By Eamonn Ryan
Ongoing legal action against move to deal directly with original equipment manufacturers closely watched as it will hit middlemen. This is Part 1 of a two-part series.
Eskom chair Mteto Nyati and the dozens of turnaround strategists that have been deployed to state-owned enterprises (SOEs) have 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 incredible wealth through using their political connections to win lucrative tenders.
State tender rules are currently intended to force government entities to comply with BEE and localisation policies, in effect compelling SOEs to procure essential goods and services from middlemen, adding a layer of costs. These rules have had unintended and harmful consequences for South Africa’s SOEs.
A loss-making SOE such as Transnet, which plays a critical role in operating and maintaining South Africa’s ports, is compelled by preferential procurement regulations to source essential services—such as port equipment maintenance, logistics support and infrastructure upgrades—from intermediaries. In some cases, these middlemen deliver substandard services or fail to meet operational standards. This can lead to serious disruptions in port operations, including delays in cargo handling, equipment failures and bottlenecks in the movement of goods—ultimately harming the broader economy – and particularly the cold chain.
Financially distressed SOEs such as Transnet need to deal directly with original equipment manufacturers (OEMs) and original parts manufacturers (OPMs) instead of middlemen if they are to have any chance of turning their fortunes around.
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 lost through fraud and artificially high prices imposed by middleman suppliers. Brown suggested that the government could mitigate the losses by buying goods directly from OEMs instead of middlemen.
It appears that Brown and Nyati’s message has finally got through because Eskom, for one, is now dealing directly with OMEs 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 South Africa, 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 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.
References: Businesslive