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Procurement Issues in South Africa that Affect Growth and Development

Literature › Works

Steven Kelman (2008). Procurement Issues in South Africa that Affect Growth and Development. CID Working Paper No. 171, Center for International Development, Harvard University (CID South Africa Growth Initiative). Center for International Development at Harvard University.
Type working paper
Scope Post-1994 South African economy
Method policy analysis
Period studied 1994–2008
Regions South Africa, Eastern Cape, Free State
Themes transition post apartheid, business and state, manufacturing industrial policy, macro fiscal finance debt
Citation key kelman2008

Argument

Kelman offers a consulting-style discussion paper on four procurement problems that affect growth: municipal infrastructure delivery, public-private partnerships (PPPs), large capex procurement at Transnet and Eskom, and the DPE Competitive Supplier Development Program (CSDP). Drawing on transaction-cost economics and principal-agent theory plus interviews with officials, he argues that low-capacity municipalities should lose the right to contract and instead use national public entities. He argues that South Africa should expand PPPs, with careful risk allocation and oversight. He finds Transnet's large-capex procurement basically sound but open to improvement, with bid-rigging a concern. He argues that CSDP should treat local supply as an evaluation factor and avoid price premiums.

Evidence and method

Interviews with senior officials at ESKOM, National Roads Agency, DWAF, Independent Development Trust, National Treasury and Transnet; a review of some Transnet bid documents for the Durban port renovation; the CSDP strategy document (DPE 2007); UK PPP literature and the Partnerships UK 2006 report; the South African Institution of Civil Engineering 2007 data on engineers. He was not given actual tender documents or bid adjudication reports.

Findings

  • Low municipal capacity is a severe constraint on infrastructure delivery, with some officials judging many municipalities unable to run procurement. (p. 4)

    about half of the municipalities probably can’t do procurement.

  • Proposal: municipalities rated 'poor' on capacity lose the right to contract and must use national delivery organisations while keeping funds and strategy. (p. 5)

    Municipalities rated by National Treasury as “poor” in terms of capacity would no longer be allowed to contract for delivery of these services.

  • South Africa has a severe shortage of civil engineers compared with peer countries. (p. 12)

    as of 2005, there was one civil engineer per 3166 population, compared to one per 311 in the U.K., one per 389 in the U.S., and one per 1341 in Singapore

  • Using PPPs merely to avoid on-budget spending is a poor argument, since government borrows more cheaply than private firms. (p. 13)

    government can borrow at a lower interest rate than private firms, and that private firms must also make a profit on top of that

  • PPP prisons adhere to contractual standards that many conventional prisons fail to meet, suggesting a quality advantage. (p. 14)

    the PPP prisons are successfully adhering to standards expressed in the contract, while many conventional prisons are not adhering to the government’s own minimum standards.

  • Early PPP prison contracts were overpriced because competitive tension was not maintained, which led to the creation of the National Treasury PPP oversight unit in 2000. (p. 19)

    the government didn’t keep the competitive tension long enough”

  • Transnet rebuilt capacity for large capex after a long hiatus by rehiring apartheid-era contract managers and bringing in Hatch. (p. 22)

    Transnet has therefore in significant measure brought back apartheid-era contract managers with SOE experience for their in-house capacity and also brought in an international contract/project management firm/consortium, Hatch

  • Bid-rigging is a real concern in large infrastructure projects, according to the Competition Commission. (p. 25)

    The Competition Commission has noted bid-rigging as a real concern, especially in connection with large infrastructure projects.

  • CSDP strategy has moved from claiming price neutrality to accepting short-term price premiums but rejecting long-term ones. (p. 29)

    Paying long-term price premiums for local supply…would not be in line with the aims of the CSDP