Following Sanral’s withdrawal of its controversial new preferential procurement policy.
Stakeholders say the sector is one of the most transformed in the country. Image: H&I Construction website
H&I Construction, which brought high court applications to review and set aside the controversial preferential procurement policy the South African National Roads Agency (Sanral) has now withdrawn, has defended the industry’s transformation achievements.
H&I Construction commercial manager Francis Chemaly told Moneyweb the firm is relieved that Sanral has made the right decision.
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“However, now more than ever as an industry and a country we need to work together in order to overcome the significant headwinds we all face,” he said.
Chemaly said H&I Construction is “optimistic and excited” by Sanral’s statement that it will engage industry moving forward and “looks forward to forging a working relationship that is beneficial to the industry while ensuring we continue with our transformation drive”.
Wolgang Neff, CEO of JSE-listed construction group WBHO, which joined H&I’s application to review and set aside the Sanral policy, stressed that its legal challenge was premised on the principle that where an organ of state allocates preference points to advance the specific goal of advancing transformation and redressing historical disadvantage, it must do so in compliance with the law to ensure that it is fair, equitable, transparent, competitive and cost-effective.
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The two firms’ comments follow Sanral’s announcement last week of its withdrawal of the new preferential procurement policy adopted by its board on 23 May 2023 to avoid lengthy court battles associated with the implementation of the policy.
Awareness alert for state entities
Gerrit Davids, lead advisor at tendering business consultancy TaranisCo Advisory, has highlighted that National Treasury has confirmed that organs of state are advised not to use the broad-based black economic empowerment (B-BBEE) status of a bidder as a specific goal.
“We hope that for once and all, Treasury’s statement will alert organs of state that all awards done on the basis of using B-BBEE as a specific goal could be declared as irregular and aggrieved bidders thus will have a right to approach a competent court to have these tenders declared as such,” he said.
National Treasury’s Guide to the 2022 Regulations can be found here.
Chemaly said H&I Construction actively supports and drives transformation because it believe it is what the country needs and it “is not up for debate”.
However, he said what somehow seems to be getting lost in translation is that the construction industry is one of the most transformed, if not the most transformed, industry in the country.
Chemaly said the industry rallied behind the B-BBEE Act and employment equity legislation, as well as Sanral’s transformation policy, for the past decade while the construction industry was in severe decline.
“In some cases, this decline has been referred to as decimation,” he added.
“The industry is less than half of what it was a decade ago and there is a mere handful of so-called ‘large companies’ left.
“Yet during this period of extreme decline/decimation, the industry’s transformation continued to be actively driven,” said Chemaly.
He highlighted that this is borne out by the Construction Sector Charter Council’s State of Transformation Report 2021.
Chemaly believes the B-BBEE Act and the previous (pre-May 2023) Sanral transformation policy have had the desired effect in the industry in that the number of large contractors with more than 50% black ownership has increased over the past nine years from 9% to 53%.
In the same period, the number of medium contractors with more than 50% black ownership increased to 82%, and for small contractors to 67%.
Chemaly is confident this trend will continue to improve provided it takes place in a sustainable manner in line with the Constitution and other legislation to ensure that it happens in a fair, equitable, transparent, competitive and cost-effective manner.
WBHO’s Neff welcomed Sanral’s:
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- Withdrawal of its new preferential procurement policy and the associated scoring methodology;
- Announcement on 24 October 2023 of the introduction of an interim and an eventual final replacement procurement policy; and
- Contemplation of its prior consultation process with interested parties in respect of both policies.
Neff said WBHO’s aim in entering the litigation was premised at ensuring compliance with the legal framework in which transformation has been implemented – including the Preferential Procurement Policy Framework Act of 2000, the B-BBEE Act, and the applicable sectoral codes adopted for the construction sector under the B-BBEE Act.
He said the interim procurement policy announced by Sanral is in accordance with its previous preferential procurement policy and is based on a tendering entities’ B-BBEE recognition level.
“This was WBHO’s court submission from the start of the litigation process and could, if adopted by Sanral at the commencement of this process, have prevented unnecessary delays in the roll out of infrastructure and legal costs.”
Blunt approach, narrow focus
Neff went on to say: “WBHO’s concern with the disputed Sanral policy was its blunt approach towards transformation with its narrow focus on direct black ownership, as evidenced by the arbitrary and disproportionate weightings allocated to 100% direct black ownership vis-à-vis 99% or 69% black ownership.
“This is in violation of the legal framework set out under the B-BBEE Act and Construction sector code.”
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To further illustrate Sanral’s narrow focus, Neff said the policy allocated up to 50% of the preferential points to direct black ownership, whereas the B-BBEE scorecard only counts 10%.
The balance of 40% of the preferential points is allocated towards a commitment to subcontract 51% of a project’s contract value to targeted enterprises, such as exempted micro enterprises (EMEs) and qualifying small enterprises (QSEs), he added.
Neff said WBHO’s commitment to transformation is evidenced by the fact that the company is majority black-owned, has a Level 1 B-BBEE recognition score, and is actively engaged in transforming the construction sector.
He said WBHO in 2018 received the second most empowered company award on the JSE in a report by Intellidex/Business Report and in 2019 was awarded the most empowered company on the JSE in both the construction sector and in all sectors.
“Despite these achievements, WBHO would have scored zero of the preferential points allocated for direct black ownership under the disputed Sanral policy, as the sole means of showing such ownership would have required the provision by WBHO of share certificates, which for publicly listed companies [is] wholly inappropriate,” he said.
‘Chilling effect’ on some black-owned businesses
Neff added that in respect of subcontracting, Sanral’s policy – with its narrow focus on black-owned companies within the EME/QSE Construction Industry Development Board (CIDB) Level 1 to 6 band – would “have the chilling effect of unlawfully excluding black-owned businesses which have grown beyond the QSE band [CIDB levels 7-9], further stunting the growth and sustainability of these black businesses”.
Neff claimed the subcontracting targets in Sanral’s policy were further applied in a generic manner, without regard for due market research, and did not take project complexity, scope of work and/or geographic location into account.
“To illustrate this point, on complex high value infrastructure projects, it becomes extremely challenging to subcontract 51% of the project’s contract value to entities which are limited to QSE size, considering the limited experience and resources these entities have and the enormous number of EME/QSE subcontractors one would have to appoint to make up 51% of multi billion rand contracts,” he said
“This would have a negative impact on the cost, and the successful completion of projects for contractors and, consequentially on the cost of contracting for Sanral.
“The inclusion in the disputed Sanral policy of a minimum subcontracting requirement further contravenes the legislative framework set out in the PPPFA [Preferential Procurement Policy Framework Act].
“Sanral has no power to exclude any bidder in terms of its preferential procurement policy, whether this exclusion operates as a pre-qualification criterion or as a condition of contract,” he said.