Tender set-asides part of new BEE narrative | Fin24
 
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Tender set-asides part of new BEE narrative

Mar 15 2016 07:30
Andile Ntingi

Not long ago, black economic empowerment (BEE) was best summed up by the following narrative: black investors bought minority stakes in white-controlled companies, and were then roped into the boards of acquired businesses.

Often, stakes were acquired through debt to be paid back from dividends.

But this simplistic narrative has evolved. Black investors are no longer content with being economic spectators collecting dividends. They want to break new ground, kick doors wide open or, even better, "rock the boat".

Going forward, the story of BEE will be dominated by blacks pursuing their dreams of being large-scale industrialists. These industrialists will be a different breed from the generation of BEE moguls before them, who were largely passive and relied on white executive teams to manage assets bought on their behalf.

Black industrialists will be entrepreneurial, hands-on, and directly involved in the origination, creation and management of industrial assets. This new narrative is fast gaining momentum in public and on media platforms.

There is another crucial matter that receives little attention, yet could change the economic fortunes of black people significantly: the imperative to give small and black-owned businesses a foothold in supply chains of both the public and private sectors, where a lion’s share of procurement spending still goes to white-owned companies.

Black business lobbyists, particularly the Black Business Council (BBC), are pushing government to introduce tender set-asides, and propose that the state must ring-fence 30% of spending on goods and services from black-owned companies.

For this to happen, Treasury has to amend the Preferential Procurement Policy Framework Act (PPPFA).

For nearly a decade Treasury was opposed to set-asides, arguing that they contravened section 217 of the Constitution by preventing white suppliers from bidding for government tenders. According to Treasury, this could be challenged in court should there be unhappiness over applications.

But Treasury caved in last year when the BBC recommended amendments to the PPPFA, opening the door to the introduction of ring-fencing a portion of government procurement for black businesses.

Under draft regulations, Treasury is proposing that contracts valued up to R10m – in future – be scored on a new formula in which price and broad-based BEE will have an equal weighting of 50:50.

Currently, tenders worth more than R1m are awarded on a 90:10 ratio, with price the heaviest weighting. The proposed changes imply that companies without strong black shareholding will be knocked out of competition for R10m contracts.

But black lobby groups, the BBC and Progressive Professionals Forum, complain that the changes will restrict black business to bidding only for R10m tenders.

Set-asides in the US and Malaysia

Preferential set-asides have been implemented in countries like Malaysia and the US.

In the US, set-asides are used to empower ethnic minorities like African Americans, indigenous Indians, and Hispanics, while in Malaysia the Bumiputeras (ethnic Malays), who make up 67.4% of the population, benefit.

Like SA, the US economy is white-dominated while the Malaysian economy is largely controlled by ethnic Chinese.

African American scholar, Dr Bessie House-Soremekun, concluded in a research paper that entrepreneurs who benefitted from minority set-asides in the US were more successful than those who didn’t.

According to the 2002 US census data, there were approximately 1.2m black-owned businesses in the US, an increase of 45% since 1997, thanks in part to the implementation of minority set-aside programmes.

“Billions of dollars have been awarded to minority entrepreneurs over the years,” said House-Soremekun, adding that legislation helped to establish “realistic goals with regard to procurement dollars and contracts for minority businesses”.

“This legislation mandated that about 10% of all federal contracts awarded for local public works projects had to be given to minority business enterprises.”

Set-asides in Malaysia’s New Economic Policy, its version of BEE, have been credited for contributing to increasing Bumiputera ownership of the Malaysian economy from 2.4% in 1970 to 30% in 1990. Malaysia generally also requires foreign companies to take on a local partner before bidding for government tenders.

Kick-starting black entrepreneurship

In SA, BEE policy is yet to place 26% of wealth in the hands of black people.

Three waves of BEE initiatives concentrated vast riches in the hands of a few politically connected individuals, who amassed wealth through buying minority stakes in white-owned businesses instead of starting new businesses.

This has entrenched blacks as perpetual passive investors rather than active players who direct and run the companies they invest in.

Set-asides will encourage blacks to be entrepreneurial by starting and operating their own businesses, making them actively involved in the economy.

It will complement legislative efforts to open up supply chains in the private sector to black-owned businesses, presenting more procurement opportunities than the government sector.

*Andile Ntingi is CEO of GetBiz.

This article originally appeared in the 10 March 2016 edition of finweek. Buy and download the magazine here.

south africa  |  tender  |  investment  |  bee  |  government  |  business  |  treasury  |  economy
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