New draft preferential procurement regulations, published by The National Treasury last week aim to help the state meet a proposed 30% set-aside for small businesses. The hope is that they will benefit struggling black entrepreneurs. But will they?
The new proposed rules, which were gazetted on June 14, call for overhauling the National Treasury’s current preference points system used to ajudicate public tenders to ensure that black people are favoured.
Currently for tenders of between R30,000 and R1 million, 80 points are allocated for the lowest price and a maximum of 20 points count towards the level of broad-based black economic empowerment (BEE) status of the supplier.
The draft regulations propose that the threshold for the application of the 80/20 system be increased to R100m.
For tenders that are above R1m, 10 preference points are used. The proposal is to increase the threshold so that the rule applies to tenders above R100m.
In addition the National Treasury has proposed that it be compulsory for winning bidders to sub-contract a minimum of 30% of the value of the contract for all contracts above R30m to small businesses (these can be black or white-owned enterprises defined as such by the National Small Business Act or with an annual turnover of less than R50m)
Some not happy
But some black business groups are not happy. Black Business Council secretary-general Xolani Qubeka (pictured above) told Business Day that 50% of preference points should be allocated to targeted groups.
He said while the 30% set-asides proposal was a "welcome attempt", it left it up to contractors to subcontract to small businesses, which could lead to manipulation and fronting (misrepresenting their BEE preference points).
White entrepreneurs winners?
Qubeka may have a point. On the surface the proposed rules seem like a fair compromise between the risk of raising the cost of procurement and granting preference to small and black-owned firms.
However if the preference points (based on race group) for contracts under R100m are doubled, it will likely disclude thousands of white-owned small businesses.
But as the 30% subcontracting clause includes white-owned small businesses too, many will simply migrate to becoming subcontractors, and become more dependent on black empowered or black-owned contractors to hand them contracts. Despite this white small firms might still net a fair amount of the contract's price value.
White entrepreneurs, who are still better resourced, networked and experienced than their black counterparts could then be the ultimate beneficiaries of the set-aside, if it goes ahead under the present proposed rules.
The state's procurement costs could also mushroom, as the initial black empowered or black-owned contractors add their own mark-up before outsourcing the work to white contractors.
Although they are carried out in a number of other countries (including US, India, Brazil and South Korea) there is no conclusive evidence over the effectiveness of set-asides - though they have lead to an increased share of state contracts in a number of countries.
Better would be for the government to drop its bid for set-asides and stick with developing its e-procurement portal further (see this post) while improving the quality of business support and finance to enable more small businesses to do business with the state.
Click here to download the draft regulations. Follow Small Business Insight on Twitter at @Smallbinsight.
Stephen Timm is a