Parliament can help resolve the contest over the budget – the first such impasse since 1994 – by cutting BEE “preference premiums” and thus avoiding a Value-Added Tax (VAT) hike.
So says the Institute of Race Relations (IRR) in a statement on recommendations made by IRR Legal to finance committees in both houses of Parliament, as part of this week’s public participation process on the fiscal framework.
IRR Legal recommends “two simple steps” −to make BEE “preference premiums” transparent, and to reduce BEE “preference premiums” in public procurement to R0.
The IRR says: “Currently, public procurement allows for BEE “preference premiums”, in the words of Treasury official Willie Mathebula, that are “capped” at 25% on contracts below R50 million and 11.1% on contracts above R50 million. These “preference premiums” increase the cost of delivering public services and reduce value for money.
As IRR CEO Dr John Endres explains: “Think of the government extending a tarred road towards a rural school. If it pays a premium to one supplier, then less road gets built. On the other hand, if it maximises value, the road goes further for the same amount of money. One of those two options is better for the school.”
“However, national Treasury is committed to paying premiums and even tabled legislation to allow for their expansion in 2024.
“In order to keep paying for these premiums, and other government expenses, finance minister Enoch Godongwana has communicated to Parliament the intention to hike VAT by R39.2 billion and Personal Income Tax (PIT) by R19.5 billion through bracket creep.
“If that happens, households earning less than R6,900 per month will pay an extra R12.7 billion in VAT over the next two years. That will pay for, inter alia, ongoing BEE “preference premiums” collected by established businesses.”
The IRR’s February 2025 report, Cut VAT & BEE, by Executive Director of IRR Legal Gabriel Crouse, “estimates that the licit cost of BEE premiums in public procurement is approximately R17 billion per annum.”
“Worse, the report estimates waste due to corruption associated with the premium procurement system to be the region of R133 billion per annum.
“By comparison the International Monetary Fund (IMF), based on an earlier internal Treasury review, has estimated avoidable waste to be in the region of R270 billion per annum.
“As an IMF report noted: ‘The preferential procurement system is costly and ineffective. The cost concerns have arisen not only because of the trade-offs with competitive procurement, but also because the Zondo commission reports have illustrated how the preferential procurement system has been used as an avenue for corruption, state capture, and rent seeking’.”
The IRR points out that the Zondo report “drew attention to the ‘inevitable tension’ between preference premiums and value for money, advising the state to derive ‘maximum value-for-money in the procurement process’.”
IRR Legal has pointed to two practical steps to reduce BEE procurement premiums that Minister Godongwana can take now, to avoid raising VAT and PIT on May 1, estimated to save R150 billion.
“First, he can reduce the threshold for the 25% premium cap from R50 million to R500,000. That would shift most of the R1.1 trillion procurement budget to the lower 11.1% cap.
“Second, Minister Godongwana has the authority to serve the public interest by exempting organs of state from paying BEE premiums if requested.
“Separately, Parliament was provided with the practical basis to calculate part of the cost of BEE premiums, which have so far never been published.
“The alternatives are clear. Either the state will continue down its current path of raising VAT, South Africa’s most regressive tax, and PIT, hitting poor and middle-class South Africans, while expanding premiums paid to established, well-connected businesses − or it can start maximising value for money.
“IRR Legal urges Parliament to direct Minister Godongwana down the only path that leads to growth.”
Says IRR researcher Anlu Keeve: “South Africa cannot afford more symbolic spending at the expense of jobs and dignity. The country is too poor for any other option. We must maximise value for money.”
* The first version of the IRR statement yesterday incorrectly stated the cost of BEE preference premiums in procurement.
Specifically, it stated that the estimated licit cost of these premiums, R17 billion, was roughly equivalent to the cost of new paved road construction “far enough to stretch from Cape Town to Beijing and back again”.
In a later statement, the IRR says:
In processing the statement, a miscalculation occurred, arising from confusing licit and illicit costs of BEE premiums, as well as an outdated road cost figure.
For full transparency, here are the correct numbers:
Calculation 1: Estimated licit cost of BEE premiums: R17 billion.
Estimated cost of low-traffic countryside road absent premium: R7.5 million per kilometre.
Distance from Cape Town to Joburg: +-1,400 kilometres.
Cost of road construction over that distance: R10.5 billion.
Conclusion 1: licit BEE procurement premiums expected to be able to pay for new road stretching from Cape Town to Joburg annually, with R6.5 billion to spare.
Calculation 2:
Estimated total cost of BEE premiums: R150 billion.
Distance from Cape town to Beijing: +-18,800 kilometres.
Cost of that distance: R141 billion.
Conclusion 2: Total BEE procurement premiums expected to be able to pay for new road stretching from Cape Town to Beijing annually, with R9 billion to spare.