Eskom is an example of BEE's failure

THIS IS A SENSATIONAL HEADING, I am hoping it will sell more copies of my book.  It is totally false, but I think there are a lot of people out there who would love it to be true.  The Eskom situation does raise a lot of questions about their very questionable procurement practices.

For some or other reason Eskom seems to think it is the guiding light when it comes to the empowerment of black owned businesses.  The reality is that they have caused more damage than good.

I am not really the expert when it comes to Eskom's procurement policies, you would need to speak to Lisa Tait about this.  But I have read their Eskadaat 6 many times (Procurement by Eskom from black suppliers).  I assume that this is the document that is used as a guideline for their procurement.  It's actually not a bad document, I often referred to it  in my book and I use it in my consultation work.  It has a very useful procurement hierarchy that explains how Eskom goes about its procurement.

The following hierarchy must be followed in sourcing products and services, with preference given to manufacturers over stockists:

1. Drawing from Eskom stores stock.
2. Drawing off from existing compulsory Framework Agreements.
3. Procurement from within Eskom Groups/Divisions
4. Procurement from Eskom Subsidiaries
5. Procurement from Black Women-owned Suppliers
6. Procurement from Small Black Suppliers
7. Procurement from Large Black Suppliers
8. Procurement from Black Empowering Suppliers
9. Procurement from other South African manufacturers
10. Procurement from local stock holders of South African or imported assets and goods
11. Direct importation.

In theory this should pose no threat to a white owned business that supplies a relatively unique product (number 9, number 9). 

It is also a good idea to read Eskadaat 6 in conjunction with the ESKAMAAE8 (Handbook for Purchasing from Black Suppliers).  This document states that

Black or Black Empowering Suppliers will not be treated differently than the norm with regard to quality, price, expected service level or delivery, or any other commercial or technical requirements.

I've singled this paragraph out because I think it is the requirement that is least adhered to.

The practice

Rumours have it that Eskom's procurement department is incentivised to purchase from levels 5 to 8 in the hierarchy.  And once you start this practice you find that the condition in ESKAMAA8 gets thrown out the window.  I would do the same if my bonus was measured in that way. A  Moneyweb report confirms this :

Eskom's annual report for 2002 stated that the company had now implemented "the first phase of the long-term plan to support BEE and introduce flexibility in purchasing coal requirements (over and above the existing long-term contracts.)"  Implementing this directive would be an "important part" of all the performance compacts of senior managers.

But there is more to this little mess.  The procurement department will go so far as to suggest to a level 9 supplier that they must be 51% black owned in order to retain Eskom's business.  My friend Selwyn who has a company in Newcastle.  He has been summoned to Durban to be told that he needs to be 51% black owned and quickly.  This might be an issue in Johannesburg, but it is damn near impossible to get right in Newcastle.  Nevertheless Selwyn is still trying to conclude a deal.

Selwyn's business with Eskom is always under threat.  He is the only company in that region that provides and maintains his product, he employs about 5 people as well.  And every now and then the Newcastle branch of Eskom decides to purchase similar products from black owned company in Durban. 
This is just plain ludicrous.  Here you have a local company that employs local people and has a proven track record with Eskom losing business to a Durban company. 

Eskom's so called black economic empowerment policy has the following impact:

1. They do not seem to be that interested in local companies employing local people.  It's all about buying from black owned companies.  In fact I heard a story about a big South African company that manufactures cables locally losing a tender to two black people who imported the same product from China.  As far as the Eskom procurement department was concerned they had bought from a black owned company.
2. They have singularly inspired and assisted in perfecting fronting practices.  Many companies realise that Eskom wants to see the black ownership so they ensure that their share certificate reflects that level of black ownership.  In many cases (the rule I would say) these are fronts. 

And now to the coal fiasco

The Carte Blanche feature interviewed some bloke who explained that Eskom decided in 2004 to hand the transporting of coal to the power stations to black owned companies.  The person notes that one contractor was a hairdresser who saw an opportunity (must count for some experience somewhere), they also paid these contractors a sum that was below their cost to transport the coal.  As a result many trucks were not maintained and coal supplies were not stable.

The same Moneyweb report explains that Eskom also moved away from fixed contracts for coal to a "active coal spot market".  This coal was then going to be purchased from levels 5 - 8 in the hierarchy.  The upshot of this programme was that the supply of coal could not meet Eskom's power generation needs. 

The question is then, has BEE failed for Eskom?

I don't think it has. There must be companies that have done well as a result.  But Eskom's procurement policy has set up a bunch of suppliers to fail because Eskom couldn't deliver in the long run.  Eskom could have been a little more innovative  in their approach by buying from a mixture of suppliers and supporting BEE at the same time.

The problem with this practice is that BEE will be blamed by the average consumer who once again has been booted out of CNA because of load shedding.

Perhaps Telkom should learn from this as well.

Comments

[Weber Gerhard]

Dear Paul,
I agree 100% with your report. We are a German company which manufacturers products, used in coal power stations. Our competitors supply to a subsidiary in South Africa, they again supply to a Black woman owned company, from there it goes to Eskom.
We could supply directly with surley 25% lower prices - but there is no chance for us in the direct way. We are on your list at the top !
So we have to look for a black woman owned company which has some contacts with Escom already.
May be you can recommend us any company.
Even if we are against such a way of selling we have to go it. Otherwise we do not get any of the business.
My correct e-mail is www.heko.com but it was not accepted by your system

best regards
Gerhard
Germany

[Alan Beattie]

Small SMME's like me have been unfairly targeted and discriminated against, because it is not set up to support the very people they say they want to help. Even within their BEE structure there is wide unfair practices taking place. Once they have forced you to take on a black partner, they are not interested in helping you to become successful in any way,that is why the policy has failed. Ask me I know. It is a total in -
fringement on my Human Rights and the freedom to do bussines with whom I want to.

[Norman Manclark]

We are a Level 2 BBBEE company who has several contracts with Eskom Stations. One contract in particular requires us to spend 5% of contract value with Black Women owned companies. We have been for nearly 2 years trying to find even one company who could be of use to us, but without success. If we do not conform, we will be penalised. We even asked Eskom to give us a list of approved BWO companies but they were unable to do so.

[Paul Janisch]

Does the contract specify what type of procurement it has to be. In other words can you spend it on anything - like cleaning etc. If you are allowed to do it on non-core activities then it might be easier to find those companies. The activity might not even relate to the actual contracted service - but you could argue that because of the Eskom contract you were able to source BWOs for those activities. This would then allow you to source traditionally BWO services like cleaning, security etc