Treasury warns on shocking preferential procurement shakedown

Contractors with provincial and local governments are being told to pay 30% of the value their contracts in cash — in lieu of having 30% subcontracted, as provided for in preferential procurement regulations.

Treasury said on Tuesday that it had received complaints about this abuse of the regulations, which stipulate that 30% of public procurement contracts be subcontracted to designated groups.

It has called on provincial treasuries to ensure that organs of state in provincial and local government abide by the regulations and report any interruptions to public projects on the basis of the 30% subcontracting requirement to law enforcement agencies.

"It is alleged that some people are now demanding that they instead be paid in cash 30% of the value of each contract awarded in these provinces or municipalities.

"If their demands are not met, they threaten contractors, interrupt or stop the implementation of projects," Treasury noted.

"Such practices are not only illegal, but defeat the government objective of transforming the South African economy through equal opportunities for all and the advancement of historically disadvantaged individuals and small, medium and micro enterprises (SMMEs)."

Preferential procurement was intended to drive transformation, including the empowerment of designated groups and SMMEs through subcontracting and prequalification.

The preferential procurement regulations stipulate that where feasible, organs of state must apply subcontracting conditions to contracts valued at more than R30m.

These conditions are that 30% of the value of the contract be subcontracted to designated groups, which include majority black-owned small and emerging enterprises, which can be majority owned by women, youth, the disabled, rural enterprises, military veterans or co-operatives.

Public tenders have to specify whether they include prequalifying criteria that are intended to advance designated groups.

Those awarded a contract may enter into a subcontracting arrangement only with the approval of the organ of state.

Treasury noted in its statement that the demands for cash payments ran counter to section 217 of the constitution, which demanded that when an organ of state in the national, provincial or local sphere of government procured goods and services, it must do so in accordance with a system that is fair, equitable, transparent, competitive and cost-effective.

Treasury said some organs of state were using procurement preferences that were not provided for in the current regulatory framework.

These included the ring-fencing of procurement for service providers and suppliers who lived within certain geographical areas.

"State funds spent on tenders awarded in this manner will be classified as irregular expenditure since they do not comply with the supply chain management and preferential procurement provisions and prescripts," Treasury warned.