By Prof. Busisiwe Mavuso
- Draft procurement regulations published in April propose extensive set-asides for 100%-black-owned businesses, but Treasury has not produced an economic impact analysis showing what this will cost or how effective it will be.
- In specialised sectors like wastewater treatment, high-voltage electrical infrastructure and enterprise IT, shallow supplier pools mean set-asides could inflate costs dramatically or prevent projects from proceeding at all.
- Regulations assume data-driven procurement planning and ICT infrastructure that most municipalities don’t possess, designing for the public sector we wish we had, rather than the one that exists.
- The Competition Commission’s regulatory review to reduce restrictions is welcome, but must be empowered to recommend legislative amendments, not just administrative changes, to make a meaningful pro-growth impact.
Are our policies as a country pro-growth? You would hope the answer is yes. Growth is the only way we deal with the severe challenges facing us – unemployment, poverty, inequality. Growth enables companies to invest and expand, hire more people and pay more taxes. Employment enables people to live better lives and escape dependence on the state. Taxes mean government can expand social spending, improving education and healthcare. In short, growth is the path to the country we all want.
So, it should be essential that the first question we ask of every new policy proposal is how it will affect growth. Too often, this question isn’t asked. Last month’s draft preferential procurement regulations are a case in point.
An overhaul of procurement regulations has been overdue since the courts invalidated the existing regulations in 2022. The new proposed regulations run to 102 pages and contain much that is positive – greater transparency, better tools to tackle organised crime in procurement, and value-for-money assessed across the life-cycle rather than price alone, which enables evaluation of quality and delivery capability.
But the regulations also propose an extensive set-aside regime to allocate more procurement toward 100% black-owned businesses. Transformation is certainly an important goal, and procurement is a powerful tool government has to achieve it. But we must ask how effective these regulations will be and what they will cost. Unfortunately, Treasury has not produced any analysis that provides answers to either question.
Here’s what the regulations propose: all tenders under R20m are set aside exclusively for 100% black-owned suppliers. For tenders of R20m to R100m, suppliers must prove they procure 40% of their inputs from 51% black-owned suppliers or 30% from 100% black-owned suppliers. For tenders above R100m, 25% of subcontracting must go to 100% black-owned businesses. Additional targets apply for black women-owned enterprises, women-owned enterprises and other categories.
In sectors with deep pools of suppliers, this may have a limited impact. But in specialised areas – think wastewater treatment, high-voltage electrical infrastructure, advanced engineering systems, enterprise IT – the pool of qualifying suppliers is shallow. What happens when a municipality needs to tender for a water treatment plant and there aren’t enough 100% black-owned firms with the technical capacity to bid? Either the project doesn’t proceed, or costs escalate dramatically as the limited qualifying suppliers recognise they face little competition.
Imagine an example. A metro needs to upgrade its electricity distribution network – a R150m project. Under these regulations, R37.5m of subcontracting must go to 100% black-owned businesses. But high-voltage switchgear installation, protective relay systems, and network control infrastructure require specialised skills and certifications. If only two or three firms qualify, they can name their price. The municipality faces either paying inflated costs or not upgrading critical infrastructure. Neither outcome serves growth or transformation.
My concern is not with transformation itself, but with the cumulative effect of a tiered, mandatory, percentage-based system on procurement efficiency, project costs and a limited supplier pool applied bluntly across the economy. There are more effective ways to drive transformation. Create incentives for established firms to develop black-owned joint venture partners. Set ambitious transformation targets but allow procurement officers flexibility in how to achieve them based on market realities. Ensure black-owned firms have access not only to domestic markets but also international markets.
The regulations also assume administrative capacity that doesn’t exist. Smaller suppliers must not only ensure appropriate ownership structures but also build substantial administrative capability to navigate complex compliance requirements. The public sector will face much higher costs from the extensive bureaucracy required to apply and monitor these rules. The regulations assume data-driven procurement planning, contract performance monitoring and ICT infrastructure that most municipalities simply don’t possess. We cannot design regulations for the public sector we wish we had rather than the one that exists.
Transaction costs matter for growth. Every rand spent on compliance bureaucracy is a rand not spent on actual service delivery. Every month a project is delayed because qualifying suppliers can’t be found is a month of continued infrastructure deterioration. Every inflated contract price, because of restricted competition, is money that could have funded additional projects.
Before finalising these regulations, Treasury must conduct a proper economic impact assessment. What will compliance cost the public and private sectors? How will restricted supplier pools affect infrastructure project costs? What are the implementation risks in municipalities that lack basic procurement systems? What alternative transformation approaches could achieve better outcomes at lower cost?
There is, encouragingly, recognition elsewhere in government that regulations need a pro-growth lens. The Competition Commission’s spokesperson Siyabulela Makunga wrote last weekend about a regulatory review to scrap superfluous rules and restrictions. He rightly pointed to international research showing investors are sensitive to predictability and workability in regulatory systems. He cited the IMF’s view that South Africa has one of the most restrictive business environments compared to peers, with lengthy approval processes, complex licensing and uncertainty over how rules are applied.
This review has real potential if empowered to recommend meaningful change. That must include legislative amendments, not just administrative tweaks. Otherwise, it becomes an exercise in documenting problems without fixing them.
But the broader lesson is this: every new regulation, every policy proposal, must be stress-tested against its impact on growth. Not just whether it achieves its stated objective – in this case, transformation – but whether it does so in a way that enables rather than constrains economic expansion.
BLSA will be making detailed submissions on the procurement regulations, highlighting specific sectors where set-asides will create implementation problems and proposing alternative transformation approaches. We will engage equally on the Competition Commission’s regulatory review with concrete examples of how uncertainty and complexity deter investment.
Government has committed to a pro-growth agenda. These regulations will test whether that commitment extends beyond rhetoric to actual policy design. The stakes are too high to get this wrong.
