The ANC has broken its own black empowerment toolkit - and Ramaphosa government understands it

The government’s broad-based black economic empowerment (BBBEE) mechanism, specifically the empowerment toolkit in its mismanaged procurement apparatus, has become a root cause of the corruption eating away at South Africa.

President Cyril Ramaphosa and key officials in his administration appear to realise this.

Spooked by the ghosts in government’s BBBEE machine, the current leadership has in effect eschewed its empowerment mandate in some of the procurement plans for distributing Covid-19 vaccines.

This is a sad development.

Fears for the most undesirable elements in the BBBEE dispensation are informing real-time decisions that exclude legitimate black-owned businesses from much-needed opportunities.

A week ago, this journalist raised the matter on Twitter. It was a foolish decision. The matter elicited a fierce response, including spurious accusations of racism.

If there is any need for a mea culpa, it would only relate to the chosen platform for raising the topic.

One cannot effectively reason in disparate, 280-character “microblogs". The topic should not have been broached on Twitter.

But the argument stands, and the matter is far too important to let lie for the sake of ducking controversy.

One can unreservedly support the idea of redress and a more equitable economy and, without compromising these beliefs, aim severe criticism at the policies and mechanisms through which government seeks to achieve these goals.

Given the prevalence of crippling poverty that disproportionately affects black South Africans, one could argue that those who most passionately desire to see a more inclusive economy would, in fact, count among the most vocal critics of the government’s redress and empowerment efforts.

After all, is anyone convinced that 27 years of government intervention has brought about significant improvements in this regard?

This journalist’s own views on how BBBEE has been mismanaged, although no doubt clearly visible, are not to be confused with the main purpose of this article.

As the piece hopefully illustrates, key government role players have seemingly woken up to the fact that South Africa’s BBBEE mechanism has largely been compromised. This view is buttressed by a series of recent utterances and actions relating to South Africa’s ongoing vaccine acquisitions and roll-out.

We may be witnessing a profound tacit admission that the ANC-led government has mismanaged and fundamentally broken what should have been a powerful means of economic redress.

All too aware that such mismanagement has transformed (!) its empowerment toolkit into a root cause of corruption, the Ramaphosa administration appears to have become deeply wary of BBBEE.

Crucially, this is derailing opportunities for legitimate black empowerment as we speak.

Healthcare workers wearing personal protective equipment at Steve Biko Academic Hospital in Pretoria. (Photo: EPA-EFE / Phill Magakoe / POOL)

Enter the middlemen

We’ll look at recent comments from Health Minister Zweli Mkhize as a point of departure.

In early January, Mkhize promised that the vaccine purchases would be free from the gross corruption we have come to associate with government procurement.

The reason we are to be spared from any fresh corruption scandals lay in the fact that the government would be interacting “directly” with the vaccine manufacturers, explained Mkhize.

As an example of how things would not be done this time, the minister referred to 2020’s corruption-ridden procurement drive for personal protective equipment (PPE). The PPE saga involved hundreds of government departments, state bodies and local authorities purchasing these goods from thousands of local suppliers.

Compared with the PPE saga, the government would radically reduce the number of contracted participants by only dealing with the international vaccine producers. It is crucial to keep in mind that Mkhize’s stated reason for adopting an approach that differs from the PPE procurement is to avoid corruption.

But which corruption-causing elements of the PPE saga are to be excluded from the vaccine deals?

In a virtual engagement with the South African National Editors' Forum (Sanef) later in January, National Treasury director-general Dondo Mogajane offered this: “There are no middlemen [in the vaccine acquisition and distribution process] ... We don’t want to go back to the PPE scandal.”

So, to avoid corruption, principal government figures say they will bar middlemen from participating in the vaccine deals. In other words, these top officials have attributed corruption in our public procurement space to middlemen.

In their estimation, expressed in its simplest form, middlemen = corruption.

Mkhize and Mogajane haven’t told us who these corrupt operators are, or what actions or traits mark them as “middlemen". But if they are referencing the PPE scandal, we may assume that the Khusela Diko-linked contractors in Gauteng, for instance, are the sort of operators they don’t want anywhere near the vaccine deals.

These companies or businesspeople are rent-seekers who typically don’t specialise in the production or supply of any particular product or service. Oftentimes, their businesses are propped up by solid political connections and not much else. They will scour available tender opportunities, regardless of the type of goods or services they would need to deliver. Once they clinch the deal, they simply outsource the work to legitimate businesses. The latter could be black-owned or white-owned, the middlemen don’t care. Because this model is associated with inflated tender pricing, they usually walk away with a nice profit even after they had paid their subcontractors.

But isn’t the “middleman" model a central feature of the broken BBBEE system? Is it not an absence of checks and balances, in a procurement space founded on empowerment considerations, that has allowed the middlemen to infiltrate and even dominate entire departments?

Put differently, when Mkhize and Mogojane identify the prevalence of “middlemen" in the public procurement space as drivers of corruption, aren’t they simply describing a central characteristic of what BBBEE has largely devolved into?

If this were the case, the equation would now look like this: middlemen = corruption = government’s BBBEE mechanism.

That last clause, as included in the vexed tweet, is instructive.

It is probably interchangeable with all manner of alternative phrases. "Current BBBEE dispensation", "BBBEE gone wrong", or "corrupted BBBEE ecosystem" are options.

Such phrasing is careful and deliberate, as it seeks to reserve any criticism for what BBBEE has become in the hands of its custodian, our government, not BBBEE as an ideal.

Many of the Twitter critics failed to see the distinction, fuelling much of the indignation.

There was anger because the corrupt businesses involved in the PPE scandal were identified as by-products of a mismanaged BBBEE mechanism.

“Excluding corrupt black companies is not ‘eschewing’ BBEE [sic] as you claim. It is dealing with corruption. BBEE [sic] does not change its meaning because it has been used for nefarious purposes,” one well-known journalist and author argued.

Sure, it is true that excluding the corrupt middleman types Mkhize and Mogojane have identified is not eschewing what BBBEE should be.  But it is avoiding a fundamental pitfall in and feature of BBBEE as it is administered in state procurement.

Can we really say BBBEE “does not change its meaning” because it has been abused? Perhaps, but only if we agreed that we would then only be dealing with “BBBEE" as an ideal and not this ideal’s manifestation in the real world.

Only adherents of Platonic idealism would take this unhelpful tack.

Are we to consign BBBEE or Empowerment to some distant realm of lofty ideals, where – alongside Virtue and Justice and all manner of other desirable concepts – we leave it in peace, comforted by our belief that this ideal will forever maintain its inherent meaning no matter what people do in its name back on planet Earth?

One would hope not.

Some of us concern ourselves with, and are concerned by, the human actions that give shape to ideals like BBBEE right here in our lived experience.

Health Minister Zweli Mkhize, Deputy President David Mabuza and President Cyril Ramaphosa receive South Africa’s first consignment of the Covid-19 vaccine. (Photo: Flickr / GCIS)

Unique factor

BBBEE, as practised in state procurement, fuels corruption.

Such a statement may spark a firestorm on social media, but the idea behind it is not novel or unique.

In a piece about the PPE scandal, Ray Mahlaka, one of my colleagues at Business Maverick, argued that “the policy [BEE] was used as a vehicle for corruption and to blatantly flout procurement laws”.

“Companies with favourable BEE profiles (on paper) were established overnight and emerged as successful tender bidders,” he wrote.

https://www.dailymaverick.co.za/opinionista/2020-08-12-the-bee-loophole-that-keeps-gifting-covid-19-tenders/

Mahlaka doesn’t use the term ‘middlemen’, but what he is describing very much sounds like the modus operandi of the dubious operators Mkhize and Mogojane identified.

Ferial Haffajee, on her part, reckons “the companies that racked up R7.5-billion in dirty PPE deals used the guise of the [BBBEE] policy to win contracts”.

These and other commentators, therefore, place BBBEE, or what is done in the name of BBBEE, at the heart of our corruption problem.

https://www.dailymaverick.co.za/article/2021-02-05-anc-business-arm-lobbies-for-members-to-get-share-of-vaccine-profits/

However, some of the Twitter critics don’t see it this way.

Corruption is universal, one well-known commentator argued.

By mentioning that there were PPE scandals in the US and in the UK, she hoped to prove that BBBEE couldn’t possibly play a role in corruption.

Seeing as these other countries don’t have BBBEE yet still experienced PPE scandals, BBBEE couldn’t be a factor.

This is not a good argument. Imagine if the science community reasoned like this.

After establishing that heart disease prevails in every country in the world, researchers could happily call it a day. Their work would be done. No one would ask them to conduct painstaking research to determine, for instance, whether heart disease in one country could be attributed to poor diet while another country’s large smoking population played a major role.

Fortunately, for us, scientists do diligently look for unique enabling factors in areas like disease research.

We would need to take a similar approach if we are to end our corruption scourge and, at the same, ensure that BBBEE is correctly leveraged to achieve its true purpose.

White corruption

Presented with the link between corruption and government’s BBBEE mechanism, one broadcast journalist angrily asked whether this was, in my view, “because only black-owned companies steal???”

The answer is no, of course, which is why I did a double-take at Mkhize’s remark about dealing “directly” with international Big Pharma. Does the minister really think that doing so would offer an automatic safeguard against corruption?

Some of these firms are by no means clean.  In 2012, Pfizer had to part with $60-million to settle charges relating to the Foreign Corrupt Practices Act (FCPA) violations. The US’s Securities and Exchange Commission (SEC) had identified bribes paid by Pfizer subsidiaries to government officials in foreign jurisdictions such as China, Italy and Russia.

In South Africa, meanwhile,  looting by white-owned firms has occurred within and because of the current BBBEE environment, not in spite of it. Corrupt white-owned businesses have become adept at gaming the system. They easily clear BBBEE hurdles, sometimes by means of fronting and other fraudulent practices. Frequently, but not always, they are suppliers to the corrupt middleman entities. When they do contract directly with the state, some of them eagerly pay bribes to clinch those tenders, or they channel some of the contract’s proceeds to suspicious development projects.

Bosasa and the large construction firms embroiled in Eskom’s corruption scandals are useful case studies. (Both examples were exposed by an investigating media that, bafflingly, stands accused of turning a blind eye to white corruption.)

One of the first South African vaccine trialists gets injected during the clinical trial for a potential vaccine against the Covid-19 virus at Baragwanath Hospital in Soweto, Johannesburg. (Photo: EPA-EFE / SIPHIWE SIBEKO / POOL)

BBBEE abuse harms black business

The maligned BBBEE tweet may have been a bad idea, but it yielded responses that are useful in terms of driving this argument forward.

After an attempt to explain my take on the corrupt middleman model, one broadcast journalist said I was “digging this hole even deeper”.

“Are you now saying that black-owned companies can only be middlemen?” he asked.

Absolutely not. But let us turn that question on its head.

Are the corrupt middleman companies Mogajane referred to necessarily black-owned?

They happen to be, by and large. And the reason for this is not because black businesspeople are inherently more corrupt than white businesspeople.

It is because opportunistic scamsters with good BBBEE scores have infiltrated the state procurement space. They are attracted to the state’s procurement space because they know that empowerment considerations offer a foot in the door. Ironically, their presence comes at the expense of legitimate black businesses.

Let’s have a look at some hard data.

The source material is a record of the Gauteng Department of Health’s (GDoH's) emergency Covid-19 spend up to July 2020. It includes the black-ownership status for each contractor.

By that stage, the GDoH had paid more than R1.1-billion to 45 companies for PPE and related goods. A total of 42 of these companies, or 93%, were 100% black-owned. Two of the companies were 74% and 64% black-owned, respectively, while one company was 100% white-owned.

On the surface, the GDoH had, therefore, done exceedingly well in terms of achieving good BBBEE outcomes.

But what type of businesses benefited from this spend, and which ones did not?

What follows underpins the extreme degree by which BBBEE in state procurement has veered off course.

South Africa has an industry body called the Black Pharmaceutical Industry Association (BPIA). It has 20 member companies all headquartered in Gauteng. Readers may recall meeting the BPIA’s chairperson, Kingsley Tloubatla, in this Scorpio investigation.

https://www.dailymaverick.co.za/article/2020-10-02-sas-r2bn-unlicensed-emergency-ppe-bombshell/

The BPIA’s members are themselves established businesses. Their owners have spent years building these firms, and they have jumped through all the necessary hoops to operate in this space. This includes getting licences from the South African Health Products Regulatory Authority (Sahpra). Without these licences, no company may legally trade in certain PPE and other regulated medical goods.

But how many of the BPIA’s member companies were among the 45 contractors the GDoH had appointed and paid by July 2020?

Only two.

Much worse is the fact that these two businesses altogether received a paltry R33-million (3%) of the R1.1-billion in PPE spend.

The bulk of the procurement pie had been gobbled up by companies with the right BBBEE status but zero track record in that sector.

The PPE spend was largely pushed through by means of emergency procurement, which is marked by fewer checks and balances. It is not the government’s preferred or standard way of doing business. Some might, therefore, argue that the PPE saga is too unique and extreme to serve as a cautionary tale about BBBEE practices in general.

But our recent history is replete with corruption horror stories that unfolded before the pandemic hit, all of which have a strong or overwhelming BBBEE element.

When French manufacturing giant Alstom clinched Prasa’s huge R51-billion train contact in 2013, it had to establish an empowered corporate structure, Gibela, to deliver the deal. And who sneaked into Gibela’s shareholding? Dudu Myeni’s son and other political cronies.

Don’t forget about Chancellor House, the ANC fundraising vehicle that clinched a lucrative empowerment stake in an Eskom contract. This was to the exclusion of black-owned engineering firms that operate in that sector.

Equally shocking is the case of the Gupta-linked companies that devoured the Supplier Development Partner (SDP) slots doled out by major international firms after the latter had secured fat contracts from our foremost SOEs.

I could go on, but an exhaustive list of available examples might break our website.

These and other schemes could not come to fruition if BBBEE hadn’t been a feature of our procurement dispensation. They were enabled by the pitfalls of government’s fundamentally broken and corrupted BBBEE mechanism.

(Photo: EPA-EFE / SIPHIWE SIBEKO / POOL)

The vaccine roll-out

But has this reality now dawned on President Ramaphosa’s administration? Still reeling from the PPE scandal, is the government making startling moves that signal a deep and creeping wariness of BBBEE?

It would appear so.

Firstly, it seems that the “direct” agreements between the Department of Health (DoH) and the international vaccine suppliers are completely devoid of any empowerment considerations.

Normally, such contracts would include provisions that are informed by South Africa’s BBBEE laws and regulations.

Alstom did not create the empowered Gibela structure from the goodness of its heart, and the likes of McKinsey and SAP did not appoint local SDPs because they are true believers in Project South Africa.

These multinationals are legally obligated to reserve portions of these contracts for empowerment purposes.

But there is no indication that any of the vaccine deals include provisions for local empowerment.

If this is the case, it may very well be a landmark moment.

The BPIA’s Tloubatla and Kganki Matabane, CEO of the Black Business Council (BBC), are both unaware of any empowerment partners included in the vaccine deals.

Has the government completely eschewed BBBEE in these agreements? If so, how does it intend to deal with the resulting legal implications?

National Treasury, which has been advising the DoH on procurement decisions relating to the vaccines, did not provide answers to these and other queries.

Even more effective as apparent proof of government’s BBBEE paranoia are some recent developments around the planned storage and distribution of the vaccines.

Please stay with me as we journey through the following events.

On 7 January, Mkhize briefs Parliament’s portfolio committee on health on the vaccine roll-out, where he stresses the importance of avoiding corruption.

On this very same day, Mkhize’s department quietly requests permission from National Treasury to appoint four companies for the storage and distribution of the vaccines. This would be through a closed bid.

National Treasury immediately approves the request, but it does state that an open tender process for a more "long-term solution" would have to be issued at some unspecified point in time.

The companies the DoH appoint through the closed bid are the Biovac Institute, which is partly owned by the government, Imperial Health Sciences, DSV and United Pharmaceutical Distributors (UPD). Details about these appointments are contained in a letter Mogajane would send to Corruption Watch’s David Lewis later in January.

DSV is Danish. Its South African subsidiary has 25% black ownership. UPD is owned by Clicks and Imperial Health Sciences belongs to Imperial.

In other words, none of the three private firms is majority black-owned.

On 9 January, President Ramaphosa echoes Mkhize’s promise, saying that there would be no corruption in the vaccine programme.

By this stage, however, pressure is mounting on the government to reveal logistical details for the roll-out.

"Who will store and distribute the jabs?" we all wondered.

With their potential financial stake in the endeavour, some members of the black business fraternity no doubt put that very same question to the presidency, or to other arms of the administration.

It is no coincidence, therefore, that Ramaphosa agrees to engage with members of the Progressive Business Forum (PBF) in a virtual meeting that takes place on 19 January.

“I agree completely that black business should participate effectively in the vaccine roll-out. There are going to be opportunities, but there are not going to be a plethora of opportunities as I see it, because the channel is government which purchases and, thereafter, the distribution is going to be the area where we are going to find opportunity,” Ramaphosa tells the delegation.

The president, in other words, pitches the distribution opportunities as something that must still be finalised.

He does not tell the delegation of black businesspeople that his government already quietly roped in three large white companies to do some of the distribution work they are now lobbying for.

And he certainly does not let slip that these firms were lucky enough to get through the door in a closed bid process, while the black companies would all have to compete for the job once an open tender finally went out.

When the BBC’s Matabane and other role players in business find out about the closed bid, they go back to the government to demand answers.

Understandably, they feel aggrieved.

“The intention of the [closed bid] is to sideline black companies in cold storage and other services aligned to vaccination in preference of the untransformed companies,” said one industry role player. Like others consulted for this article, this businessperson prefers to remain anonymous because of the fraught nature of the tender space.

But the lobbying pays off, or sort of.

On Monday, 8 February 2021, the DoH finally issues a request for proposals to provide “importation" and “logistics" services. But it will be for the period between 1 April and 31 December.

That leaves nearly two months during which the companies already appointed through the closed bid would be able to perform potentially lucrative work.

If it weren’t for the unforeseen issue with AstraZeneca’s vaccine, DSV and Imperial would have been distributing shots in some “remote areas” as we speak, according to the Sunday Times’ most recent lead.

This while black-owned logistics companies are expected to patiently wait for the conclusion of the "long-term" tender.

That all of this should unfold while government makes promises about rooting out corruption is telling.

There is almost no conceivable reason the Ramaphosa administration would implement procurement decisions that risk isolating the black business fraternity.

Unless the fallout from the PPE saga has rendered it so fearful of fresh corruption scandals that it has quietly decided to hit the pause button on empowerment.

If this is the case, Ramaphosa and his cohorts in government should be reminded that legitimate black-owned businesses did not break BBBEE.

Instead of shunning these companies, the government should instead figure out how it is going to fix an important tool for redress that clearly does not serve its intended purpose. DM