The BEE-sting that kills – analysis of a policy gone horribly wrong - Biznews

Jun 06, 2018
6 June 2018 - Some BEE businessmen, it seems, are now willing to intimidate, burn, and even kill for the 30% (or more) of sub-contracts to which they see themselves as entitled under the government’s procurement policies.

 Dr. Anthea Jeffery
In April 2017 new regulations under the Preferential Procurement Policy Framework Act of 2000 took effect. They require that at least 30% of the value of all state contracts worth R30m or more should be sub-contracted to small BEE firms.

The regulations downplay the key issue of whether these BEE firms have the capacity to deliver at cost-effective prices. This has fostered an entitlement mentality among some BEE businessmen – who now also seem to assume that the 30% ‘rule’ applies to all private sector procurement as well.

Just how far this sense of entitlement goes is illustrated by events in Durban. Here, the Delangokubona Business Forum has allegedly brandished guns and threatened violence to buttress its demand for a ‘share’ in major construction contracts.

As Business Day reports, the forum’s intimidatory tactics have stalled a R1.8bn revamp of Tsogo Sun’s SunCoast Casino complex, the construction for the Durban City Fleet of a R120m building (which the forum came close to torching), a R132m hotel being built in the inner city, and a R4.2bn project at the Oceans Umhlanga site.

In April 2018 the forum, acting together with the Umkhonto we Sizwe Military Veterans Association and a local taxi group, reportedly brought a multi-million N3 highway project outside Durban to a halt.

The R275m Hammarsdale interchange was supposed to be completed by November 2018, but threats from the forum and its allies halted construction by workers fearing for their lives. The group demands a 30% stake in this development, saying local black business must be given their ‘fair share of local projects’.

 The demand for a ‘fair share’ of contracts is also reportedly what lay behind the killing of six mineworkers from the Modikwa Platinum mine near Burgersfort in Limpopo in the same month.

The six were burnt to death in a petrol-bomb attack on a bus which was taking more than 50 mine employees back home. More than 40 mineworkers were injured in the attack and the death toll could easily have been higher.

A local official from the National Union of Mineworkers, Phillip Mankge, blamed the deaths on local business people trying to ‘gain access to contracts’. This assessment was echoed by a traditional leader, Chief Masiya Mohlala, who said that ‘conflict among people competing for mining tenders in the area was the root cause of the problem, with desperate unemployed young people being used to instigate violence against competitors’ businesses’.

Another local businessman commented that the 30% preference for local business would ‘never be enough in a place where 90% of the population is poor’. Competition was acute and existing contractors would do anything, including ‘instigating violence’, to ‘hold on to their contracts’.

Competition for BEE construction contracts is also contributing to the rigging of the ANC’s internal elections and, if these attempts fail, to the assassination of rival candidates in KwaZulu-Natal and other provinces, says ANC member Omry Makgoale.

Wrote Makgoale recently in City Press: ‘There is a process of paying for bulk [ANC] memberships at construction sites, where businessmen will pay large sums of money for people to become ANC members. These people have no clue about ANC policies, their sole task being to vote for specific slates at an [ANC] conference that will secure these businessmen…the promise of future tenders.’

If the intended rigging does not succeed, then assassinations may instead be used – for the people behind these hits know that the inefficient police are unlikely ever to succeed in putting them behind bars.

The poison too often present in BEE preferential procurement is becoming more apparent. Inflated pricing, poor delivery, and corruption have long ranked among BEE’s fruits, but intimidation, arson, and murder must now be included among them too.

The extent of the corruption was explained by an (anonymous) BEE businessman some years ago, when he said: ‘You pay to be introduced to the political principals, you pay to get a tender, you pay to be paid [for completed work], and you must also “grease the machinery”. From time to time, you are called to make donations to the ANC. There are also donations to the youth league, the women’s league and the SACP.’

Because the ‘mandatory kickbacks’ are so many, the price inflation is major too. Pravin Gordhan said as much in 2010, during his first stint as finance minister, when he lamented  that the government was paying more for everything, from pencils to building material, than a private business would: ‘R40m for a school that should have cost R15m, R26 for a loaf of bread that should have cost R7.’

Gwede Mantashe, then ANC general secretary, said much the same in 2012 when he urged BEE companies to ‘stop using the state as their cash cow by providing poor quality goods at inflated prices’. He also queried what benefit there was in the government buying a R7 bottle of water for R27 because it ‘wanted to create a middle-class person who must have a business’.

The overall costs of the price mark-ups and the corruption add up. So much so that, in October 2016, shortly before he retired as the National Treasury’s chief procurement officer, Kenneth Brown warned that up to 40% of the state’s total procurement budget, then worth R600bn overall, was tainted by ‘inflated prices and fraud’.

Back in 1994, when the ANC was making its case for BEE, it said that the policy was needed to help remove ‘all the obstacles to the development of black entrepreneurial capacity’ and unleash ‘the full potential of all South Africans to continue to wealth creation’.

The very different way in which BEE procurement has worked out in fact underscores the dangers in accepting ANC propaganda at face value. It also highlights the need to take current ANC assurances – that expropriation without compensation (EWC) can be implemented without harming investment, growth, or employment – with very much more than a teaspoon of salt.

BEE, like EWC today, is supposed to provide a quick fix. However, quick fixes do not work.  As experience around the world has shown, the people most likely to succeed in business are those with sound schooling and university degrees, solid work experience, access to venture capital – and a strong risk-taking entrepreneurial spirit. If such entrepreneurs are to prosper, they also need the benefits of rapid growth, low joblessness, sound protection for property rights, and vibrant markets both at home and abroad.

This is a proven formula for success. It is the formula that South Africa must embrace if President Cyril Ramaphosa’s anti-corruption drive is to succeed – and if the country is to avoid yet more of the violence, fraud, and wasteful spending that BEE ‘tenderpreneurship’ has already fostered.

Dr Anthea Jeffery is Head of Policy Research at the IRR, a think tank which promotes political and economic freedom. 

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