IRR Legal calls on Parliament to cut BEE premiums and VAT burden on the poor

As Parliament confronts the task of resolving South Africa's first contested budget since 1994, IRR Legal recommends two simple steps to solve the problem while avoiding a Value-Added Tax (VAT) hike.

These are to:

• Make BEE “preference premiums” transparent, and
• Reduce BEE “preference premiums” in public procurement to R0.

These recommendations have been presented to finance committees in both houses of Parliament as part of this week’s public participation process on the fiscal framework.

Currently, public procurement allows for BEE “preference premiums", in the words of Treasury official Willie Mathebula, that are “capped” at 25% on contracts below R50 million and 11.1% on contracts above R50 million. These “preference premiums” increase the cost of delivering public services and reduce value for money.

As IRR CEO Dr John Endres explains: “Think of the government extending a tarred road towards a rural school. If it pays a premium to one supplier, then less road gets built. On the other hand, if it maximises value, the road goes further for the same amount of money. One of those two options is better for the school.”

However, national Treasury is committed to paying premiums and even tabled legislation to allow for their expansion in 2024.

In order to keep paying for these premiums, and other government expenses, finance minister Enoch Godongwana has communicated to Parliament the intention to hike VAT by R39.2 billion and Personal Income Tax (PIT) by R19.5 billion through bracket creep.

If that happens households earning less than R6,900 per month will pay an extra R12.7 billion in VAT over the next two years. That will pay for, inter alia, ongoing BEE “preference premiums" collected by established businesses.

The IRR's February 2025 report, Cut VAT & BEE, by Executive Director of IRR Legal Gabriel Crouse, estimates that the licit cost of BEE premiums in public procurement is approximately R17 billion per annum. That is equivalent to roughly 42,000km of new paved road construction costs, far enough to stretch from Cape Town to Beijing and back again.

Worse, the report estimates waste due to corruption associated with the premium procurement system to be the region of R133 billion per annum.

By comparison the International Monetary Fund (IMF), based on an earlier internal Treasury review, has estimated avoidable waste to be in region of R270 billion per annum.

As an IMF report noted: “The preferential procurement system is costly and ineffective. The cost concerns have arisen not only because of the trade-offs with competitive procurement, but also because the Zondo commission reports have illustrated how the preferential procurement system has been used as an avenue for corruption, state capture, and rent seeking.”

The Zondo report drew attention to the “inevitable tension” between preference premiums and value for money, advising the state to derive “maximum value-for-money in the procurement process".

IRR Legal has pointed to two practical steps to reduce BEE procurement premiums that Minister Godongwana can take now to avoid raising VAT and PIT on May 1, estimated to save R150 billion.

First, he can reduce the threshold for the 25% premium cap from R50 million to R500,000. That would shift most of the R1.1 trillion procurement budget to the lower 11.1% cap.

Second, Minister Godongwana has the authority to serve the public interest by exempting organs of state from paying BEE premiums if requested.

Separately, Parliament was provided with the practical basis to calculate part of the cost of BEE premiums, which have so far never been published.

The alternatives are clear. Either the state will continue down its current path of raising VAT, South Africa’s most regressive tax, and PIT, hitting poor and middle-class South Africans, while expanding premiums paid to established, well-connected businesses − or it can start maximising value for money.

IRR Legal urges Parliament to direct Minister Godongwana down the only path that leads to growth.

Says IRR researcher Anlu Keeve: “South Africa cannot afford more symbolic spending at the expense of jobs and dignity. The country is too poor for any other option. We must maximise value for money.”

Media contacts: Gabriel Crouse, IRR Legal Executive Director Tel: 082 510 0360 Email: gabriel@irrlegal.org.za

Anlu Keeve, IRR researcher Tel: 071 929 9516 Email: anlu@irr.org.za

Media enquiries: Michael Morris Tel: 066 302 1968 Email: michael@irr.org.za