LIST OF ABBREVIATIONS AND ACRONYMS
2.5 OVERVIEW OF PREFERENTIAL PROCUREMENT POLICIES
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Public procurement has been shown to be an effective vehicle for achieving a broad range of socio-economic objectives, such as supporting local and domestic small firms, assisting historically disadvantaged or minority and woman-owned businesses (Erridge, 2004).
Researchers and policymakers agree that increased emphasis on public procurement contract awards to small businesses increase innovativeness, entrepreneurship and contributes to job creation and economic development (Reed, 2004). Moreover, government policies structure the environment within which SMEs function (OECD, 2014). Therefore, SME-friendly public procurement represents a major component of government policy in many countries.
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by Bates (1997) as the most powerful tool used by city governments in the US to promote historically disadvantaged enterprise (HDE) development. It is a piece of legislation or an executive order requiring that a specified percentage of procurement expenditures go to HDE.
Bid preferences are also a common public policy tool in the US, where preference points are given to small businesses and HDEs. Bates (1997) reported emerging firms in industries such as construction and manufacturing are most capable of exploiting extended market opportunities created by preferential procurement programmes. Sales to government was considered important in the US particularly to small businesses (Bates, 1997), as the scope of preferential procurement programmes was substantial with over 10% of the minority-owned firms reporting that they had done business with government clients (Bates and Williams, 1995). However, Bates and Williams (1995) further reported that minority business sales to government declined in the 1990s due to restrictive Supreme Court ruling regarding preferential procurement practices. Indeed, the continued widespread use of public procurement as an instrument of social policy has not without controversy and various questions have been raised with regard to its effectiveness, transparency and cost effectiveness.
Despite its perceived benefits towards attaining socio-economic goals, preferential procurement policies have faced many criticisms, with opposing views based on moral and socio-political grounds from various interest groups (Kajimo-Shakantu, 2007; Rice, 1992;
Watermeyer, 2000). The targeting of small firms, particularly HDEs on government procurement is often justified on the grounds of job creation, and to remedy the present effects of past discrimination and disadvantage by giving HDEs greater opportunity to participate in government contracts (Bates, 1995a, 1997; Evenett and Hoekman, 2005). However, giving preference to some individuals over others has been opposed for both being morally unjust and for introducing an element of inefficiency in the procurement system (Charlton and van Nierk, 1994). Moreover, preferential policies reinforce group identities and exacerbate tensions (The FW de Klerk Foundation, 2005). Nonetheless, the use of public procurement as an instrument of social policy suffers from a lack of shared understandings, and because of the limited research and data on most programmes, it is difficult to support or disapprove of them (Gounden, 2000). Despite the varying viewpoints, many governments continue to use preferential policies in public procurement to pursue redistributive and development goals (McCrudden and Gross, 2006).
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Notwithstanding the lack of empirical studies in the literature, some research has contributed to identifying the impact of minority business enterprise programmes in the US. Marion (2007) studied the effectiveness of set-asides in road construction in the US, and found that set-asides significantly increases contract awards to SMEs. However, an earlier study indicate that while total number of SMEs receiving contracts increased, as did the volume of contracts, contract- winning rates actually fell from pre-set-aside era to set-aside era (Myers and Chan, 1996);
suggesting that the programmes did not substantially improve the competitiveness of minority businesses. Blanchflower and Wainwright (2005) also found that removal of set-asides led to 80 to 99% decline in minority business participation in public procurement in the construction industry. They also argue that affirmative action programs have not achieved their objectives of improving the position of minority businesses in the construction industry. The issue of fronting and switching has also been reported, where “certified minority businesses have traded the opportunity to gain a foothold in the construction industry for the quick profit available from selling the use of their name to non-minority firms” (Bates, 1995b).
In the state of California, where affirmative action does not apply to state funded contracts since 1996, a 2006 study by Morris et al. (2006) found that SMEs experienced more than 50%
reduction in contract winning rate, and only one-third of transportation construction SMEs that was operating in 1996 were still in business. In a separate study on the impact of minority set- aside programs on black-owned SME growth in Cleveland, House-Soremekun (2006) conclude that affirmative action programs, and by extension minority set-aside programs, appear to have a positive and significant empirical impact on the growth of black-owned SMEs regardless of how growth is measured. Marion (2007) also suggest that set-asides may play a role in the net survival rates of these businesses. Holzer and Neumark (2000) however reports that firms moving from set-aside projects to an environment without set-asides did not fail at higher rates than comparable firms. On the other hand, evidence suggests that SMEs deriving a large percentage of their revenue from set-aside projects are relatively more likely to go out of business (Bates and Williams, 1996; Holzer and Neumark, 2000); although this phenomenon may be attributable to fronting activities in the construction industry.
Malaysia and Northern Ireland also adopted the concept of affirmative action as originated by the American model (McCrudden, 2004). Malaysia introduced a comprehensive system of preferential policies in the New Economic Policy (NEP) designed to benefit the politically dominant, but economically weak, indigenous Malay (Bumiputra) majority (Emsley, 1996);
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which bears striking similarity to the South African context because the policy benefits the majority, and also because racial and ethnic differences coincide. Moreover, it is constitutionally sanctioned under Article 153, which exclusively warrants preferential treatment to Malays and other native groups, safeguarding their “special position” in modern Malaysian society (Guan, 2005). The promulgation of the NEP resulted in what Adam (2000) described as a rare case of complete success in preferential policy implementation, which saw a significant socio-economic restructuring of Malaysian society leading to ethnic integration (Guan, 2005). The Malaysian government also structured procurement works contracts in the construction industry, where at least 30% of the annual value of contracts was set aside for Bumiputra contractors (McCrudden, 2004). The Malaysian experience provides an important lesson for South Africa, and serves as a set of lenses which can help to clarify the possibility and limits of transformation in South Africa.
From the foregoing, several schemes for using public procurement as a tool to achieve socioeconomic objectives have evolved in different countries and socio-political contexts (McCrudden, 2004; Watermeyer, 2003; Manchidi and Harmond, 2002; Gounden, 2000). These include reservations, preferencing, and indirect and supply-side interventions. The manner in which a country implements its procurement policy will influence the achievement of its socio- economic objectives (Evenett and Hoekman, 2005). A summary of these schemes and their associated methods and actions is presented in Table 2.1.
SME development initiatives through public procurement have mostly been applied by governments in two broad ways: bid price preferences that load the lowest non-SME bid or provide a discount to the lowest SME bid, and set-asides which provide quotas for targeted SMEs to bid competitively against each other (ADB, 2012). For example, in Singapore, bidding preferences were offered to local construction firms and joint ventures (Ofori, 1996). Botswana also implemented bid preferencing schemes to promote engagement of citizen contractors (Govender and Watermeyer, 2001; Watermeyer 2003). While Namibia adopted South African- style preferential procurement strategies to realize socio-economic objectives in its labour- based programmes and in promoting the participation of small enterprises in construction projects (Govender and Watermeyer, 2001). Whereas, set-asides or reserved procurement
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Table 2.1: Methods used to implement preferential procurement policies Scheme type Methods Associated actions
Reservation
Set-asides Only enterprises with specific characteristics required by the procuring entity can compete for contracts reserved for their exclusive execution. These are typically enterprises that meet the procurement policy objectives. For example, a tender can be issued restricting bidding to HDI-owned companies. Set asides are however, not acceptable within the legislative framework of South Africa. Bolton (2010) affirm that “the use of set-aside practices or the exclusion of certain contractors from procurement procedures is unlikely to pass the constitutional muster.”
Qualification criteria
Exclude enterprises that cannot meet a specified requirement relating to procurement Policy objectives from participating in contracts other than those provided for in law.
Contractual conditions
Make policy objectives a contractual obligation. The contractor that is awarded the contract through a competitive bidding process is required to subcontract a percentage of the contract to SMEs or form a joint venture with a HDI-owned company.
Offering back The procuring entity offers bidders that satisfy criteria relating to policy objectives the opportunity to execute the contract or part thereof if the tenderer is prepared to match the price and quality of the best tender received. This arrangement is usually sought if the bidder that submitted the best offer in terms of price and quality is not HDI-owned and does not satisfy the policy requirements in relation to the achievement of RDP goals.
Preferencing
Preferencing at the shortlisting stage
Limits the number of suppliers or service providers who are invited to tender on the basis of pre-qualification and give a weighting to policy objectives along with usual commercial criteria, such as price and quality, at the short-listing stage.
Award criteria (tender evaluation)
The procuring entity gives a weighting to procurement policy objectives along with usual commercial criteria, such as price and quality, at the evaluation stage. This is common practice in South Africa where procuring entities are required to allocate preference points in advance which will be used to evaluate tender offers.
Indirect interventions
Product or service specification
The procuring entity states requirements in product or service specifications for example, by specifying labour-based construction methods where procurement is used as a policy tool for employment creation. In South Africa all contracts under the EPWPs have mandatory conditions for the maximum use of labour (unskilled labour in particular) to create job opportunities.
Targeted Procurement
Design procurement processes, specifications and/or set contract conditions to facilitate the participation of targeted groups of contractors, suppliers and service providers.
Supply-side interventions
General assistance Provide support for targeted groups to compete for business, without giving these parties any favourable treatment in the actual procurement.
HDI: historically disadvantaged individual(s); RDP: Reconstruction and Development Programme, EPWP: Expanded Public Works Programme Source: Watermeyer (2003:5)
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strategies have been used to encourage participation of small businesses and minority business enterprises in government contracts in the US, South Africa, Indonesia and Malaysia (Arrowsmith, 1995; Hawkins, 2012) and to develop minority enterprise and counter the effects of past discrimination (Bolton, 2006; Chatterji et al., 2014). Hence, government interventions have been an integral part of public procurement arrangements; they are initiated, facilitated and financed by contracting authorities to provide mechanisms for accelerating the development of targeted enterprises through learning from their experiences and that of other contractors.
2.6 PREFERENTIAL PROCUREMENT AND CONTRACTOR DEVELOPMENT