The draft procurement regulations published in April propose extensive set-asides for 100%-black-owned businesses; however, National Treasury has not produced an economic impact analysis showing what this will cost or how effective it will be, business organisation Business Leadership South Africa (BLSA) CEO Busi Mavuso writes in her weekly newsletter.

“Transformation is certainly an important goal and procurement is a powerful tool government has to achieve it. But we must ask how effective these regulations will be and what they will cost. Unfortunately, Treasury has not produced any analysis that provides answers to either question,” she says.

The regulations propose that all tenders under R20-million are set aside exclusively for 100% black-owned suppliers; for tenders of R20-million to R100-million, suppliers must prove they procure 40% of their inputs from 51% black-owned suppliers or 30% from 100% black-owned suppliers; and for tenders above R100-million, 25% of subcontracting must go to 100% black-owned businesses, Mavuso explains, adding that additional targets apply for black-women-owned enterprises, women-owned enterprises and other categories.

She predicts that in sectors with deep pools of suppliers, this may have a limited impact.

However, in specialised areas, such as wastewater treatment, high-voltage electrical infrastructure, advanced engineering systems and enterprise IT, the pool of qualifying suppliers may not contain enough 100% black-owned firms with the technical capacity to bid, which could stop projects from proceeding or cause an escalation in costs owing to a lack of competition, Mavuso postulates.

“My concern is not with transformation itself, but with the cumulative effect of a tiered, mandatory, percentage-based system on procurement efficiency, project costs and a limited supplier pool applied bluntly across the economy,” Mavuso clarifies.

She advocates for other ways to drive transformation, such as creating incentives for established firms to develop black-owned joint venture partners; setting transformation targets but allowing procurement officers flexibility in how to achieve them based on market realities; and ensuring black-owned firms have access to domestic markets and international markets.

Mavuso adds that the regulations assume administrative capacity that does not exist.

“Smaller suppliers must not only ensure appropriate ownership structures but also build substantial administrative capability to navigate complex compliance requirements. The public sector will face much higher costs from the extensive bureaucracy required to apply and monitor these rules.

“The regulations assume data-driven procurement planning, contract performance monitoring and information and communications technology infrastructure that most municipalities simply don’t possess. We cannot design regulations for the public sector we wish we had rather than the one that exists,” she avers.

Mavuso calls for Treasury to conduct a proper economic-impact assessment before finalising the regulations, with considerations to include what compliance will cost the public and private sectors; how restricted supplier pools would affect infrastructure project costs; what the implementation risks in municipalities that lack basic procurement systems are; and what alternative transformation approaches could achieve better outcomes at a lower cost.

BLSA will be making detailed submissions on the procurement regulations, highlighting specific sectors where set-asides will create implementation problems and proposing alternative transformation approaches, Mavuso informs.

The organisation will engage equally on the Competition Commission’s regulatory review with concrete examples of how uncertainty and complexity deter investment, she adds.