Preferential Procurement Policy Framework Act: hearings

NCOP Finance

08 September 2003
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Meeting report

FINANCE SELECT COMMITTEE

FINANCE SELECT COMMITTEE
9 September 2003
PREFERENTIAL PROCUREMENT POLICY FRAMEWORK ACT: PUBLIC HEARINGS

Chairperson:
Ms Q Mahlangu (ANC)

Documents handed out:
Preferential Procurement Policy Framework Act, No 5 of 2000
Deloitte & Touche submission
Institute of Management Consultants of South Africa submission
South African Association of Consulting Engineers (SAACE): Submission
South African Association of Consulting Engineers (SAACE): Powerpoint Presentation
South African Chamber of Business (SACOB): Comments
Congress of South African Trade Unions (COSATU) submission
National Youth Chamber of Business submission
Broad-based BEE Bill [B27B-2003]

SUMMARY
On the second day of public hearings on the effectiveness of the Preferential Procurement Policy Framework Act passed in 2000, submissions where made by Deloitte & Touche, the Institute of Management Consultants of South Africa, South African Association of Consulting Engineers, South African Chamber of Business, Congress of South African Trade Unions and the National Youth Chamber of Business. The issues raised included:
- discrepancies between the Act and the Broad-based Black Economic Empowerment Bill;
- the definition of Historically Disadvantaged Individual (HDI);
- the certification of consultants;
- alternatives to a tendering system;
- how the Act facilitates fronting;
- the lack of uniformity in procurement processes; and
- the needs of youth in business.

MINUTES
Deloitte & Touche
Ms R Bradell, Senior Manager: Procurement, Provisioning and Programme Management, said the Act did not clearly instruct public entities to implement the law by the letter, but only insisted that they comply with the spirit of the law. Loopholes could be created by the discrepancies between the Act and the Framework for Supply Chain Management and the Black Economic Empowerment Bill. Ms Bradell suggested that HDI needed to be more clearly defined. The current HDI definition in the Act enabled companies to claim more points than they should be entitled to. The Act lacked direction on goal promotion and had no compulsory utilisation of goals. She said the definition of "black" in the Black Economic Empowerment Bill only promoted a portion of the HDI promotion in the Act. A clear future direction had to be determined in this regard. She added that the Black Economic Empowerment Bill and Act did overlap in certain aspects. Overlaps had to be minimised in order to make the legislation easier to apply. The officials who had to implement the law, required capacity building and skills development.

Discussion
Mr J Aulsebrook (IFP) referred to the need to align the Act and Black Economic Empowerment Bill. Regarding the Act's lack of management, he pointed out that the Employment Equity Act also did not deal with the management of implementation.

Ms Bradell said it could enhance the Act if it were given a stronger management component.

Mr Makgato (Finance Committee, Eastern Cape) said Ms Bradell talked about goals being left to organisations and how this could result in lost opportunities for black empowerment. Yet a broad framework for goals did exist. Would companies not work within that? On the previous day the Committee had heard that white business owners were transferring their companies to their spouses to benefit from the Act. That showed that they did not belong to this country, because they were defeating what Government was trying to do.

The Chair said she thinks the goals mentioned were RDP and other goals published in 1996.

Ms Bradell said that in the market, goals were not usually part of documents. Goals could be monitored per project; therefore one goal could perhaps be added to each tender.

Mr C Kruger, Deputy Director General: Specialist Functions - National Treasury, said that, in practice, procurement practitioners could select the criteria for goals.

Mr Makgato wanted examples of the mentioned overlaps between the Black Economic Empowerment Bill and Act.

Ms Bradell said she specifically referred to overlaps in the application of the legislation.

The Chair wanted confirmation that no exemptions would be given to any organs of state.

Mr Kruger said it had not been necessary to force anyone to comply to the letter of the law.

The Chair said the Act stated that the Minister might exempt if it was in national interest. She asked Mr Kruger to establish to what extent stage organs were complying with the Act.

Mr Kruger replied that the National Treasury would do so, in conjunction with the Department of Public Enterprises.

Institute of Management Consultants of South Africa
Mr B Laauwen, Executive Director of the Institute of Management Consultants, said his organisation wanted to add to the Act that beneficiaries of the Act should be members of functioning professional bodies. The reasons for this were to enable quality assurance and to avoid problems in the consulting market (such as those mentioned in Minister Fraser Moleketi's budget speech, 2002). Many officials did not know how to contract a management consultant. The Act was more concerned with whether companies were black enough and whether a company consisted of enough Previously Disadvantaged Individuals (PDIs), than it was concerned with professionalism. The remedy for this would be to demand ownership of a professional body, just like doctors or lawyers had to be members of professional bodies. Most consulting services were not currently regulated in legislation. Consequently the buyer of such services was left vulnerable to abuse. This could be avoided if consultants had to get certification before procurement. Professional bodies offered strong peer review systems. Professional bodies would also facilitate integration between PDIs and Previously Advantaged Individuals (PAIs).

Discussion
Mr Aulsebrook (IFP) said it could lead to cartels and very high costs if one had to legislate for the exclusive use of consultants belonging to professional bodies.

Mr Makgato commented that Mr Laauwen's suggestion could be exclusion by inference, because not everybody could belong to a professional body. If it worked elsewhere, it did not mean that it would work in South Africa, which had a unique historical background and a legacy of exclusion.

Mr M Sogoni of the Gauteng Legislature's Finance Committee said Mr Laauwen's suggestion is exclusionary in the same manner that an advertisement for a vacancy was when it demanded ten years of experience.

Dr E Conroy (NNP) asked if there were any formal qualifications a consultant needed to have.

Mr Laauwen replied that the route to certification could be through a formal qualification or through work experience. He conceded that one had to be careful when one tried to implement first world solutions in third world circumstances. He took note of the concerns about exclusivity, but this was not the purpose of his suggestion and even though it could be a by-product, it could also be avoided. The ideal was for people to come together and uplift each other and debate with one another.

Mr T Shabe, Executive President: National Youth Chamber of Business, said he was in favour of Mr Laauwen's suggestion, because it could save time and money.

South African Association of Consulting Engineers (SAACE)
Mr P Silbernagl, Past President: South African Association of Consulting Engineers, said black representation in the civil engineering industry was extremely low. Only 2,8% of registered professional engineers in the sector and only 23,8% of engineers in training were black. Instead of increasing numbers of black people entering the profession, the black component was decreasing. The SAACE was concerned about the Act's framework being interpreted too loosely by stage organs, especially local authorities. Tenders should not necessarily be judged in terms of the lowest price, because the lowest price did not always turn out to be cost-effective. Nor were tenders always the appropriate option, apart from in the case of tariff-based appointments. The Act and other black empowerment strategies needed to do more to promote the entrance of black professionals and women into the civil engineering sector.

Discussion
Mr Makgato pointed out that blacks were by design discouraged from taking maths under the previous dispensation. He wanted to know what the SAACE was doing to bridge the gap. He also requested clarity on why Mr Silbernagl thought tenders were not always the best route.

Mr Silbernagl replied that his organisation had been engaging with the Department of Education about work shadow opportunities and bursaries. Even when full engineering bursaries were offered to young HDIs, they were sometimes not interested, because they preferred IT or accountancy directions. Regarding tenders, he said huge costs were incurred by tendering. He cited the Western Cape Film Studio as an example. Each interested party had to do intensive preparatory work, including traffic and geographical studies. The Government should rather have done the preparatory work itself in order to provide exact specifications. Such an approach would save time and money.

Ms S Sithole, Chair of Finance: Limpopo, said professional bodies must move away from the prejudiced concept that maths and sciences were difficult. Accounting and maths were a lot easier than a lot of children were made to think these subjects were.

Mr Makgato wanted to know how the suggestion of forsaking tenders would be applied. How could one call on just a few companies without being accused of favouritism?

Mr Silbernagl pointed out that the private sector never called tenders for professional services. One did not ask doctors for tenders if you had to have an operation done. He said a roster system was one possible alternative to tendering. The US Brooks Act offered another option in that it entailed a process of quality-based selection. A company would be scored on various indicators, including community participation.

The Chair wanted Mr Silbernagl to elaborate on fronting in his industry.

Mr Silbernagl said members of his organisation have been informed that disciplinary steps would be taken against them if they were to engage in fronting. There were proper ways of partnerships with black firms, but the Act in its current form almost encouraged fronting.

South African Chamber of Business (Sacob)
Mr P Krawitz, Past President: Sacob, said the Act regulations were only applicable to national and provincial departments, not to public entities and local authorities. The 80/20 and 90/10 systems created opportunities for exploitation. These systems did not bind international companies and thus enabled cheap imports, leading to job losses in the South African manufacturing sector. The Act showed a total lack of measurable norms regarding involvement of HDIs in public sector procurement. It was difficult to quantify RDP goals and measure their implementation. Sacob also raised concerns about the effect of the Act on families businesses. The Act created opportunities for fronting: A black person would get a contract, but he would pass the manufacturing work on to a white company. Such actions were illegal and only enriched a small elite. The Act did not encourage black/white partnerships, but pitted black and white companies against one another. This was not in the national interest, because South Africa's strength was in its diversity.

Discussion
The Chair referred to Sacob's comment about companies being pitted against one another instead of partnerships being promoted. She said this aspect of the Act should rather be seen as a means of stimulating competition.

Mr K Warren, Sacob's Policy Executive: Parliament, said his organisation saw it as a deficiency that no specific provision was made for partnerships and co-operatives. Sacob was not saying black and white should not compete, but that there should be more opportunities for SMMEs and outsourcing.

Mr Makgato commented that it seemed like Sacob's submission said that one should not tamper with the status quo, but the status quo had to be disturbed in order to bring black people into the economic mainstream.

Ms S Sithole said the biggest challenge in dealing with historical inequalities was in terms of the business sector. Organisations like Sacob could help solve problems in this regard by becoming less white. Responding to Sacob's concern about family businesses, she said those businesses had thrived over many years because of black labour. Such labourers should be seen as part of the family.

Ms P Drodskie, Sacob's Director of Policy, said her organisation wanted to see a broadening of the Black Economic Empowerment Bill in order to expand opportunities. A more comprehensive system was needed to attack the inequalities of the past.

Congress of South African Trade Unions (Cosatu)
Mr E Paulus, Research Co-ordinator: Cosatu Parliamentary Office, said Cosatu found the timeframe and planning of the hearings problematic. The original process leading to the Act was unsatisfactory, largely through foot-dragging by the Department, resulting in the absence of a White Paper process, which could have resulted in better public participation. Some progress had been made towards uniformity in the procurement process amongst different organs of state, but the various distortions brought about by different systems since the promulgation of the Act, has had a range of negative consequences. Cosatu requested clarity on the process subsequent to the public hearings on the Act. Mr Paulus raised a number of points around the defining of and rationale for preferential treatment. He presented the Committee with selected case studies pertaining to the Act's implementation - Mustek and Pinnacle, Transnet, Limpopo Education Department, Telkom, Tswane municipality and the Johannesburg metropolitan municipality. The latter purchased Brazilian buses instead of giving the tender to Durabuild (a South African bus manufacturer). Durabuild consequently closed down and 400 people lost their jobs. Mr Paulus said the Act should not facilitate the dumping of foreign goods. He stressed the importance of quantitative data on procurement.

Discussion
Mr H Malinga, Chief Director: Supply Chain Policy of the National Treasury, pointed out that Cosatu had made the same submission to Nedlac a week before.

The Chair said the current parliamentary process did not affect the Nedlac process.

Mr Makgato referred to the document Cosatu submitted and said it was a flaw to try and dictate how the Constitution should be read. Was this Cosatu's interpretation or the common interpretation of the Constitution?

Mr Aulsebrook (IFP) requested clarity on Cosatu's position regarding export-orientated local production.

The Chair said most of the examples cited by Cosatu fell outside the target areas of the Act. Has Cosatu looked at the Act in terms of the public sector?

Mr Paulus replied that export-orientated local production should not happen at the cost of local jobs. He said he would like to invite Nehawu and Sactwu to express their experiences as well. He did not think it was a flaw to interpret the Constitution in the way that Cosatu did. Cosatu was able to recommend that the Constitution should be interpreted progressively.

National Youth Chamber of Business
Mr T Shabe, Executive President: National Youth Chamber of Business, said the Act's 80/20 and 90/10 systems focussed on financial rather than technical skills. This caused fronting. The financial sector had not transformed sufficiently to accommodate the needs of young people. A young person could not open a cheque account and could not get access to finance due to not being able to offer security. The Act's procurement system attached too much importance to credentials and experience, while skills and the ability to be innovative should count for more. The Act should identify the youth sector as HDIs and should allocate young people their deserving points. Mr Shabe proposed a new criterion of 70/30 to address new entities largely owned by the youth, because 60% of the country's population were young people. Information dissemination (especially in rural areas) had to be improved, because it was difficult to access the documents necessary to orientate one towards doing business with the State. The Umsobomvu Youth Fund and Khula initiatives have not delivered to the youth. The Act should prioritise youth business development.

Discussion

Ms Sithole wanted to know how gender sensitive the National Youth Chamber of Business was. She was also interested to hear whether it was leaving behind colour.

Mr M Sogoni from the Gauteng Legislature's Finance Committee said it was not enough to just be innovative. Was the Youth Chamber looking at getting support from people with experience?

Mr Makgato commented on the unreliability of Umsobomvu and Khula. He said the two organisations were set up to help emerging businesses, but if they were not fulfilling this function, it proved that the wrong people manned them.

Mr S Asiya, Chair of Finance: Northern Cape, said when youth with businesses received government contracts, one would suddenly see them drive a BMW and relocate to a better house - even though they often did not complete the projects they were assigned. He wanted to know if the Youth Chamber had forged links with institutions for skills development.

Mr Shabe said the National Youth Chamber of Business was a development chamber. It did have partnerships with Wits and other tertiary institutions elsewhere in the country. Linkages were being formed with big business (Business South Africa and the Black Chamber of Business). He said his organisation was non-racial and very gender sensitive. There were six women on the Chamber's executive of ten. He added that the Chamber was in the process of compiling a mentorship list.

The meeting was adjourned.

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