobody in his region's municipalities understood the system. Disadvantaged companies turned out to be sister companies of advantaged companies. This led to situations where black companies earned a few hundred thousand rands for doing nothing. Work was allocated on the basis of which political party you belonged to.

Mr Makgato wanted to know how Mr Naidoo thought the point system should be set up in order to empower HDIs.

Mr Naidoo replied that the 80/20 system was not working. He would prefer to see a 50/50 system. The State should be able to monitor how real black involvement is in companies, whether there had been a transfer of skills.

Mr Makgato inquired whether Mr Naidoo had raised his concerns with a petition to his provincial legislature. And if not, why did he not do so?

Mr Naidoo replied that his organisation did report some cases, but nothing happened, they were covered up. There was nobody down on the ground that they could take complaints to.

Dr Conroy (NNP) asked if Mr Naidoo was referring only to Port Shepstone (where he hailed from) or to the rest of KZN as well.

Mr Naidoo said his experience was mostly related to Port Shepstone.

The Chair reminded Mr Naidoo that business was not supposed to be represented in city councils, because council members were politically elected. Since Mr Naidoo described himself as an ANC member, he must have lived in a particular ward. Did he not have a ward committee where issues related to the performance of the municipality were discussed?

Mr Naidoo replied that such steps would work in an ideal situation. Even the Speaker of the provincial legislature might be involved in corruption. His region did have a so-called procurement policy, but the people who allocated points were young and inexperienced. The same company would be awarded different points at different times.

Mr Malinga said it was clear that certain areas had a lack of capacity to implement the Act. Serious attention needed to be paid to capacity building.

The meeting was adjourned.



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