The South African government’s promised 30% set-aside for small businesses will take effect from April 1, but it won't be compulsory for state organs to implement the measure.
This follows the gazetting by The National Treasury of revised Preferential Procurement Regulations on January 20. The new regulations take effect from April 1.
The new regulations allow government departments, municipalities and state entities “if feasible” to ensure that those that win bids of R30 million ($2.2m) or higher subcontract at least 30% of the bid’s value to small businesses. In some instances firms won’t be able to tender if they are unable to subcontract to small businesses.
In addition the threshold at which 10% points are allocated to a firm’s Black Economic Empowerment (BEE) score when adjudicating on a tender, has been moved from the current R1m to R50m. For tenders below this amount preference points will make up 20% of the total adjudication score.
A firm’s BEE score is made up of a range of indicators including level of black ownership, number of black staff, skills development and purchases from black firms, among others.
The National Treasury said in a press release earlier this month that the new regulations are aligned to President Jacob Zuma’s pronouncement in his 2015 State of the Nation Address that the government will set aside 30% of the “appropriate categories” of state procurement for purchasing from small businesses.
Yet the regulations leave it up to state organs themselves on whether to implement the subcontracting clause to small firms or not.
Clause 3(d) reads: “An organ of state must determine whether compulsory subcontracting is applicable to the tender as envisaged in regulation 9…”
Striking a balance
While the country’s treasury has often been labelled by some as conservative in its approach to encouraging economic transformation, the revised regulations appear to strike a balance between the concern by the treasury of price and that of relaxing requirements to allow for more black and small businesses to win bigger contracts.
The lobby group the Black Business Council has previously called for 50% of adjudication points to be assigned to BEE, and the remainder to price. The treasury was likely concerned that this could increase the price of procured goods and services.
White SMEs included
The rules also don’t distinguish between black or white small businesses, although Zuma in an address to a Black Business Council gala dinner in September specifically mentioned that the 30% subcontracting provision would apply to “small and emerging enterprises owned by the women, youth, black people or persons with disability”.
It means part of the 30% can be subcontracted to small white-owned firms too (they however will still be assessed on their BEE score).
An important provision in the new rules is designed to partly guard against work being won by black contractors only to be outsourced to white-owned small businesses. This after earlier concern that white firms could unwittingly benefit from the subcontracting provision (see this post).
The new rules state that a firm awarded a contract won’t be permitted to subcontract more than 25% of the value of the contract to any other enterprise that doesn’t have the same or a higher BEE score than it – as per clause 12 (3). Firms that are subcontracting and have an annual revenue of under R10m are excluded from meeting this provision.
In October Zuma said a 2011 amendment to the Preferential Procurement Policy Framework Act (PPPFA) to provide for BEE preference points had not led to the desired impact. He said the act will be repealed by the Public Procurement Act which would be tabled in Parliament early next this year.
Meanwhile small black firms are struggling in a market dominated by a few (mostly white) companies.
Earlier this month outgoing Business Unity SA chief executive Khanyisile Kweyama (pictured above) noted for example that less than 20% of construction companies overall are owned by black people and less than 5% of large construction companies generating revenues greater than R35m annually are in black hands.
The decision to leave it up to each entity and department as to whether to implement a set-aside might ensure that the measure is tested more cautiously. However this may limit the intended impact of the regulation – which is to shift more work to smaller companies.
Timm is a South African who writes on small business. Follow Small Business Insight on Twitter at @Smallbinsight.
Stephen Timm is a