Paul Janisch

The complex nature of government procurement and a course that explains it all

You might have noticed this weekend's Business Times' article on Dennis Worral and his little issue with doing business (or more correctly, his ATTEMPT) at doing business with the government. The bidding department is that of Transport. The story goes along these lines

(Worral's company) put in a R6.7-million bid to run a three-day investment conference for the transport department in June, but the tender was awarded to a 100% black-owned company, which offered to do the job for R13.5-million.

And when Worral asked why they didn't win

A spokesman for the Department of Transport, Thami Ngidi, has refused to enlighten Worrall about the tender award, other than to insist that the bid committee made its decision "based on price and capacity to deliver".

My natural tendency is to assume that the transport department was wrong, a sentiment that the article seems to suggest. I then spoke to Jan Breytenbach of National Treasury about the tender rules and how to evaluate the 80 or 90 points for price. Jan was extremely helpful, this is what I learned.

• In terms of general tender transparency and other rules the tendering department has to supply a reason as to why a bidder was not successful. They do not have to provide intimate information about why a certain bidder won, in other words "based on price and capacity to deliver" is a sufficient answer in terms of the law.
• I thought that perhaps the 90 points (the winning bid was R13.5m so it must be 90 points) would have been made up of price and functionality. This is what brought me to Jan Breytenbach, I couldn't figure out how the functionality points worked. Jan referred me to this Treasury Note which alerted bid managers that functionality had been regarded as ultra-vires in two different high court judgments. This would explain why the new regulations have eliminated functionality.
• The bid process removes all those bids that don't qualify for a variety of reasons. In other words the bid committee looks at the response and decides whether the bidder can actually deliver on what they are promising. If not, their bid is rejected (it's likely that Worral's bid was rejected at this point). The remainder of the bids are then evaluated out of the 90 points which is based on price.

Now onto the actual tender. I'll have to speculate here because I don't know anything about the pricing details other than the winning bid was for R13.5m.

So we'll invent a few other bidders for fun

A company – R12.7m

Winning company – R13.5

Other company – R14.9m

Let's start with the 10 preference points.

These points are allocated on a variety of criteria. I have seen bids that award points on this kind of basis (very speculative)

Criteria	Number of points
Ownership of people who had no vote before 1994	6
Woman ownership	3
Local capacity	1

In each of these cases they would allocate a formula but the maximum number of points is available for 100% compliance. Under these circumstances we might be referring to African, Coloured or Indian people. The women ownership points would include white women. Local capacity might refer to how much of the work would be performed by South African sub-contractors. Again, I haven't seen the bid so I don't know what the criteria might be.

In our fictitious world let's say the preference points were awarded this way

Company	Preference points
A company	0
Winning company	8
Other company	6

 

What about the 90 points that are based on price

The vast majority of government tender documents allocate the full 90 points for price. The formula for these points is (this has remained unchanged in the 2011 regulations – except they've brought in the concept of "comparative price").

Ps = 90 x	1 -	Pt - Pmin
		Pmin

Where

Ps = Points scored for price of tender under consideration

Pt = Rand value of tender under consideration

Pmin = Rand value of lowest acceptable tender

The points for these three companies are (you'll have to trust my calculations). 

Company	Price points
A company	90
Winning company	84
Other company	74

Putting it altogether

Many believe that if you don't get any of the preference points your bid is rejected altogether. This is rubbish by doing that you'd effectively be setting aside procurement for a certain type of bidder. This was outlawed by Treasury in 2006. The rule is that the bidder with the highest number of points (there is a caveat this: a bid may be awarded to a bidder with fewer points under certain circumstances).

Company	Price points	Preference points	Total number of points
A company	90	0	90
Winning company	84	8	92
Other company	74	6	80

 

You'll see how important the preference points are in bids that are very similarly priced. And the pricing is one of the things that the bid committee should be aware of at the outset (as per paragraph 3.a of the new PPPFA regulations).

Our PPPFA course

We've partnered with Keyona Business Information & Management Solutions to deliver a one-day PPPFA course where I'll be covering all this information and how the new regulations work in the bid process. I'll also throw in a special section on the Madonsela report. The course is on the 5^th of October, 2011 in Gauteng. You can find out more information here – or download the brochure.

Empowerment by (wrong) numbers - mining charter differentials, losing battle

Instead of a plethora of verification bodies, the government and the industry need to set up a single, authoritative body that should be mandated to provide not just a final level of black ownership, but all of the significant details and proportions. Too much rides on this number to be sloppy or unclear about it.

via www.businessday.co.za

The editorial highlights two other issues facing the BEE verification industry

1. verification agencies differ in methodology, sometimes quite cynically. Beneficiary-aligned agencies find fault everywhere; corporate-aligned agencies find fault nowhere. 
2. some government officials set no store by the findings of verification agencies and claim high ratings can easily be bought.

There is a huge problem with standards in this industry, although I don't think this is why government agencies don't accept VA's findings - I suspect this is just plain bloody-mindedness. One verification agency described a few of the other agencies as monkeys - they may be right but these monkeys still issue certificates and these certificates are valid. It's no surprise that consultants like myself ally themselves to one or two verification agencies because we understand how those agencies work.

I suspect the quotes above refer to a competent DTI-type authority, something the DTI is not.

Something else about the numbers also bears consideration, you cannot come up with a contrary figure to government because they will refute them.  They however use consultants like Duma Gqubule and UdgeAy who will find the figures to support their continuous contention that transformation is not taking place.   

 

FSC is still happening - some time

the Financial Sector Charter Council was close to finalising its proposals for the Financial Sector Code. A revised draft agreement will be submitted to National Treasury and the Department of Trade and Industry.

via www.engineeringnews.co.za

NEF Enterprise Development project - not convincing enough

This has to be approached with a certain amount of caution.  Other than the fact that the NEF itself instills very little confidence in me, this information we get to read is sketchy, and for an investment of R5m you'd want a lot more information.

The first issue is their "blackness", they claim in the prospectus that they are a BEE facilitator.  I can't comment what they are - but I suspect they are correct.  BEE facilitators are considered in paragraph 3 of code 100

the Minister may by notice in the gazette, designate certain Public Entities as BEE Facilitators. In calculatingtheir Ownership score, Measured Enterprises must treat BEE Facilitators as having rights of Ownership held: 

• 100% by Black People; 
• 40% by Black Women; 
• 10% by black designated groups: 
•  without any acquisition debts; and 
• without any third-party rights. 

In other words they can claim the full 20 points for ownership.  I was not aware that this same status could now be used to claim themselves as black for enterprise development purposes.  They however do think this is possible

NEF has been designated as a BEE Facilitator in terms of the Codes.........Since NEF is deemed to be 100% owned by black people, the NEF qualifies as a beneficiary for Enterprise Development.  In addition, in terms of Code 600, payments made by Measured Entities to third parties to perform Enterprise Development  on behalf of the Measured Entities, qualify as Enterprise  Development contributions. NEF is therefore suitably qualified to act as a recipient of Enterprise  Development contributions and to carrying out Enterprise  Development activities.  

They've hedged their bets a bit here - claiming that they are also allowed to perform ED facilities on behalf of measured etcs.  Even though the bets are hedged they are either calling themselves category A or B beneficiaries - I can't find a BEE scorecard that confirms either status (it's based on turnover or contributor level if turnover is more than R35m).

Rule number 1 - GET A BEE CERTIFICATE FROM THE NEF BEFORE YOU DO ANYTHING

The minimum investment amount is R5m and for this you will get a section 18(A) certificate.  Even though they qualify this in a disclaimer remember no more than 10% of your income can be donated for tax deductability purposes.  

It also seems that each contribution will last for five years; viz

The NEF ED Fund will have a 5 year term for each Contributor

I read this as saying that you can contribute R5m upfront and you will accrue ED points for five years for the contribution, subject to the rules.  Effectively a company would have to project five years into the future to get to a cumulative NPAT of R5m.  I'll do the basic maths here:

• Assume that R5m target is evened out over five years.  
• This would mean that for 15 points a company would need to contribute R1m per year (this is 3% of NPAT).  
• Therefore 1% would be R333,333 per year
• Which amounts to a total NPAT figure of  R33,333,333.
• The complexity comes in determining turnover.  However the fine people at BEE-Matrix tell me that the industry average profit margin is 6.17%.  
• The turnover would therefore be R540,248, 514.32 - that's just over half a billion rand - and this is smallest company that can make a contribution.

 

I don't know how many companies there are that turnover this amount of money - but there are at least 10 that the NEF wants to contribute to them on an annual basis (that's 10 x 5 years - 50 companies).

The business case here is flimsy - it'll be a lot cheaper and I think more beneficial for you to hire a decent ED facilitator who might be able to sweat this money more effectively for you.  Someone who understands your business and looks for greater business opportunities in your ED project.

Just as I have done with EMEX - the NEF is free to post a stronger justification in the comments, in the absence of this my advice is to steer clear of it for two reasons

1. there are two many holes in the concept 
2. they are a government organisation, and I don't believe that they can do anything for enterprise development that the private sector can't do better.

PPPFA - Government procurement list available in December

The trade and industry department will publish the procurement list of designated economic sectors from which government will be obliged to purchases on December 7.

In an address to the Cape Town press club, Minister Rob Davies said the designations — provided for in the preferential procurement act — would include infrastructure projects.

A significant proportion of inputs for these projects would have to come from South African manufacturers.

This would include the rolling stock acquisition programme of the Passenger Rail Agency of SA.

via www.businessday.co.za

This is good news if Rob actually makes the deadline. Don't expect him to....

How to do it properly - a brief post

The Sunday Times accused the Western Cape government of tender irregularities.  The DA, who run the Western Cape, deny this.  This is typical in South African politics.  However there are two very unique features to this denial which puts the DA in a morally superior position to that most efficient and uncorrupt party - the ANC.

1. Zille accepts responsibility for this and offers to resign if corruption is found.
2. They actually publish a complete explanation of the tender process and submit these processes to the auditor general to confirm that they are correct.  And all this within 4 days of the accusation.

What would the ANC do?

We don't know - they haven't accepted responsibility for anything in the last 17 years.  

 

EMEX explains

EMEX must feel very strongly about my comments on their sustainability certificate because not only have they emailed me, but they have posted this explanation as a comment.

THE EMEX NPO SUSTAINABILITY CERTIFICATE -A JOINT VENTURE BETWEEN EMEX TRUST AND VODACOM

Dear Paul, with reference to previous correspondence herein kindly herewith some more information to the Emex NPO Sustainability Certificate.

Background: In 2009 the Vodacom Foundation embarked on a journey to develop a Non-Profit Organisation (NPO) accreditation measurement. Eight accreditation weighted elements were identified and operationally defined. As there was no known precedence in South Africa or elsewhere in the world and Vodacom could not be seen as both a player and a referee, Emex Trust, as an independent role player and SANAS accredited B-BBEE Verification Agency, was brought on board in 2010 to help concretise the NPO assessment process. This led to what is now known as the NPO Sustainability Certificate. The NPO Sustainability Certificate may be issued to any NPO subject to the verification process which more fully explained hereunder.

Is it a B-BBEE Certificate?

The NPO Sustainability Certificate is not a B-BBEE certificate and is not marketed as such. It is a certificate aimed at showing the sustainability status in a particular NPO based on the criteria set out below.

Elements Measured:

The following 8 (eight) elements are measured in terms of the NPO Sustainability Certificate:

1. Sustainability - This element measures the NPO's operational capacity and whether the NPO would be able to continue its activities in the future;
2. Experience - This element looks at the number of years the NPO has been in existence and measures the field and extent of knowledge the NPO has acquired over its years in existence;
3. Governance - This element measures in which way the NPO is effectively governed by a board of directors and/or trustees and/or a management committee;
4. Expertise - This element measures in which way the NPO's staff acquired specialised skills or knowledge, whether through professional training or through practical experience;
5. Credibility - This element measures the NPO's image, reputation, truthfulness and reliability by engaging the community(s) within which the NPO operates and obtaining testimony from such community(s);
6. Staff Compliment (sic) - This element measures the number of staff associated with the NPO and looks to provide assurance that the NPO has enough resources to accomplish the objectives of the project(s) it is engaged in;
7. Reach - This element looks at the geographical area in which the NPO operates and looks at the extent of the NPO's project(s)/activities in the different provinces of South Africa;
8. NPO Registration - This element measures whether or not the NPO followed the formal requirements to be registered as an NPO.

Regulation of the Emex NPO Sustainability Certificate:

The NPO Sustainability Certificate is not regulated by statute. It is a privately developed product - developed jointly between Emex Trust and Vodacom. As such Emex Trust and Vodacom entered into a joint venture agreement which regulates their relationship with respect to this product. The intellectual property behind this product is also held jointly by Emex Trust and Vodacom.

Conclusion:

This product was developed to assist any person or entity wishing to make contributions towards an NPO as to the viability of such an NPO.

I note this and to a large extent it's laudable – but it doesn't detract from the unnecessariness of this certificate. What purpose does it serve? And why should any NPO make use of it. Yes it tells a whole lot about a non-profit organisation but these entities exist to serve a cause/community or the like. Does this certificate then make a cause more worthy than any other?

I think there is a moral issue at play here – EMEX and its partner are effectively profiteering off NPOs who could be using the money to benefit their cause/community.

I tell you what I would like to see – Vodacom sponsoring each NPO in getting this certificate. Go on Vodacom,  I dare you.

So you want me to sell your software, services or perhaps your grandmother

Chris Daffy came to see me the other day. He's been running a business that is doing very well and I wanted to know more about it. Chris owns a sales channel development company. He will take your product and match up the correct people/companies to sell it for you. He will then ensure that all the parties are talking and supporting each other. He is responsible for the whole process. I asked him how this business came about and he explained thus:

A few years ago my career took a sudden turn and I was at a loose end. Almost everyone I knew suddenly saw me as a resource to sell everything from meat to gambling tables. And as hard as I did or didn't try nothing ever came of it. I started to think about how can this process be properly managed to produce the desired results. And it really came down to a simple matter of training, support and communication.

Chris explained that there needs to be a proper commitment shown from both parties in order for this to succeed. All too often the company that has the product views this "channel" as a cheap way of getting their product/service (grandmother) to the market and they pay little or no attention to the person selling the product. The chances of this succeeding under these circumstances are round about zero (perhaps lower).

He's right – I have been courted by three different software vendors in the last three weeks, and all of them have wonderful products. They see me as a useful conduit to get their products out to the market. But they have no idea as to how to do this. What they do know is that hiring a sales team is an expensive operation. And so I have been sent 80 page reseller contracts that I have not read beyond the third page and have frankly forgotten what it is they are selling. They could of course make use of Chris Daffy (if he has the time for them right now) but if they don't then they might want to look at the following pointers (which are specifically BEE-related)

1. BEE is a GRUDGE purchase

   If a client negotiates every cent they spend with me then why would they want to spend 10-20 times more than that on a software package? The answer is that they won't. And no amount of BEE sexiness is going to justify that expense. Which brings me onto the next point

2. These products are being used by corporates in South Africa – so there is a market

   Help me sell this product by producing a proper value proposition. What are the cost benefits to the client? For example if your software package can save the company from hiring 4 other people then spell it out. Back it up with the necessary documentation.

3. Don't stop there. Create a proper support structure

   I am a consultant who tries to SAVE my clients money in their BEE programme. If I am going to sell this programme/product I will need proper collateral, preferably with something that I might attach my brand to. The collateral must be up-to-date and must be written in a way that I am able to understand it and sell it. Yes I come from an IT background but that was a long time ago, I don't want to have to explain whether the SQL orange will frequent often with the VB Glaswegian warehousing (you get what I mean). On top of this make sure that there is someone who can come out with me to meet the clients to discuss the finer details – don't leave me floundering in the mire.

4. The sexiness of the product is not enough to get me to sell it

   The chances are that as excited as I am when I leave your demo this excitement will fade very quickly as I get on with my core business. Don't send me a pdf'd presentation and reseller contract and think that I'll do anything with either. I won't. In fact all that shows is that you don't know what you are doing and that you view me as a cheap conduit to get your product to market.

   What you need to do is invest some time in getting me up to speed. This will require training, on-site visits and anything else that might keep my interest piqued.

5. Understand why I may want to sell it

   I consult, in other words, I sell time. There is a limit to what I can earn. I'm also a specialist in certain things that might not be attractive to other types of companies. I'm interested in broadening the types of companies or government departments that I can consult to. A sexy product might get me into those companies. On top of this it opens up a different type of revenue stream that might work for me for a few years. It also moves my profile out of the "elevator capital" sphere and into a business that someone might want to buy in the future.

   I once met some idiot who thought that I could sell his company's products but part of the deal was that I followed his consulting methodology. Our relationship didn't last much longer than the first meeting. He didn't get me at all and just pissed me off.

6. You are going to have to do some marketing

   Think about those products that use very effective channels, like insurance companies. They spend a fortune on branding and marketing so that when that painful broker calls you up he doesn't need to sell the Liberty brand – he just needs to sell himself. I am not going to expend time and effort getting your brand and name out to my clients unless you are willing to throw an equal amount or more in promoting your own brand.

   Years ago I worked for a software company that sold Microsoft products. They would present products at Microsoft sponsored events for a variety of corporates. Why not arrange a nice breakfast where I get to talk about BEE related stuff and your product. We all win – it's just that you have to pay a little money to organise this thing.

7. The chances are we are going to compete in the marketplace

   That's fair enough, a little ridiculous but fair enough. If this is the case then I want some advantage over you, like a preferential rate that allows me to discount or something. I also want some method of letting you know that I am talking to a certain company so that you don't go in there and destroy my chances.

8. Make it financially worth my while

   I cost a fraction of a full time sales person. I will foot many of the costs that you would subsidise your permanent staff, things like travel, printing, telephone etc. The commission structures must be very attractive and clear. I don't want myself selling something and discovering that actually you don't pay commission on this or that. Also make it clear when and how you pay commission and what is expected from me to earn commission on renewals.

9. Have a lead programme

   Because you are doing the marketing it's likely that companies will phone in and want to know more. An equitable lead referral system would help all of us. If I find out that you are taking all the leads then I believe our relationship will come to a rapid end.

10. Why not set up a mutual referral system

    I'll be talking to my clients about you, so why don't you tell your clients about me. If you pay me a commission to sell your stuff then I'll pay you a commission to sell mine.

I believe that these are the most basic requirements for a channel programme. If you have this in place I believe we can talk, if you don't then call Chris – or I'll help you set it up for a fee.

A vile attack on a successful black woman – Constitutionally Speaking

But when I read the opinion piece by one Eric Miyeni in The Sowetan today I immediately thought that this is the kind of hateful and deeply reactionary and sexist drivel which qualifies as hate speech. Mr Miyeni is of the race-is-destiny school of thought, the school of thought which thrives on racial generalisations and assumes that one has no individual moral agency. One IS one’s race. One has no life, no moral core, no complex emotions and beliefs that are unique to oneself — one is only one’s race.

via constitutionallyspeaking.co.za

Could it be that Miyeni was dropped on his head as a child and the damage is only manifesting now. The whole de Vos post is worth reading.

I say we should boycott his writing, his movies, everything.

PPPFA and contractors

There doesn't seem to be much press on the new PPPFA regulations, which I find quite strange because it's these regulations that Malema's cronies need to figure out so that they can carry on stealing from the taxpayer (oops did I just write that). There was an article in the Engineering News last week where Naren Bhojaram who is the CEO of consulting engineering company SSI laments

While these regulations are a great step forward in the bid to promote preferential tender award aims long held by the National Treasury and the Department of Trade and Industry, a refinement of the Act, specifically for consulting engineering services to include functionality as a component of the price and preference points in one assessment, would be a more positive advancement."

Further, the new regulations do not give preference for local consulting engineering groups. The regulations make provision for preference for local content but do not specifically include consulting services in terms of local preference.

There are two issues he raises here

1. That the functionality should be included in the price and preference points section (I think this is what he is saying)
2. The regulations might exclude local consulting services as part of local content

It's not clear what he means in the first point. Functionality has always been a component of the price section, and must be clearly specified and weighted. This is confirmed in section 4 of the regulations

4. (1) An organ of state must indicate in the invitation to submit a tender if that tender will be evaluated on functionality.

(2) The evaluation criteria for measuring functionality must be objective.

(3) When evaluating tenders on functionality, the

(a) evaluation criteria for measuring functionality;

(b) weight of each criterion;

(c) applicable values; and

(d) minimum qualifying score for functionality,

must be clearly specified in the invitation to submit a tender.

The second point is a lot more interesting. He's completely correct that local content is now expressly mentioned (a kind of anti-blackwashing). But, as Naren points out, local content refers back to imported content which is defined as

"imported content" means that portion of the tender price represented by the cost of components, parts or materials which have been or are still to be imported (whether by the supplier or its subcontractors) and which costs are inclusive of the costs abroad, plus freight and other direct importation costs, such as landing costs, dock dues, import duty, sales duty or other similar tax or duty at the South African port of entry;

This definition refers directly to tangibles, not intangibles like intellectual services. This is exacerbated by the definition of local content

"local content" means that portion of the tender price which is not included in the imported content, provided that local manufacture does take place

However I think that in spite of the tangibility of local and imported content, the PPPFA does contemplate services in its regulations and this falls within the definition of functionality

"functionality" means the measurement according to predetermined norms, as set out in the tender documents, of a service or commodity that is designed to be practical and useful, working or operating, taking into account, among other factors, the quality, reliability, viability and durability of a service and the technical capacity and ability of a tenderer

This is further enhanced by the definition of tender

"tender" means a written offer in a prescribed or stipulated form in response to an invitation by an organ of state for the provision of services, works or goods, through price quotations, advertised competitive tendering processes or proposals;

The question now is how do consulting services of any shape or form be stipulated as local content. It seems that the most effective way of doing this in terms of the regulations (I can't comment on how practical this is) would be to lobby the DTI to recognise that sector as being a designated sector in line with the national development and industrial policies for local production; viz

"designated sector" means a sector, sub-sector or industry that has been designated by the Department of Trade and Industry in line with national development and industrial policies for local production, where only locally produced services, works or goods or locally manufactured goods meet the stipulated minimum threshold for local production and content;

Once you've been designated as a designated sector you are specifically included in regulation 9 (paragraph 1)

An organ of state must, in the case of designated sectors, where in the award of tenders local production and content is of critical importance, advertise such tenders with a specific tendering condition that only locally produced goods, services or works or locally manufactured goods, with a stipulated minimum threshold for local production and content will be considered.

Even if you haven't managed to persuade the DTI that your sector should be a designated sector you aren't out in the cold. Section 9 (3) states

where there is no designated sector, an organ of state may include, as a specific tendering condition, that only locally produced services, works or goods or locally manufactured goods with a stipulated minimum threshold for local production and content, will be considered, on condition that such prescript and threshold are in accordance with the specific directives issued for this purpose by the National Treasury in consultation with the Department of Trade and Industry.

Furthermore the local capacity has to be determined at the outset in terms of regulation 3 of the PPPFA regulations

3. An organ of state must, prior to making an invitation for tenders

(c) determine whether the services, works or goods for which an invitation for tenders is to be made has been designated for local production and content in terms of regulation 9.

Naren does leave with a last thought that is terribly apt and is the sole reason why the BMF wanted a 70:30 or 60:40 split in the tender regulations.

"Consulting engineers compete with foreign companies that sometimes have the backing of their government to provide services on the African continent. This can result in unfair price competition because, even if the international company scores zero for preference, their subsidised lower price will give them the greater advantage in the overall score,"

And this comment gets to the bottom of section 217 of the constitution

217. (1) When an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is

fair,

equitable,

transparent,

competitive and

cost-effective.

The government still wants a fair price for the goods and services it procures. This issue was raised by Thuli Madonsela in her "Against the Rules Too" report on the SAPS leases (page 15),

(g) The market rental rate for a building such as the Transnet building was determined by the DPW at R40.00 per m². The lease agreement signed between RPF and the DPW in respect of the Transnet building reflect a rental rate of R125.30 per m². The procurement of the lease was not in accordance with a system that is cost effective.

The BMF's lobby point would have been a complete violation of section 217 and was correctly ignored (along with almost everything else they say).

PPPFA course in October, 2011

By the way, we are arranging a one day course on the PPPFA and B-BBEE in October.  The course will go through the legislation and finish up with a few interesting case studies.  I'll keep you posted as to the details.