THE PRIMARY OUTCOMES OF THE AFFIRMATIVE PROCUREMENT POLICY
5.3 REVIEW OF POLICY PROVISIONS OF THE POLICY FOR THE TARGETING OF AFFIRMABLE BUSINESS ENTERPRISES
5.3.1 General
In assessing the policy outcomes, it is important to understand the background to the policy and the precise manner in which the Department implemented this policy. Certain refinements made in the policy between the time that the policy was adopted and the time that it was implemented need to be understood, as these have a direct bearing on the manner in which the two hypotheses will be tested. 5.3.2 Provision. ofthe 10 POint Plan
5.3.2.1 General
The Affirmative Procurement Policy specifications draw its preferencing mechanisms for contracts less than R2 million and its classification of building contracts, from points 7 and 10 of the 10 Point Plan respectively (MOF and MPW, 1995). Points 7 and 10 will be discussed below as they provide useful background information, in assessing the impact of the Affirmative Procurement Policy.
5.3.2.2 Point 7 : Preferences I Targeting
Point 7 of the 10 Point Plan addressed the question of preferences and targeting. The interim strategy which was proposed was that a :
·price preference system be effected to target a specific group, i.B. ~Persons disadvantaged
by unfair discrimination-within the emerging SMME sector. This policy wifl be based on a
percentage preference and shall apply to all contracts which are usually less than R2 mil/ion.
(This limit is to control the possibility of any undue expenditure resulting from this preference policy during the untested period of implementing these interim strategies. In addition, this limit targets the emerging SMME sector rather than the'better established businesses)."
"This preference system will be operated via tender adjudication criteria. The following
criteria is proposed:
(a) Cost of the works
The calculation of these points will be based on the formula:
88(1-T-T,,;,J T"", where T min =
and T =
the lowest tender (offer)
the tender submitted in each case.
(b) Equity owned by disadvantaged persons
1) Maximum 100 % equity 10 2) Minimum 0 % 0
3) Prrrrata allocation within the maximum and minimum limits
(c) Equity owned by women
1) Maximum 100 % equity 2 2) Minimum 0 % equity 0
3) P~rata allocation within the maximum and minimum limits
The tender selected will be the one with the highest number of points~.
5.4
POINTS
88
10
2
This policy proposal was conceptualised in the absence of clear and scientific definitions of small, medium and micro enterprises and was developed to initiate:
"a system that starts to deracialise business ownership and control through this focused
policy of black economic empowerment".
It also preceded the definition of small medium and micro enterprises as defined in the South African National Small Business Act of 1996 (Act No. 102 of 1996). As the application was restricted to contracts below R2,O million in value, and the benefits targeted at a prime contractor level, it may be argued that in practical terms. black owned. SMMEs were the primary targets of Point 7. One of the limitations of Point 7 was that it made no reference to management and control of the enterprise and that it focused only on equity-ownership.
The policy proposal set out in this point of the 10 Point Plan also contained the following definitions:
• "Disadvantaged person" refers to a South African citizen disadvantaged by unfair racial discrimination in the previous political dispensation.
• "Equity" refers to the value of the shareholding held in the tenderer's business entity as reflected in its financial statements and/or contractual agreement as at the closing date of tenders.
5.3.2.3 Point 10 : Classfflcatlon of building and engineering contracts
The interim strategy set out in point 10 (MOF and MPW, 1995) sought:
"to provide interventions that will assist towards establishing, regulating and promoting an enabling environment and thereby ensuring the meaningful and effective involvement of small, medium and micro enterprises".
A framework for the following was provided to enable interim strategies to be effected viz. :
• Contract classification
• Performance bonds (security I sureties)
• Tender adjudication criteria
The first part of a contract classification system made provision for the following classes of contracts:
• International
• Major
• Minor
• Micro
A minor contract was defined as a contract in which :
• -the potential risks involved in the works for both contracting parties are adjudged to be small;
• the period for completion of the contract does not normally exceed 6 months but cerlainly not more than 12 months;
• the contract value is usually (ess than R1 milfion and generally not more than R2 million;
• the works are of a straightforward nature in terms of complexity, quality and tolerances and the possibility of significant variations from the work envisaged is adjudged to be relatively low;
• the site establishment requirements are adjudged not to be onerous;
• the contractor has no responsibility for the design of the permanent works other than possible design of a specialist nature;
• the design of the works, save for design work for which the contractor is made responsible, is complete in all essentials before tenders are invited;
• the contractor's responsibility for nominated / selected sub-contractors is limited;
• the contractor is not required to underlake work of a specialist nature. ~
It was suggested that:
"major contracts are contracts which have more onerous requirements than that descn'bed in
respect of minor contracts. International contracts are major contracts where the necessary resources required are adjudged to be beyond the capacity / capabilities of most large South African companies, At the other end of the scale, micro contracts are contracts which are adjudged to have less onerous demands than is the case for minor contracts and where the
5.6
'.
contract period is normally less than 3 months and certainly not more than 6 months; and the value of the works ;s usually less than R100 000".
In essence the above-mentioned classifK:ation is based on risk and the demands placed on those who have resources to execute such contracts.
A further means of classifying contracts was put forward to facilitate the integration of emerging I historically disadvantaged contractors into the main stream of the economy. This classification was based on who the contracting parties are, viz. :
• prime
• community I development
• structured joint ventures
Community IDevelopment Contracts have not been included in the scope of this dissertation, as they have no material bearing on the analysis of Public Works contracts as this model was nct utilised on any contracts awarded by the Department of Public Works.
It was suggested that:
·Prime contracts are contracts in which the contractor is unassisted by other contracting
parties, separately appOinted by the client. Community contracts are ones in terms of which the client has appOinted a development and/or materials procurement contractor to provide ceriain
rasourcas
which community / emerging contractors may lack. Typically,a
development contractor would be required to establish the site, to advise, assist and train-on- the-job, administer payments made to community / emerging contractors to provide certain items of equipment, to report to the Client on project expenditure, construction and progress and co-ordinate site actMties. In some circumstances a development contractor may be required to engage specialist contractors to perform certain aspects of the works and/or to construct portions of the work. In structured joint venture contracts, established and emerging contractors
are
selected through independent processes and enter intoa
final jOint venture agreementto
execute the worlcs"The aforementioned classification of contracts was used to frame the interim strategies in respect of tender adjudication criteria and the levels of performance bonds required to reasonably share the risk of a contractor's failure to perform between the state and the contractor. The interim strategy for perfonnance bonds was based on the premise that the Employer's risks associated with performance
',-~nds (Le. the additional cost of compfeting the worKs where the works are interrupted prior to their
completion, due to the termination of the contract for reasons which may include contractor insolvency or failure to perform) could be addressed by the management strategies which are adopted and the classification of contracts. It was accordingly proposed that performance bond requirements be as follows :
7ype of Contract
International Major
% Performance Bond
Minor estimated contract price.:: R1.0 m estimated contract price > R1,O m
10· 12,5%
10· 12,5%
2,5%
5%
Micro nil
The strategy proposed that contracts be awarded on a points basis in a similar manner to point 7 with a maximum of 85 points being allocated to price and a maximum of 15 points being allocated to project specific RDP objectives!.
5.3.2 Awarding of tenders in terms of the Affirmative Procurement Policy
Tenders, in support of an Affirmative Procurement Policy, are awarded in terms of a development objective I price mechanism as described in the Green Paper on Public Sector Procurement Reform in South Africa (MOF and DPW, 1997) i.e. a slightly modified version of that put forward in the 10 Point Ptan (MOF and DPW, 1995).
It was envisaged in the 10 Point Plan that black owned SMMEs would be targeted on contracts below R2,0 million. No definitions for black owned small businesses were available when the 10 Point Plan was conceived. As a result black equity was used as an interim measure. The final approach put forward by the Procurement Forum and that which is currently being used in terms of the Department of Public Wolits' initiative for the Delivery of Targeted Procurement in support of an Affirmative Procurement Policy is as follows:
Prime (Minor) and Prime (Micro)
Price
Affirmable Business Enterprises status
Women Equity Ownership (WEO) where such equity exceeds 25% (0,0333 x (WEO -25))