Black Economic Empowerment initiatives

PUBLIC WORKS PORTFOLIO COMMITTEE
6 June 2001
BLACK ECONOMIC EMPOWERMENT INITIATIVES: BRIEFING; COMMITTEE REPORT ON THE STUDY TOUR TO LONDON: ADOPTION

Chairperson: Mr MW Hlengwa

Documents handed out:
Presentation to the Committee on Black Economic Empowerment
Committee Report: Study tour to London

Relevant Document
Director General's Address on the Enterprise Development Forum 7 June 2001(See Appendix)

SUMMARY
The Department briefed the Committee on its Black Economic Empowerment initiatives. The briefing was complex in content and the Committee was impressed that efforts are being made to redress the inequalities of the past. The Committee re-iterated its concerns about larger companies fronting subsidiary companies as Black Economic Empowerment companies to get government contracts. The Members were interested to know what steps are being taken by the Department to resolve the issue.

MINUTES
Black Economic Empowerment Initiatives
The Director General, Mr S Sokutu, briefed the Committee on the Department's Black Economic Empowerment (BEE) initiatives. The aim of the presentation was to inform the Committee about various aspects of the BEE initiatives. These aspects include setting out the BEE legislative framework, programmes, challenges and future direction. The focus of the Department is to redress past imbalances through poverty alleviation and job creation for the previously disadvantaged. The subject matter of the briefing was very complex.

For detail on the BEE initiatives please refer to the attached document.

Discussion:
[The Department did not deal with the questions as they were raised but addressed them in one concerted effort]

Due to the complex nature of the subject matter, the Chairperson appealed to Members not to ask complicated questions but rather to make suggestions or recommendations.

Mr Sigweba (ANC) asked how Kwazulu-Natal was successful in allocating work to new contractors. He suggested that contractors be evaluated on a merit system to encourage them to perform better. Mr Sigweba asked what the Department is doing about the problem of fronting. He felt that larger companies should be punished for fronting as smaller black companies in order to obtain government tenders.

Mr Opperman (NNP) referred to the use of the term 'african' in the briefing document and asked whether there was any difference between the use of the terms 'black' and 'african'. He also asked if the Department has made any ex-gratia payments. Further, he asked if the information in the Briefing document was obtained from the participants.

Mr Moonsamy (ANC) asked how many emerging black professional service contractors are currently on the Departments database. He then asked at what point the status of these contractors would be upgraded to the status of the established service contractors.

Mr Sokutu stated that contractors could only be awarded government tenders if the applicant owned a percentage of the firm that she or he represented. He added that the Department checks on ownership and tax certificates but this is not where the problem lies. After the tender process is complete, the contract is inevitably awarded to larger firms because they have the capacity to do the work. From a business point of view there is nothing wrong with the subcontracting but from government's point of view it goes against the objectives of BEE. Some of the smaller firms experience financial difficulties which forces them to turn to the larger firms. The fact that a company is registered does not shed light on the company's ability to perform. Mr Sokutu stated that the success in the Kwazulu-Natal is attributed to the large number of Indian persons who have been empowered as opposed to black persons.

Mr Sokutu explained that currently the Department is under tremendous pressure to cancel its contract with an emerging contractor for the building of Kokstad Prison. The emerging contractor has not completed 40% of the work in the stipulated time period. The Department refuses to cancel the contract, because it understands that emerging contractors are bound to experience problems because they are new in the system.

With respects to the difference between the terms 'black' and 'african', Mr Sokutu explained that in the Western Cape the Department is facing criticism because it is alleged that it is favouring coloureds over africans in the granting of tenders. Mr Sokutu insisted that more tenders are allocated in the Western Cape to coloureds because there are more qualified coloured artisans in the Western Cape than blacks.

Mr Sokutu stated that ex-gratia payments are of no legal consequence to contractors. He added that no specific budget has been set aside specifically for the empowerment of women but it is practice that women should be allocated certain portions of quotas. He also stated that some black professional service providers are not interested in government contracts and prefer working in the private sector.

Mr Radebe (ANC) suggested that the tendering documents expressly state that contracts may not be ceded to other firms.

Mr Scheepers (NNP) felt that investment is needed to meet upcoming challenges. The difficulty is in finding investors.

Ms Twala (ANC) asked what mechanisms have been established to prevent late payments to sub-contractors.

Ms Bici (Chief- Director of the Strategic Project Initiative) replied that the Department is investigating ways of approaching the issue of BEE. Partnerships between government and the private sector are needed. She pointed out that the enabling environment which the Department is trying to create is stifled by a lack of training and delays in payment. In attempts to address the shortage of black professionals, the Department is awarding bursaries to blacks even though this is on a limited basis. Ms Bici stated that legislation would soon make it illegal for emerging contractors, who have been awarded tenders, to sub-contract to other firms.

Report on study tour to London
The Committee unanimously adopted the report with minor amendments.

The meeting was adjourned.

Appendix
Director General's Address on the Enterprise Development

Mr Tami Sokutu
Director-General Of Public Works
on behalf of
Minister of Public Works
Ms Stella Sigcau
7 June 2001

THE ENTERPRISE DEVELOPMENT FORUM ON BLACK ECONOMIC EMPOWERMENT

Good evening Ladies & Gentlemen

I have been asked to talk about the Department's Black Economic Empowerment initiatives. We are proud to share our contribution as the largest procurer of state goods and services in South Africa but most importantly as the custodian and manager of the largest asset portfolio.

South Africa's future lies in its people and must solve its current human development crisis if it is to claim the 21^st century. Our mandate emanates from the South African Constitution and the latter requires of us to promote the achievements of the socio-economic objectives of the government including restoring the dignity of our people. Investment in people is important for two critical reasons. First, South Africa's future economic growth will depend less on it's natural resources, which are being depleted and subject to long-run price decline and more on it's skills and it's ability to accelerate a demographic transition. Secondly, investing in people promotes their individual development and gives them the ability to escape poverty.

The state has a moral obligation to intervene in redressing the historical imbalances, and therefore, the success of black economic empowerment is predicated on a deliberate state intervention program.

Since 1995, Public Works has championed the Affirmative Procurement Program of government as a key to the transformation of the built environment. The interim 10 Point Plan we embarked upon was significant for two reasons. Firstly it increased the participation levels of the previously disadvantaged persons in the mainstream economy. It also served as a guiding light for future procurement reforms and enabled us to facilitate the following:

The development of small businesses, owned and operated by previously disadvantaged individuals

Increase of employment opportunities

Empowerment of communities and individuals from previously disadvantaged sectors of society

Achieving targeting by means of contract classification, general targeting and specific targeting (area bound).

You will obviously realize the close alignment of these efforts, and others to which I will refer this evening, to the BEE Commission's report, and how it includes activities referred to by definition of Black Economic Empowerment. Our understanding of BEE is that it needs to support the greater economic agenda of the country.

As you will recall, we have indicated that for the medium term, when we acquire or dispose of property or grant management contracts, we will ensure that at least 20% of the transactions will benefit the previously disadvantaged. On disposals to date, we have achieved more than 75% PDI involvement. This is a remarkable feat.

In all programs, activities, projects and initiatives of the Department, Black Economic Empowerment is a key consideration. This means that job creation, socio-economic upliftment, training and capacity building are prioritized.

We believe that indeed we are contributing to the desired transformation in this country by addressing the skewed ownership and lack of participation in both the construction and property industries by previously disadvantaged groups.

We however still face serious challenges that we need to overcome such as dealing with "deracialization of the construction industry "(free thoughts)

CHALLENGES DPW FACES DURING THE TENDERING PROCESS

The Department will continue to increase empowerment opportunities for black enterprises but we also want to challenge Black Enterprises to tender for work when we invite tenders. I know that we are sometimes faced with the difficult situation where were are forced to award tenders to white firms because there were no black firms that tendered. This clearly goes against the objectives of our Black Economic Empowerment goals as a Department and the state and is as self -defeating as the whole problem of "fronting". Fronting undermines issues of black economic empowerment and development.

Nearly 100% of all tenders are invited on preference therefore ABEs are strongly encouraged to tender. The Department is going to award further tenders to the value of R778 million to repair and maintain the Department of Defence bases, and we further invite ABEs to participate.

In spite of these challenges we have detailed implementation plans on various aspects of our economic empowerment drive to actually leave us with the intended results. Some of these are:

1. Repair and Maintenance Program (RAMP)

This is a program aimed at affording ABEs access to opportunities within Public Works to repair and maintain state properties. Using our targeted procurement policies we have in this financial year awarded nearly R449 million of the R1,1 billion RAMP budget to Affirmable Business Enterprises .ie black owned, controlled and/or managed enterprises.

About R616 million has been contracted under RAMP between 2000/2001 and 2003/2004 for the maintenance of Correctional Services facilities (i.e. 33 prisons). On average, 48% of the works has been allocated to Affirmable Professional Service Providers such as engineers, quantity surveyors and architects.

Also, R70 million worth of maintenance, involving about 720 lifts in government owned buildings will be effected over the next five years. Of this amount, 70% will benefit Affirmable Business Enterprises. Just to further illustrate the extent to which the new leadership has managed to change things in the Department, here is an interesting account. Historically all lift maintenance contracts for all state buildings have been awarded to established white firms, sometimes these were automatically renewed despite inadequate service by these firms.

For the first time in the history of government and Public Works in particular, this year we cancelled all those contracts and invited new tenders. Interestingly, black employees who work for these firms organized themselves and tendered for these contracts. This has indicated to us that there are competent professionals who can render quality service.

RAMP is expected to create 8000 job opportunities.

2. Asset Procurement and Operating Partnership System (APOPS)

Two concession contracts for the construction of the Maximum Security Prisons at Bloemfontein and Louis Trichardt respectively, have been signed. Both deals required a large percentage of black control and ownership as prerequisites.

The contractual opening date for the Bloemfontein prison is October 2001 and January 2002 for the Louis Trichardt prison.

In January 2001, Public Works initiated the tendering process for the design, building, operating and maintaining of the new head office for the national Department of Education in Pretoria. The project is the first to be built along the proposed Government Boulevard in Struben Street, Pretoria, fulfilling the commitment of Cabinet that Government Departments should remain in the city centres. This recommitment by Government to inner city renewal follows approval by Cabinet of our proposal that all Departments should have their head offices in the inner city.

Four companies have been short-listed, following the initial phase of pre-qualifications in January this year. This will be the first Public Private Partnership project in government office accommodation in South Africa and Treasury approval was sought and obtained in 2000. Other similar projects are planned for the provision of office accommodation to the national Departments of Foreign Affairs, Environment and Tourism and Trade & Industry.

3. Facilities Management Initiative

A Business Case to initiate public private partnerships in the management of public estates over a period of five years has been submitted to National Treasury for consideration. We are currently still awaiting approval, before we can issue pre-qualification documents to the private sector. This R100 million programme will see maintenance on government buildings performed with the help of the private sector. Once again we appeal to black enterprises to bid for these contracts.

Pilot projects on this initiative are:

The Union Buildings and Bryntirion estates

Pretoria Magistrates' Court

Parliamentary complex and residences in Cape Town, and the

Sunrise Police Station in Cape Town.

4. The Consultants Roster

The roster makes appointments of professionals who have skills in the fields of architecture, quantity surveyors and engineers.

The Consultants Roster System is a computerised selection tool, working from a database that distinguishes geographic positioning, that distributes work to consultants in a fair, transparent manner, targeting historically disadvantaged firms and individuals.

About 18% of active firms on the roster are Affirmable Professional Service Providers (APSP). Between October 1999 (inception) and May 2001, R89 million of a total of R238 million (value of fees) have been awarded to APSP firms.

5. Strategic Projects Initiative (SPI)

The SPI fast tracks graduation of black contractors from the level of sub-contractors to becoming prime contractors, on projects of more than R5 million. The first projects successfully delivered (completion and hand over), are:

Botshabelo Magistrates Office (R11 million)

St Albans Prison Production Workshops (R24 million)

Richards Bay Police Complex (R32 million).

In the current financial year, we are expecting to complete at least the Butterworth police station (at around R9 million), Khayelitsha magistrates' offices (at about R29 million) and Kokstad Medium Security Prison (R67 million).

6. Construction Industry Development Programme

Within this programme I am going to mention various initiatives that contribute to Black Economic Empowerment, grouped in two programmes:

Emerging Contractor Development Programme (ECDP):

Last year registered emerging contractors on the ECDP database increased from 1 500 to over 2 500. The number of active women contractors increased from 118 to 247. Noticeably more contracts were awarded to contractors on the database.

An extensive training campaign in all nine provinces, addressed general business skills, tendering and procurement and specialist training (e.g. electricity and plumbing). This programme, with specific focus on women, will:

Reach 1000 contractors;

Train more than 200 contractors in management and contracting skills, using the Contractor Entrepreneurial Training (CET) programme developed with the ILO

Thus far 120 contractors have been trained.

I do believe that this training, greater clarity on how the tendering process is evaluated and the actual technical skills acquired, will all contribute to curb problems such as fronting in future.

Support from Khula and the Industrial Development Corporation (IDC) ensures access to bridging finance for working capital and performance guarantees. This year the IDC has agreed to make R20 million available for this purpose.

The IDC partnership can be largely attributed to the introduction of mentorship support to emerging contractors. The mentorship programme was finalised during 2000 and will be introduced on strategic projects worth a total of R99-million to ensure that competent black contractors emerge into the mainstream construction economy.

Women in Construction

The continuous effort of the Department to ensure women participation and development within the construction industry is further strengthened by our close working relationship with SAWIC. They have contributed to policy formulation and training, and are represented on the Construction Industry Development Board.

A regional survey by Public Works is currently underway to establish women owned construction businesses, their areas of speciality, their business skills capacity and the potential for accelerating women development in construction from a mere contractor level, to that of a prime contractor. That would mean that women should also compete for contracts exceeding R5 million.

In conclusion I would like to believe that with the current team of management and the brave leadership they display we will indeed accelerate Black Economic Empowerment and meet other developmental objectives of government