In the past week, both Eskom and SAA confirmed huge new demands on some of their contractors – SAA demanding 30% of a contract with Bidvest’s BidAir Services and Eskom 30% equity in its boiler serve contractors Steinmuller, Actom and Babcock. These contracts are about to be renewed.
SAA confirmed that its aim is for the 30% share of BidAir Services’ SAA grooming, toilet and water contract to be transferred to a black-owned small business, apparently nominated by SAA. Eskom did not disclose whether it would retain the 30% equity it is trying to obtain, or also transfer it to a third party.
A service provider who attended a recent tender meeting at a third State-owned company (SOC) told Moneyweb on Sunday potential bidders were informed of a similar requirement.
This raises the question whether government has adopted new requirements that may effectively introduce another 30% empowerment requirement over and above existing empowerment legislation.
Corporate governance expert Charl Kocks of Ratings Afrika says if that is the case, it will corrupt the existing black empowerment programme that has been carefully introduced over a period and increase uncertainty in the market about the rules of doing business with government.
As a result, companies may either avoid doing business with government, or build in substantial risk premiums.
Moneyweb earlier obtained a copy of a letter dated June 30, and signed by Bidvest Executive Director Mpumi Madisa and CEO Lindsay Ralphs requesting “advice and guidance” on the matter from SAA non-executive director Yakhe Kwinana, who apparently made the 30%-“request”. It also asks that the request “be formalised and communicated in writing for due consideration”.
Bidvest itself would not comment, saying: “This confidential letter forms part of an ongoing engagement with SAA. Bidvest does not wish to add anything further at this stage.”
In the letter the company explains that BidAir Services is a 100% owned subsidiary of Bidvest Ltd and only the parent company can make decisions about ownership and shareholding.
It further states that BidAir Services is already 63.42% black-owned and a transfer of a further 30% to a black-owned small business will therefore result in 74.39% black shareholding. “Does this imply that SAA’s supplier black ownership requirement is now closer to 75%?” Bidvest asks.
It explains that BidAir Services provides similar services to other airlines and a new company would therefore have to be established for the SAA contract to accommodate a 30% partner, which the SAA will apparently nominate. The company asks questions about, among others, the ability of the unknown black small business to contribute to the capital cost such a new company would incur, estimated at R20 million.
In its response to questions from Moneyweb, SAA said: “We confirm that the company is in receipt of correspondence dated 30 June from Bidvest which canvassed a number of issues regarding SAA transformation requirements. SAA is neither oblivious nor in doubt of the BEE ownership of Bidvest. The intent was hardly to influence the existing shareholding at Bidvest. If anything, SAA’s intention is to contribute to transformation of services rendered by Bidvest to SAA. The 30% applies to (the) SAA contract, not to Bidvest as a company.”
SAA explains that it agreed with the Department of Trade and Industry (dti) to “contribute and accelerate transformation using procurement of goods and services as a launch pad”.
It said: “In support of a call made by our government, SAA has pledged to support black industrialists, black-owned businesses, women and the youth. These categories serve as principles that inform the criteria for eligibility.
“This is a first, bold move in South Africa’s aviation history. SAA Board is on record indicating that the airline is committed towards empowering entrepreneurs from disadvantaged backgrounds by leveling the playing fields to deliver inclusive opportunities.”
SAA does not say whether the transfer of 30% of the contract was specifically agreed upon with the dti.
In its explanation of the 30% equity claim Eskom said: “Eskom was granted a mandate to negotiate a 30% shareholding from boiler-serve contractors: Steinmuller, Actom and Babcock – in return for a portion of the order book, which is currently valued at approximately R30 billion.”
The utility did not expand on what exactly the mandate entails, whether it was government as shareholder or its board that gave the mandate or whether it will transfer the equity stakes to a third party.
It said Eskom is looking for “constructive partnerships with the boiler-serve suppliers, to drive Eskom’s strategic procurement approach. These include improving plant and safety performance, providing greater insight in addressing the high level of unplanned boiler maintenance and enhancing skill transfer.”
Eskom denied forcing the equity requirement on the contractors and said: “It is unfortunate that the information was perceived as a non-negotiable and shut condition, which is in clear contradiction to the way Eskom conducts its business.”
Kocks said it is untenable for companies to tender, not knowing who will be given to them as partners. They will therefore increase their bids by up to 30% to provide for increased risk. The result will be that SOCs will pay more for goods and services. This will be recovered from their clients, who are the people of South Africa, he said.
Kocks added that when government imposes something like this on the market at short notice, it increases uncertainty.
He said there is already a suspicion in the market that factors other than the adjudication scorecard play a significant role in government procurement. “This kind of irrational demand introduces a new level of risk. Companies will ask themselves what to expect tomorrow and the day thereafter.
“Who at SAA will identify the entities that will benefit?” He says the discipline of a competitive market is being diluted by this kind of central control and inefficiencies will increase, while the door is being opened for corruption.
Kocks says on a rational basis, a change in government procurement of this kind may affect the share prices of listed supplier companies and investors may be deterred, as the market perceives bigger risk and lower return on contracts for these companies.