How SA’s draft procurement regulations will raise costs, deepen corruption

Public procurement is where the state meets the market. It is the mechanism through which government buys the goods, services and infrastructure it needs to govern: medicines for hospitals, textbooks for schools, pipes and pumps for water reticulation systems, vehicles for police stations, maintenance for public buildings.

If procurement works, the state has a fighting chance of delivering. If procurement fails, even the best conceived policies will disappoint.

South Africa’s procurement system – estimated to be over R500-billion each year – fails far too often.

It is slow, over-regulated, legalistic, risk-averse, corruptible and, all too frequently, incompetent.

Contracts expire without replacements. Emergency procurement becomes routine. Officials hide behind process. Suppliers overcharge. Politically connected intermediaries insert themselves between the state and the goods it needs. Projects are delayed, prices rise and citizens are left with dry taps, dark streets, broken clinics and collapsing public infrastructure.

Overloaded regulations

It is in this context that National Treasury’s proposed preferential procurement regulations must be judged. Sadly, they fail on multiple counts.

The regulations ask procurement to carry too many social and economic objectives at once. Public procurement is expected not only to buy efficiently, but also to advance black ownership, women’s ownership, youth participation, disability inclusion, military veterans and small businesses. To say nothing of local economic development, industrial policy and spatial equity.

These may be legitimate public goals, but when all of them are loaded on to a procurement system that already struggles to buy basic goods and services, the result is not transformation. It is higher prices, delays and new opportunities for abuse.

Procurement has a primary purpose: to enable the state to acquire what it needs to perform its functions. That does not mean procurement should completely ignore social objectives. But those objectives must be pursued in ways that do not undermine procurement’s core function.

A hospital procurement system that advances ownership goals but fails to secure medicines is not a success. A municipal tender that meets subcontracting requirements but leaves a sewerage plant unrepaired is not a success. A training programme that imparts no practical skills but is delivered by military veterans is a waste of scarce resources.

A critical state operating system

The danger of the proposed regulations is that they treat procurement as a general-purpose instrument of social policy rather than as a mission-critical operating system of the state.

Public institutions must make choices under constraints. A procurement official evaluating a tender should be able to answer a basic question: which supplier is most likely to deliver the required goods or services at the best value over the full life of the contract? The new proposals make that question harder to answer.

What is being proposed are procurement processes that are concerned less with what the state needs and more with whether a sufficiently large share of contracts is directed to businesses that are wholly owned by designated groups.

The more objectives a procurement process must serve, the harder it becomes to judge performance. If a contract costs more but goes to a qualifying firm, is that a good procurement outcome or a bad one? If a contractor has the right ownership structure but is vastly less experienced than another plausible supplier, should it be the first choice? If a tender advances one designated group but excludes another, has transformation been achieved or will the next tender have to be directed at the group that missed out this time?

Corruption peril

A system with too many goals becomes a system with no clear idea of success. This is dangerous in South Africa, where procurement is already one of the main sites of corruption and rent extraction. Government has a difficult job, and some kinds of procurement are inherently complex. But complexity enables corruption, so every additional requirement requires an additional decision and an additional opportunity for pressure, manipulation and the extraction of rents.

The more complicated the rules, the easier it becomes for insiders to game them and the harder it becomes for the public to see whether value has been delivered.

Designated groups

An especially problematic characteristic of the proposals is that it is designed to exclude bidders who are not wholly owned by designated groups. This is structurally different – and worse – than the existing system in which it was possible (in principle, at least) for companies to win tenders against more empowered competitors by offering their services at lower prices. Under the proposed regime, this will no longer be possible for a large sub-set of government tenders: only businesses that are wholly owned by members of designated groups will qualify.

In fact, the requirement is even worse than it sounds: as the regulations are currently written, a firm that is 90% black-owned, women-owned or otherwise transformed may still fail to qualify if its ownership structure is not a perfect fit to the tender requirements.

Weakened competition

The proposed regulations will also weaken competition, one of the few reliable protections taxpayers have. When all capable suppliers can compete for the work, prices are more likely to reflect market value, and delivery is more likely to improve. When the pool of bidders is narrowed by formal eligibility rules, the state is more likely to pay too much.

The new regulations also depart from the logic of existing broad-based empowerment policies, which have always involved a range of measures: ownership, management, skills development, enterprise development and preferential procurement. The proposed regulations risk replacing broad-based empowerment with a narrower, more brittle form of formal eligibility.

A similar problem arises with the envisaged compulsory subcontracting rules. In principle, subcontracting could build capacity if it were well-designed, technically sensible and linked to skills transfer and performance. But compulsory subcontracting is a very blunt instrument. If the main contractor must allocate a fixed share of the contract to a qualifying subcontractor, the subcontractor’s bargaining power derives not from its ability to add value, but from its role in satisfying the regulation.

That can turn subcontracting into a tollbooth. In the worst-case scenario, politically connected firms would be able to extract value by occupying strategic positions in the contract chain, while the state pays more and receives less.

Social engineering

Procurement policies should aim to build and reward competitive firms, not create dependencies. They should expand the pool of capable suppliers, not narrow it. It should encourage non-racial businesses, not actively discourage them.

Procurement policy cannot carry the full weight of South Africa’s unresolved social compact. It cannot compensate for failed education and skills training, weak industrial policy, poor enterprise support, broken municipalities and a stagnant economy. It can contribute to transformation, but only if it remains anchored in its first duty: helping the state deliver efficiently and effectively.

The proposed regulations forget that. They treat every tender as an opportunity to pursue social engineering by allocating rents. But a tender is not a social justice manifesto. It is a contract to get something done.

South Africa does not need procurement rules that make the state feel virtuous. It needs procurement rules that help the state buy honestly, cheaply, quickly and well. Without that, preferential procurement will not transform the country. It will, however, make failure more expensive. DM