LIST OF ABBREVIATIONS AND ACRONYMS
2.6 PREFERENTIAL PROCUREMENT AND CONTRACTOR DEVELOPMENT IN SOUTH AFRICA
2.6.3 Preferential targeted procurement in the South African construction industry Preferential procurement policies in the South African construction industry are currently being
implemented through the policy provisions enshrined in the PPPFA and B-BBEE Act, both of which provides the primary statutory framework for preferential procurement and the promotion of black economic empowerment in South Africa. The objectives of the B-BBEE Act, in relation to the construction industry are implemented through the Construction Sector Transformation Charter. The charter provides a framework for the South African construction industry to address B-BBEE, enhance capacity and increase productivity; and applies to all enterprises that are involved in the creation, expansion and/or maintenance of fixed assets
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related to residential or non-residential buildings, infrastructure or any other form of construction works in South Africa (DTI, 2006).
The objectives of the charter include: the transformation and growth of the sector; improvement in the competitiveness and efficiency of the sector; the achievement of a substantial change in the racial and gender composition of the ownership, control and management within the sector;
addressing the critical skills shortage and skills development with a specific focus on women;
and enhancing entrepreneurial development and sustainable development of black economic empowered SMME construction companies through strategic partnerships.
Preferential procurement interventions are comprised of mechanisms aimed at the engagement of SMMEs owned by previously disadvantaged persons in government contracts thus maximizing job creation. Preferential procurement ensures that participation in procurement activities is achieved through: making the tendering process accessible to the target group (without, however, guaranteeing work); and linking opportunities to target business enterprises. The long-term goal is to facilitate growth in the numbers and sizes of business enterprises owned and controlled by the target groups, as well as in terms of the efficiency and effectiveness of delivery.
According to Hawkins (2012), the combined achievement of infrastructure project delivery objectives and incorporation of social development opportunities (for example, contractor development) during the process of design, procurement, implementation and operation has the potential to increase the contribution of investment in infrastructure towards economic growth, poverty reduction and attaining sustainable development goals (Hawkins, 2012). Depending on how procurement strategies are structured to incorporate social development opportunities, the process of procuring infrastructure assets can be as significant as the constructed assets itself (Gounden, 2000; Hawkins, 2012).
The adoption of preferential procurement policies in South Africa as a vehicle for contractor development, in a practice called Targeted Procurement is well-documented in literature (Adediran and Windapo, 2017a; London 2008; Shakantu 2012; Watermeyer 2003). Similar to the Malaysian NEP model, Targeted Procurement was introduced to promote the participation of targeted enterprises and targeted labour in government infrastructure contracts ( cidb, 2008a;
Ofori, 2009; Jacquet and Noyana, 2001; Watermeyer, McCrudden, 2004). However, unlike the Malaysian model which provided set-asides exclusively for the Bumiputras, Targeted
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Procurement was not designed to exclude any enterprise from tendering (Letchmiah, 2012).
The South African model was intended to usher in an evolution from past inefficient prescriptive instruments used by governments as procurement interventions for SMEs, to more effective options where incentives or benefits are awarded for achieving or improving on predetermined performance goals (Watermeyer, 2000). Furthermore, Targeted Procurement was developed to enable implementation of the Ten Point Plan and satisfies the framework set out in the PPPFA (Letchmiah, 2000).
The cidb (2017b) defined a targeting strategy as an approach which is pursued to make a contract participation goal (CPG) an obligation of contract. A CPG, in the case of targeted enterprises, is the amount equal to the value of goods, services and works for which the contractor contracts the targeted enterprises in the performance of the contract, expressed as a percentage of the tender value (cidb, 2017b). The Malmesbury prison complex project of 1996 with a CPG of 30% was the first Targeted Procurement project in South Africa (Watermeyer, 2000). Target Procurement has since become an innovative government procurement intervention strategy designed and used by public-sector clients in the construction industry to achieve the state entities’ ‘contractor development goals’ which are included as relevant criteria for contract award. Prior to inviting the submission of bids, the client entity establishes the objective to be derived from the procurement process, and a limited range of targeting strategies are selected, which are to be defined and activated in the tender documents. These objectives are defined as contract-specific goals and tender evaluation points are awarded in a competitive and flexible process to motivate the potential contractor to optimise the use of, for example, local SMEs (Hawkins, 2012). Hence, Targeted Procurement allows preferential procurement policies to be implemented and enables social objectives to be linked to procurement in a fair, transparent, equitable, competitive and cost-effective manner; it also permits these objectives to be quantified, measured, verified and audited.
The Department of Public Works (DPW) introduced innovative Targeted Procurement strategies in 1996 as part of national procurement reforms to address past imbalances and stimulate SMC growth and development (Shakantu 2012; Watermeyer et al., 1998). The various government Targeted Procurement strategies used in public procurement in the South African construction industry include (Watermeyer, 2000, 2005, SANS, 2003, 2004; cidb, 2008b; Letchmiah, 2012): unbundling of contracts, mandatory subcontracting, preferencing,
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third-party management, tendering equity, and accelerated rotations. They are further described in Table 2.4.
Table 2.4: Targeted Procurement strategies used in the construction industry Targeted Procurement
strategy
Description
Unbundling of Contracts The client break contracts down into smaller packages to facilitate the participation of SMCs as prime contractors.
Mandatory Subcontracting
In Mandatory Subcontracting, the client requires larger prime contractors to subcontract a portion of the works (for example, 20% contract sum) to SMCs using prescribed procurement procedures.
Preferencing Preferencing involves the client granting tender evaluation points to contractors who satisfy prescribed preferencing criteria (for example, joint ventures between large and small contractors).
Third-party Management
In Third-party Management strategy, the client appoints a larger established contractor(s) and/or consultant(s) to provide construction, materials and management support as appropriate, and mentor SMCs in the execution of contracts as prime contractors and monitor satisfactory progress of their work.
Tendering Equity Tendering Equity is when the client requires tenderers to have minimum levels of equity when tendering for certain type of contracts (for example, >50%
black women ownership).
Accelerated Rotations Accelerated Rotations refers to when the client uses electronic databases to accelerate the rotation of targeted enterprise through the quotation roster to ensure that target groups have more opportunities for the preparation of quotations and hence a greater chance of success.
Source: cidb (2008b); Letchmiah (2012); SANS (2003; 2004); Watermeyer (2000; 2005)
Targeted Procurement, through a variety of techniques, can provide opportunities for participation by targeted enterprises, even to those who may not have all the necessary resources, capacity or expertise in their own right to perform contracts. However, this is done in a manner which does not guarantee contracts to these enterprises. On small contracts having a value below a predetermined financial threshold, direct preferences are accorded to targeted enterprises to tip the scales in their favour. On contracts above a financial threshold, tenderers are required to compete on the basis of both the product and the process. The use of Targeted Procurement enables contracts to be awarded in a number of ways, viz. (SANS, 2003; 2004;
Watermeyer, 2000): by procuring works in the smallest practicable quantities; by obligating prime contractors to engage SMEs in the performance of their contracts in terms of resource specifications; by requiring joint venture formation between large businesses and SMEs (known as Structured Joint Venture); and by providing third-party management support to enterprises which are not capable of operating as prime contractors (known as Development Contracts).
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Technical specifications are used to define the product and establish compliance criteria.
Standardized resource specifications are used to define social objectives and establish compliance criteria. These specifications accordingly define the social deliverables which must be realized through the delivery process and set out the manner in which they can be achieved, measured and monitored. Contracts are awarded to the most advantageous offer, based on a balance between the tendered price and the tendered deliverables in respect of targeted groups.
Targeted enterprises, depending upon the contracting strategy which is adopted, may participate in contracts as prime contractors, joint venture partners, subcontractors, service providers, manufacturers or suppliers. The preference system for Targeted Procurement is implemented via tender adjudication criteria that complies with the legislative framework of awarding tenders, whereby tenderers are required to meet both price and development goals.
The Targeted Procurement specifications for construction are contained in the South African National Standards document – SANS 10396:2003 (Implementing preferential construction procurement policies using targeted procurement procedures).
Despite its widespread popularity, Targeted Procurement has come under some criticisms.
Khatleli (2009) described the relationship between government clients and established large construction companies (whereby the established companies are compelled to unbundle work packages to accommodate emerging small businesses as subcontractors or joint venture partners) as a principal agent relationship characterised by moral hazard and adverse selection problems militated by asymmetric information favouring the established companies. Khatleli (2009) further opined that Targeted Procurement is structured such that successful empowerment of SMEs is effectively ceded to the private sector, that is, main contractors who serves to implement the government client’s contractor development objectives through the Targeted Procurement project. He argues that this is problematic given that previously advantaged owners of large established companies have the capital, skills and experience skewed in their favour, and represent a significant majority of construction companies operating as main contractors in South Africa. However, Rogerson (2000) noted that best empowerment results occur where partnerships are formed between large established construction businesses and emerging enterprises.