By Hügo Krüger and Sdumo Hlope
To enhance the competitiveness of Eskom Generation, in an unbundled framework, the South African government should evaluate its policies based on empirical outcomes, rather than solely focusing on its intended objectives.
This assessment should encompass policies such as the Preferential Procurement Policy Framework Act (PPPFA) of 2000 that was promulgated in order to give effect to S217 of the South African Constitution, which requires an organ of state to contract for goods and services in accordance with a system that is fair, equitable, transparent, competitive and cost effective.
S217(2) states that an organ of state is not prevented from implementing a procurement policy that provides for:
(a) categories of preference in the allocation of contracts; and
(b) the protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination.
When scrutinised closely, the South African Constitution deems clauses (a) and (b) as optional. However, in contrast, the government mandates compliance with S217(2) for state-owned enterprises (SOEs) through the PPPFA.
It is this policy that warrants scrutiny, as it proves impractical in execution, giving rise to unintended consequences such as the emergence of Black Economic Empowerment (BEE) middlemen, a surge in procurement costs and a lack of service delivery.
The primary issue arises from the escalation of administrative tasks. Often, the targets that are set are badly researched, entirely impractical, and burdened with administrative complexities, making compliance difficult.
This is partly attributed to the Key Performance Indicators (KPI) in the shareholder compact that heavily emphasise preferential procurement, thereby rewarding procurement from local, “transformed” agents over “untransformed” original equipment manufacturers (OEMs).
The OEMs that cannot comply with this criteria, for a variety of reasons, ultimately permit BEE intermediaries to represent them at Eskom for a commission, despite these middlemen contributing no real added value to their products.
Furthermore, local procurement initiatives compel Eskom to prioritise BEE spend over direct business value. The market frequently lacks BEE companies capable of supplying specialised goods and services, leading to dependency on agents with significant mark-ups. The repercussions include delayed payments, a lack of work instructions, inflated prices for repairs and stranded assets.
The challenges posed by the PPPFA, coupled with tender documents crafted by inexperienced procurement teams primarily concentrating on fulfilling objectives such as BEE criteria, supplier development, localisation and industrialisation (SD&L) KPIs, often result in the establishment of unattainable targets or errors in the tender documents.
This situation leads to cancelled bids, causing bidders to incur losses in both time and money. Due to extensive bureaucratic processes, numerous OEMs opt not to register on the treasury's Central Supplier Database, rendering them ineligible to engage with South Africa’s SOEs.
Instead, these OEMs prefer the private sector for its consistent and transparent regulations, leading to many no longer finding it worthwhile to engage with Eskom. The PPPFA’s objectives clearly come at the cost of healthy competition, which forms the foundation of value-for-money procurement.
In late 2022, a significant development unfolded as the business watchdog Sakeliga emerged triumphant in a five-year legal battle against the Minister of Finance.
The Constitutional Court's ruling in favour of Sakeliga in February 2022 deemed the Minister's 2017 preferential procurement regulations illegal and unconstitutional.
A notable argument that Sakeliga used in their case was the finding of the Zondo Commission that the PPPFA should not come at the expense of value-for-money procurement.
“Ultimately, in the view of the Commission, the primary national interest is best served when the government derives the maximum value-for-money in the procurement process and procurement officials should be so advised.”
Sakeliga released a report clarifying the constitutional position, affirming that state entities are not obligated to include BEE or local content conditions in tenders. This report provides a roadmap for responsible and value-driven procurement choices.
The path leading to the revised regulations involved the minister's acknowledgement of more than 700 exemption requests from state entities seeking relief from preferential procurement rules. This indicated a growing realisation among SOEs that they could distinguish between value-for-money procurement and preferential procurement.
SOEs now possess a constitutional court ruling that strengthens their argument, asserting that the intricacies of the PPPFA are inherently cost-ineffective and result in harm to service delivery. However, through their politically appointed boards and CEOs, the SOEs are not yet able to break from the shackles of the PPPFA as these have been codified in internal Procurement Policies.
The PPPFA, in practice, has achieved little except for significantly escalating the operating costs of SOEs, diminishing crucial competition, and creating a distance between SOEs and the service providers with whom they should ideally collaborate closely (due to the perpetuation of “middlemen” agent usage).
In some instances, this has led to stranded assets as OEMs prefer to withdraw rather than operate under the burdensome PPPFA and other political regulations.
If this trend persists, all OEMs may opt to disengage, non-value-added agents may collapse, and South Africa will find itself in a more precarious situation than before the implementation of the PPPFA and other associated regulations.
If Eskom ever considers overhauling the entire coal fleet, then a legally binding commitment is required. This commitment should include that Eskom and other Schedule 2 SOEs should be exempted from these policies. Unless the PPPFA is scrapped then we should anticipate the once proud creature of legislation to follow the path of South African Airways, where it will be bailed out to the point of no return and later sold to political oligarchs for scrap.
Hügo Krüger, MSc in Civil Nuclear Engineering and Sdumo Hlope, BSc (Physics and Chemistry), MSc in Engineering Management, with input provided by Tisaenergy.
* The views in this column are independent of Business Report and Independent Media.
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