Governments in three emerging economies are expanding bids to set aside procurement for disadvantaged groups. But it's not without its problems.
India's small business ministry is set to next month launch a hub that will help facilitate state purchases from lower-caste Indians, Malaysia earlier this year put in place a procurement set-aside for indigenous Malays and South Africa is seeking to put in a similar measure to favour black entrepreneurs.
Hub in India
The latest move comes from India, where its small business minister Kalraj Mishra (pictured above) wants to use the planned National SC/ST Hub to help the state buy more from lower-caste Indians, who make up about a quarter of all Indians.
This will help central government agencies and departments to meet a target set by a 2012 policy of purchasing 4% of goods and services from the group.
One chamber estimates that the central government currently buys just 0.5% of goods and services from lower-caste entrepreneurs. It says officials often complain that they battle to locate such entrepreneurs. The hub could therefore help, it argues.
In Malaysia, as a trade off to the Trans-Pacific Partnership Agreement, which was signed in February, the Malaysian government has set aside 30% of state procurement for
indigenous Malays (known as Bumiputeras) for construction contracts above a certain size.
In addition Bumiputera suppliers and manufacturers would also continue to enjoy price preferences for goods and services (ranging from 3% to 10% depending on the contract’s size), says the government.
The idea is that with the onset of the trade treaty these measures will help to shield Bumiputera entrepreneurs who are under represented in Malaysia, despite making up about 60% of the population.
SA sub-contracting bid
In South Africa President Jacob Zuma last year announced that the state would set aside 30% of state procurement for small businesses. Earlier this week he said the treasury is finalising a new procurement bill which would be presented to Parliament early next year.
In a speech to lobby group the Black Business Council (BBC) earlier this week Zuma said the government would in the meantime produce new procurement regulations that will introduce of a compulsory sub-contracting clause.
The initial draft by the treasury that proposed that a minimum of 30% of the value of the contract for all contracts above R30 million be subcontracted to small businesses and did not mention whether this be to black or white-owned small firms.
However in the speech Zuma specifically mentioned that those that benefited from subcontracting would be “small and emerging enterprises owned by the women, youth, black people or persons with disability”.
This may suggest that the treasury may have envisaged that small businesses in general should benefit, but that Zuma and the BBC have pushed for this to be narrowed to mainly black firms. No ones seems to have noticed.
There is evidence from Brazil (where the federal government has a 30% set-aside for small business) is that public procurement can provide small businesses with a boost.
A paper released in February by three authors which used data from Brazil found that winning at least one government contract in a given quarter increases firm growth by 2.2 percentage points over that quarter, with 93% of the new hires coming from either the unemployed or the informal sector.
Public procurement can therefore be a powerful development tool.
'Over reliance on state'
It doesn’t however follow that set-asides are the best way to go - as they risk inflating procurement costs. Less market distorting methods, such as e-procurement might be preferable (see this post).
In addition a 2014 evaluation of the effectiveness of Canada’s use of set-asides for aboriginal businesses cautioned that though the tool had helped more such firm contract with the state, it risked creating an over reliance of aboriginal firms on the state. Better would be to help such businesses enter the mainstream market.
In this South Africa is on the right path. Its BEE laws implore more companies – through a points system – to among other things take on black partners and more black staff and buy more from black small businesses. Those with a higher BEE score are more favoured in contracts with big firms and the state.
But black business is running out of patience. Set-asides are a sharp political weapon.
Yet just as effective could be simplified procurement procedures and e-procurement, better tender training as well as better and wider reaching technical and business support.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
Stephen Timm is a