Eskom chair Mteto Nyati and the dozens of turnaround strategists that have been deployed to state-owned enterprises (SOEs) may have delivered a crushing blow to tenderpreneurship. The blow is certainly not fatal, but it is destined to shake the foundations of a practice that has crippled many SOEs, leaving them bankrupt and dependent on government bailouts to survive.
Nyati, a former CEO of MTN SA and Altron who has also held senior leadership and executive roles in multinational technology companies such as IBM and Microsoft, has been calling for an overhaul of preferential procurement regulations to eliminate loopholes that expose SOEs to opportunistic middlemen, also known as tenderpreneurs. These middlemen have amassed wealth through using their political connections to win lucrative tenders.
Nyati has been lamenting that state tender rules, intended to force government entities to comply with BEE and localisation policies, in effect compel SOEs to procure essential goods and services from middlemen, adding a layer of costs. While Nyati understands that the regulations are intended to give black-owned businesses and local companies a leg up, he is also aware that they have had unintended and harmful consequences for SA’s SOEs.
A loss-making SOE such as Eskom, which regularly needs coal and maintenance repairs for its power stations, is forced by the preferential procurement regulations to source these essential goods and services from middlemen, which in some instances deliver subpar coal or perform shoddy equipment repairs. This can have dire consequences, often leading to breakdowns of power stations and leaving Eskom’s customers without electricity.
Nyati has argued that a financially distressed SOE such as Eskom needs to deal directly with original equipment manufacturers (OEMs) and original parts manufacturers (OPMs) instead of middlemen if it is to have any chance of turning its fortunes around. At first, his public stance against preferential procurement regulations were considered blasphemous by lobby groups that support BEE and localisation policies, even though his assertions were backed by evidence that was plain to see.
In 2016 the National Treasury’s former chief procurement officer, Kenneth Brown, became the first government official to publicly raise concerns about the loopholes in public sector procurement rules. He estimated that these loopholes had resulted in the government losing about 40% of its annual procurement budget, which was siphoned off through fraud and artificially high prices imposed by middleman suppliers. Brown suggested that the government could mitigate the losses by buying goods directly from original manufacturers instead of middlemen.
It appears that Brown and Nyati’s message has finally got through because Eskom is now dealing directly with OMEs and OPMs when it sources essential services and equipment. And other parastatals appear to be following suit. Transport and logistics SOE Transnet, the monopoly operator of freight trains, seaports and petroleum pipelines in SA, is also starting to cut out middlemen.
In September the parastatal’s board, chaired by Andile Sangqu, approved a 61-page procurement manual that directs the company to procure goods and services in a manner that minimises costs, improves customer service and boosts revenue. The document also encourages the parastatal to identify and partner with strategic suppliers such as OEMs and OPMs that can assist it with implementing its turnaround strategy.
“The Transnet board of directors approved an OEMs/OPMs strategy for the procurement of goods and services that affect the operations to ensure reliability and security of supply for the critical operations equipment and as means of cutting the exorbitant middleman costs that Transnet was found to be paying,” the manual states.
The steps taken by Eskom and Transnet will be sending shivers down the spines of SA’s army of tenderpreneurs because while saving the parastatals a small fortune, this development is bound to hit their pockets hard. Tenderpreneurship is inextricably linked to state capture, the dark period in postapartheid SA’s history that peaked in 2011-18, when SOEs such as Eskom, Transnet, arms manufacturer Denel and airline SAA were systematically looted, causing losses of up R57bn, according to the state capture commission report.
This pillaging was facilitated by executives in the SOEs who colluded with corrupt business people in return for kickbacks. But the damage was not limited to SOEs. The broader economy also took a hit, with lost economic activity estimated at R500bn-R1.5-trillion. Many of the affected SOEs are yet to recover from the repercussions of state capture, which was in part why turnaround strategists such as Nyati and Sangqu have been given the leeway to tighten procurement rules to stop or reduce the haemorrhaging.
Transnet’s board wasted no time in implementing its procurement manual after it was approved in September, ruffling a lot of feathers in the process. The parastatal immediately cancelled three tenders for acquisition of a fleet of 22 new dockside-rail mounted jib cranes, which are intended to be used for ship repairs and maintenance.
Transnet initially went shopping for the cranes in February last year to replace old jib cranes at its ports in Durban, Cape Town and East London. The previous three tenders were opened to local companies, but after the procurement manual was approved these tenders were cancelled and the tender process was restarted from scratch.
In May a new tender combining the three previous tenders was issued, but with a new stipulation — only OEMs were invited to bid. This meant the middlemen that routinely bid for — and won — such contracts in the past were excluded. This has predictably caused much unhappiness. Durban-based Channel Construction, one of the local companies that partnered with an international OEM to bid for one of the three tenders — the installation of jib cranes at the East London harbour — fled an urgent application at the Johannesburg high court for an interim interdict preventing Transnet from going ahead with the new tender.
The application was not granted and Transnet is proceeding with the tender, but the ongoing legal action will be closely watched as it has implications for local businesses and tenderpreneurs that have previously positioned themselves as middlemen or partners of OEMs in large procurement deals.
Another interested party in the lawsuit will be the National Treasury, which is developing a new preferential procurement policy, a crucial element of the recently promulgated Public Procurement Act, which will replace the Preferential Procurement Policy Framework Act.
The National Treasury has to balance the interests of black and local suppliers who are entitled to a fair share of the state’s R800bn annual procurement spending, against the interests of the state, which must be protected from paying inflated prices for goods and services.
Perhaps in time the procurement reforms introduced by Transnet and Eskom will force some middlemen suppliers to develop capabilities and expertise that transform them into original producers and suppliers of goods and services. However, meanwhile the spotlight remains focused on Transnet and its quest to enforce its new tender rules.
Will the parastatal prevail in its quest or will its new procurement reforms be overturned by the courts, or replaced by the preferential procurement policy that is being drafted by the Treasury?
• Ntingi is founder of e-procurement platform GetBiz.
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