EMPLOYMENT THROUGH PROCUREMENT · PBE Priority Business Enterprise PFMA Public Finance Management...

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EMPLOYMENT THROUGH PROCUREMENT

Municipal Case Studies on Pursuing Socio-Economic Objectives through Procurement

Dr Sean Phillips and Mr Mehleli Mpofu

Researchers

Global Sustainable Development (GSD)

May 2010

centre for poverty employment and growth

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Human Sciences Research Council

May 2010

This paper forms part of the Employment through Private Preferential Procurement and Value Creation Project, with funding from the W.K. Kellogg Foundation and the Tshwane Metropolitan Municipality. The authors would like to thank representatives from the following organisations for sharing their experiences and information on the profiled programmes and municipalities: Shisaka Management Services, Link’d Project Managers and Department of Environmental Affairs for the Mafeking Waste Management Case Study; The City of Joburg Transport Sector and the Joburg

Development Agency for the City of Joburg Case Study.

Produced by: Mr Mehleli Mpofu and Dr Sean Phillips

Global Sustainable Development

Contact: Dr Miriam Altman Executive Director, CPEG

E-mail: [email protected]

Tel: +27 12 302 2402

Municipal Case Studies on Pursuing Socio-Economic Objectives through

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Contents

Executive Summary...................................................................................................................7

1. Introduction ....................................................................................................................10

1.1. The employment through procurement project.............................................10

1.2. Components of the research..............................................................................10

1.3. Definition of key terms ......................................................................................11

1.4. Research methodology........................................................................................12

1.5. Research propositions.........................................................................................12

1.6. Selection of municipal programmes for case studies.....................................12

2. Overview of legislative environment...........................................................................14

2.1. Key national procurement legislation...............................................................14

2.2. Key municipal procurement legislation ...........................................................15

2.3. Key municipal preferential procurement legislation ......................................17

3. Case study reports ..........................................................................................................20

3.1. eThekwini contractor development programme............................................20

3.2. Pursuit of socio-economic on the City of Joburg’s BRT project ................31

3.3. Mafeking waste collection programme ............................................................40

4. Analysis of results...........................................................................................................50

4.1. Feasibility of implementing dedicated programmes ......................................50

4.2. Alignment to existing legislation .......................................................................51

4.3. The socio-economic impact of municipal programmes................................52

4.4. Impact of programmes on service delivery .....................................................52

4.5. Additional observations......................................................................................52

5. Conclusion.......................................................................................................................54


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List of Acronyms

BBBEE Broad Based Black Economic Empowerment

BBE Black Business Enterprise

BEE Black Economic Empowerment

BRT Bus Rapid Transit

CIDB Construction Industrial Development Board

CoGTA Cooperative Governance and Traditional Affairs

CoJ City of Johannesburg

CPEG Centre for Poverty, Employment and Growth

CPG Contract Participation Goals

DEA Department of Environment Affairs

DEAT Department of Environmental Affairs and Tourism

DED Department of Economic Development

DPBE Disabled Person Business Enterprise

DPW Department of Public Works

DTI Department of Trade and Industry

EMA eThekwini Municipality Area

EPWP Expanded Public Works Programme

GEP Gauteng Enterprise Propeller

GDP Gross Domestic Product

GRP Gross Regional Product

GSSC Gauteng Shared Service Centre

HDI Historically Disadvantaged Individual

HSRC Human Sciences and Research Council

IDP Integrated Development Plan

JDA Joburg Development Agency

JRA Joburg Road Agency

LED Local Economic Development

LM Local Municipal

LTDF Long Term Development Framework

MFMA Municipal Finance Management Act

MSA Municipal Systems Act

NEC New Engineering Contract

PBE Priority Business Enterprise

PFMA Public Finance Management Act

PPG Priority Population Group

PPPFA Preferential Procurement Policy Framework Act

RFP Request for Proposals

RFQ Request of Quotations

SANS South African National Standard


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SARS South African Revenue Services

SCM Supply Chain Management

SCMU Supply Chain Management Unit

SME Small and Medium Enterprises

SMME Small Medium and Micro Enterprises

SMME Small Medium and Micro Enterprises

TBP The Business Place

WBE Woman Business Enterprise


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Tables

Table 1: Primary pieces of legislation that regulate public sector procurement 14

Table 2: Minimum requirements municipal supply chain management framework 16

Table 3: Determination of a firm’s BEE status 18

Table 4: eThekwini adjudication scorecard for contracts below R500,000 24

Table 5 : eThekwini adjudication scorecard for contracts above R500,000 25


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Executive Summary

The HSRC in partnership with Tshwane Metro have embarked on a partnership to intensify local economic development and employment that can be stimulated through improved procurement practices. As part of this partnership, Tshwane has committed to strengthening its own systems. In setting out to do so, the HSRC has prepared a review of municipal approaches to achieving socio-economic objectives. We believed that this could identify the current standard to help benchmark Tshwane’s own performance.

Some of our questions starting out included:

• Is it possible for municipalities to implement dedicated programmes to achieve socio-economic objectives through procurement?

• Can the implementation of these dedicated programmes be carried out within the existing regulatory framework?

• Can such programmes have significant socio-economic impact?

• Is it possible for the implementation of dedicated programmes to achieve socio-economic objectives through procurement in a way that does not impede service delivery nor raise the costs of service delivery?

The socio-economic objectives investigated included increasing employment, local content, SME and/or BEE involvement in municipal supply chains.

The key observation from the research was that very few municipalities have adopted dedicated programmes to pursue socio-economic objectives through procurement. Where programmes that purport to support SMME/BEE involvement in the municipality’s supply chain have been identified, these programmes are still in their infancy. However, municipalities have adopted a transactional approach to pursuing socio-economic objectives through procurement. This approach involves granting preferential points to tenderers on separate procurement events (i.e., targeted procurement) in accordance to the municipality’s preferential procurement policy as well as applying the EPWP guidelines where applicable. Where a more programmatic approach has been adopted, this has resulted from the selected procurement and contracting strategy for the related spend category or set of projects. In these instances, a programmatic approach has been possible as the related contracts were of a high value and long duration (i.e. 2 to 3 years).

Further the research also indicates that the development of a more programmatic approach to pursuing socio-economic objectives through procurement need not necessarily be driven by the municipality’s supply chain unit. Rather this process can be driven by the line departments who have a greater awareness and knowledge of their supplier industries and hence the applicable strategies and tactics to maximise the attainment of socio-economic objectives. The case studies show that SCM units play a crucial role in setting policy, supporting its implementation and monitoring its compliance. However the line departments also play a crucial role in ensuring that


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best practices for their sector are applied within the existing municipal guidelines and policies.

A second key observation from the profiled programmes, it that it is possible to develop and implement dedicated programmes within the existing legislative framework and still have meaningful local economic impact. Indeed the profiled programmes not only compiled with the legislative framework, but leveraged the best practice guidelines produced in terms of the existing policy frameworks to achieve results that would not have being achieved through transactional approaches alone.

Thirdly, the case studies highlights that the pursuit of socio-economic objectives, be it on a transactional or programmatic basis, need not affect service delivery nor the cost of service delivery. However, it is clear that case by case trade offs between achievable socio-economic objectives and service delivery, often need to be made, reinforcing the need for greater collaboration between the line departments and SCM units. Further, the case studies highlights that time pressures, imposed on certain procurement processes and projects, may results in the pursuit of socio-economic objectives being compromised.

In addition to testing the above research propositions, two observations were made which partially explain the tendency to only use transactional approaches rather than programmatic approaches are provided. The first observation was a general shortage of capacity within municipalities which hinders the development and implementation of dedicated programmes. The two identified programmes extensively relied on external consultants and services providers to not only develop but to also implement the programmes. The second observation was that the general low levels of maturity of the municipal approaches to supply chain management and procurement when compared to best practices from both the private and the public sector, hinders the development and implementation of appropriate programmes. Indeed earlier research on the approaches to preferential procurement adopted by South African corporates indicated that the most successful corporates in pursuing socio-economic objectives through procurement are those which have adopted practices such as strategic sourcing, supplier relationship management and use cross functional teams. These corporates have also embedded their approach to preferential procurement within these practices. This has resulted in the selection of procurement and contracting strategies with the potential to maximise the realisation of socio-economic objectives as well as enabled the development of appropriate support programmes aligned to the sophistication and needs of the particular supplier market.

Therefore to enhance the ability of municipalities to pursue socio-economic objectives through procurement, it was recommended that municipalities adopt programmatic approaches in addition to existing transactional approaches. This can be achieved if municipalities adopt a sector based approach to identifying and developing specific programmes aligned to the sophistication and needs of the particular sector. This approach will not only enable municipalities to apply identified best practice for the particular sector, but will also enable the building of a body knowledge as specific programmes are piloted and tested.

To bridge the capacity shortfall within municipalities, greater collaboration between municipal SCM units and their line departments will also be necessary. In particular, the line department’s knowledge and awareness of their supplier markets will need to


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be tapped into. Secondly, national bodies or knowledge networks can play a key role in helping to develop and disseminate sector best practices. The Construction Industry Development Board (CIDB) is already fulfilling this role within the construction sector and its best practices guidelines are already aligned to the existing legislative environment. Similarly the DEA is also playing a similar role with regards to improving waste management amongst poorer municipalities with a rural/urban demographic.


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1. Introduction

1.1. The employment through procurement project

In July 2008, the Tshwane Metropolitan Municipality agreed to partner with the Centre for Poverty, Employment and Growth (CPEG) at the Human Sciences Research Council (HSRC) to implement the “Employment through Procurement Project”. The project involves developing and disseminating a knowledge base of procurement and enterprise development strategies to achieve socio-economic objectives. The idea was to leverage pre-existing commitments to preferential procurement as a way of fast-tracking investment, business development and employment in Tshwane. The project is expected to run until June 2011, depending on availability of funding.

In December 2010, to ensure maximum value for money for the Tshwane Metropolitan Municipality it was proposed that project’s scope of work be altered to focus on three project elements stated below. These proposed changes and the original project deliverables are outlined in the “Proposed Strategic Framework” document presented to the City of Tshwane in December 2010.

1.2. Components of the research

The three project elements outlined in the Proposed Strategic Framework document are as follows.

� Project Element 1: Employment through Tshwane Procurement

• Target Beneficiaries: Potential suppliers to Tshwane Metropolitan Municipality.

• Objectives: To promote employment and value creation in the Tshwane area by increasing the participation of Tshwane based suppliers within the supply chain of the Tshwane Metropolitan Municipality.

� Project Element 2: Employment through Private Sector Procurement

• Target Beneficiaries: Potential suppliers to large corporates within the boundaries of the Tshwane Metropolitan Municipality.

• Objectives: To promote employment and value creation by increasing the participation of Tshwane based suppliers within the supply chain of large corporates with significant operations within the boundaries of the Tshwane Metropolitan Municipality.

� Project Element 3: Baseline Information and Knowledge Sharing

• Objective: To establish a knowledge network whose activities include:


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a. The strengthening of linkages between various initiatives and stakeholders;

b. Increasing research activities in focus areas identified by corporates and the public sector (e.g., monitoring the impact of various approaches over time);

c. Promoting interaction between policy development and knowledge; and

d. Introduce the knowledge into the education system and the procurement profession.

This report focuses on the first deliverable for Project Element 1, the Compilation of case studies on preferential procurement approaches adopted by cities and municipalities to increase the involvement of local suppliers in their supply chains. The work builds on the lessons learnt and key messages from earlier research reports produced on the Employment through Procurement. These include.

a. Research report: Employment through Private Preferential Procurement and Value Creation Project. HSRC (CPEG). 2009;

b. Research report: Overview of the policy and institutional landscape for enterprise development and preferential procurement in South Africa. HSRC (CPEG). 2009;

c. Research report: Overall case study report on the employment through procurement. HSRC (CPEG). 2010;

1.3. Definition of key terms

For the purposes of this document ‘procurement’, ‘preferential procurement’ and ‘enterprise development’ have been defined as follows:

Procurement is the acquisition of goods and/or services at the best possible total cost of ownership, in the right quantity and quality, at the right time, in the right place and from the right source for the direct benefit or use of corporations or individuals, generally via a contract.

Preferential procurement encompasses the aforementioned procurement processes and includes other issues that directly impact on supplier selection to meet various socio-economic goals, such as BBBEE or local supplier support. Preferential procurement does not impact on the type of goods and services that are procured but may impact on the way procurement is planned and executed. In this series of reports, the term ‘preferential procurement’ includes all procurement approaches aimed at achieving socio-economic objectives and is not limited to the application of preferences in the tender adjudication process, as the term is commonly understood in government.

Enterprise development is the investment of time and capital in creating, expanding, or improving the governance, management and operations of a business thereby


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contributing to the growth and sustainability of the enterprise. In this document, the term ‘enterprise development’ incorporates the term ‘supplier development’.

Further the document makes a distinction between transactional and programmatic approaches to pursuing socio-economic objectives through procurement. A transactional approach refers to the use of a preferential points system during tender processes to give preference to firms that commit to achieve certain socio-economic objectives during the course their contract. A programmatic approach involves the design and implementation of specific support measures to enable the sustained realisation of socio-economic objectives throughout the course of a contract. Programmatic approaches (referred to as programmes) can be implemented as part of long term contracts or as a stand alone support measures to be leveraged across multiple procurement events.

1.4. Research methodology

The research applied a multiple case study approach to identify key lessons and practices with regards to the municipalities’ pursuit of socio-economic objectives through procurement. A minimum of 2 programmes were targeted for data collection and assessment. Data was obtained from publically available policy and strategy documents, interviews with key programme stakeholders and documentation received from the interviewees.

1.5. Research propositions

The initial propositions which the researchers aimed to test included:

1) It is possible for municipalities to implement dedicated programmes to achieve socio-economic objectives through procurement

2) The implementation of these dedicated programmes can be carried out within the existing regulatory framework

3) Such programmes can have significant socio-economic impact

4) The implementation of dedicated programmes to achieve socio-economic objectives through procurement need not affect service delivery and the costs of service delivery.

Socio-economic objectives to be investigated include increasing employment, local content, SME and/or BEE involvement municipal supply chains.

1.6. Selection of municipal programmes for case studies

In line with the overall objective for project element 1, rather than just profiling the general transactional approaches being adopted by municipalities, the research focused on profiling specific programmes that have been applied by municipalities to


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leverage their procurement expenditure for employment, business development and/or fast tracking investment.

Programmes were identified through a web-based review of the procurement practices and Local Economic Development (LED) strategies that are being applied by municipalities across South Africa and through enquiries with representatives from the DTI, SA Cities Network, the Business Trust, National Treasury, the Department of Cooperative Governance and Traditional Affairs. The research exclusively focused on employment creation and enterprise development programmes that leverage municipal procurement expenditure and as such as generic job creation and SMME development programmes (e.g., creating an enabling environment for economic development) were excluded.

Three programmes were thus identified for case study purposes.

� The eThekwini Contractor Development Programme

• The eThekwini contractor development programmes highlights how a province can apply Construction Industry Development Board (CIDB) aligned construction procurement strategies to simultaneously ensure effective infrastructure delivery and contractor development on large scale municipal infrastructure programmes making use of South Africa’s globally competitive construction sector.

� Pursuit of Socio-Economic Objectives on the City of Joburg’s BRT Project

• The case study on the pursuit of socio-economic objectives on the City of Joburg’s Bus Rapid Transit Programme highlights the distribution of responsibilities across municipal departments with regards to developing and implementing “employment through procurement” projects. In particular, a municipality’s SCM or finance department can develop the procurement policies and procedures, the economic development unit can develop cross-cutting programmes to support SMME and other black suppliers, and service departments apply the appropriate strategies to leverage the expenditure within their control to ensure that the socio-economic development targets are achieved.

� Mafeking Waste Collection Programme

• The Mafeking Waste Collection Project provides an example of how a municipality can expand its services to un-serviced areas in a manner that promotes entrepreneurial development and creates work opportunities for local communities.


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2. Overview of legislative environment

2.1. Key national procurement legislation

The primary pieces of national legislation that govern procurement and hence the approaches to pursuing socio-economic objectives through procurement, within the local sphere of government are shown in table 1 below.

Table 1: Primary pieces of legislation that regulate public sector procurement

Act Applicability What it does with respect to Supply Chain Management?

Constitution of the Republic of South Africa, 1996 (Act No 108 of 1996)

All organs of state

Provides procurement objectives and establishes government’s policy for preferencing

Preferential Procurement Policy Framework Act, 2000 (Act No 5 of 2000)

All organs of state

Establishes the manner in which preferential procurement policies are to be implemented

Public Finance Management Act, 1999, (Act 1 of 1999)

All organs of state, except in the local sphere of government

Establishes broad framework within which accounting officers / authorities must establish their procurement and provisioning system (supply chain management)

Municipal Finance Management Act, 2003 (Act No 56 of 2003)

Municipalities and municipal entities

Establishes a detailed regulatory framework for supply chain management.

Municipal Systems Act, 2000 (Act No 32 of 2000);

Local sphere of government

Establishes a framework for the establishment of service delivery agreements involving competitive bidding processes

Construction Industry Development Board Act, 2000 (Act 38 of 2000)

All organs of state involved in procurement relating to the construction industry.

Establishes a means by which the Board can promote and implement policies, programmes and projects aimed at procurement reform, standardisation and uniformity in procurement documentation, practices and procedures within the framework of the procurement policy of government; Establishes a national register of contractors (and if required, consultants and suppliers) to manage public sector procurement risk.

Broad-Based Black Economic Empowerment Act, 2003 (Act No. 53 of 2003).

All organs of state.

Establishes a code of good practice to inform t

– The development of qualification criteria for the issuing of licenses or concessions, the sale of state owned enterprises and for entering into partnerships with the private sector; and

– development and implementation of a preferential procurement policy.


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Act Applicability What it does with respect to Supply Chain Management?

Prevention and Combating of Corrupt Activities Act, 2004. (Act No. 12 of 2004).

Public and private sector

Makes corruption and related activities an offence; Requires the establishment of a Register in order to place certain restrictions on persons and enterprises convicted of corrupt activities relating to tenders and contracts; Places a duty on certain persons holding a position of authority to report certain corrupt transactions.

Source: Construction procurement best practice guideline #a2, applying the procurement prescripts of the CIDB in the public sector December 2007

2.2. Key municipal procurement legislation

2.2.1. The municipal finance management act

The Municipal Finance Management Act, stipulates that accounting officers are responsible for taking all reasonable steps to ensure that proper mechanisms and separation of duties in the supply chain management system are in place to minimize the likelihood of fraud, corruption, favouritism and unfair irregular practices; and for implementing the supply chain management policy of the municipality or municipal entity in accordance with a prescribed regulatory framework for supply chain management, issued by the Minister of Finance that cover the requirements shown in table 2 below.

The Municipal Supply Chain Management Regulations published in 2005, require each municipal entity in terms of section 111 of the Act to have and implement a supply chain management policy that is consistent with other applicable legislation (including the CIDB Act) and does not undermine the objective for uniformity in supply chain management systems between organs of state in all spheres.

2.2.2. The construction industry development board act

Construction procurement, apart from being regulated in terms of general legislation governing public procurement, is also regulated through the following prescripts of the Construction Industry Development Board (CIDB) which have been issued in terms of the Construction Industry Development Board Act, 2000 (Act no. 38 of 2000)):

� CIDB Code of Conduct for the Parties engaged in Construction Procurement published in terms of the Construction Industry Development Board Act (Act 38 of 2000); and

� CIDB Standard for Uniformity in Construction Procurement published in terms of the Construction Industry Development Regulations of the Construction Industry Dvelopment Board Act (Act 38 of 2000)


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Table 2: Minimum requirements municipal supply chain management framework

A Municipal Supply Chain Management Framework must cover the following:

� The range of supply chain management processes that municipalities and municipal entities may use, including tenders, quotations, auctions and other types of competitive bidding.

� When a municipality or municipal entity may or must use a particular type of process.

� Procedures and mechanisms for each type of process.

� Procedures and mechanisms for more flexible processes where the value of a procedure is below a prescribed amount.

� Open and transparent pre-qualification processes for tenders or other bids.

� Competitive bidding processes in which only pre-qualified persons may participate.

� Bid documentation, advertising of and invitations for contracts.

� Procedures and mechanisms for: o the opening, registering and recording of bids in the presence of interested persons;

o the evaluation of bids to ensure best value for money; o negotiating the final terms of contracts; and o the approval of bids.

� Screening processes and security clearances for prospective contractors on tenders or other bids above a prescribed limit.

� Compulsory disclosure of any conflicts of interests prospective contractors may have in specific tenders and the exclusion of such prospective contractor from those tenders or bids.

� Participation in the supply chain management system of persons who are not officials of the municipality or municipal entity.

� The barring of persons from participating in tendering or other bidding processes, including persons: o who were convicted for fraud or corruption during the past five years; o who willfully neglected, reneged on or failed to comply with a government contract during the past five years;

o whose tax matters are not cleared by South African Revenue Service.

� Measures for: o combating fraud, corruption, favouritism and unfair and irregular practices in supply chain management;

o promoting ethics of officials and other role players involved in municipal supply chain management.

� The invalidation of recommendations or decisions that were unlawful, improperly made, taken or influenced, including recommendations or decisions that were made, taken or in any way influenced by: o councilors in contravention of item 5 or 6 of the Code of Conduct for Councilors set out in Schedule 1 to the Municipal Systems Act; or

o municipal officials in contravention of item 4 or 5 of the Code of Conduct for Municipal Staff Members set out in Schedule 2 to that Act.

� The procurement of goods and services by municipalities or municipal entities through contracts procured by other organs of state.

� Contract management and dispute settling procedures.

� The delegation of municipal supply chain management powers and duties including to officials.

Source: Construction procurement best practice guideline #a2, applying the procurement prescripts of the CIDB in the public sector December 2007


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The CIDB in terms of its mandate has also published a library of construction procurement best practice notes. Key practice notes include notes on:

� Framework agreements

� Competitive selection of contractors

� Identifying a construction works contract

� Competitive negotiations

� Achieving social and economic deliverables

� Evaluating quality

� Evaluation of tenders

� Scaling up delivery and accelerating empowerment

� Applying the register of contractors

� Procuring best value on construction works

� Accepted subcontracting arrangements

� Obtaining social and economic deliverables

Whilst these practice notes are not legally binding, they provide guidelines that are compliant with the principles and minimum standards of a public procurement system as stipulated in the PFMA and the MMFA.

2.3. Key municipal preferential procurement legislation

As with all organs of states, the most pertinent acts with regards to the pursuit of socio-economic objectives through procurement are the PPPFA and the BBBEE Act.

2.3.1. The preferential procurement policy framework act

The PPPFA requires all government institutions to implement procurement policies which provide for categories of preference in the allocation of contracts. Through this act, public sector institutions are obliged to use the 90/10 or 80/20 rule, depending on the size of the contract, during the adjudication of tenders. According to this rule, up to 20% of the adjudication points can be derived from the consideration of specific goals such as the contracting with persons, or categories of persons


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historically disadvantaged1 by unfair discrimination on the basis of race, gender or disability. The remaining 80% of the points are based on price and functionality.

2.3.2. The broad based black economic act

The BBBEE Act was introduced to address the shortcomings of the initial conceptualisation of BEE which focused more on the transfer of the ownership and control of economic assets to a few prominent black individuals without addressing the vast racial and gender inequalities, which were still being perpetuated through the lack of access to assets, skills, employment and wealth creation opportunities such access to tenders and key economic activities. Therefore the BBBEE act enabled the application of a definition of black economic empowerment which included ownership and control of economic assets, skills development, preferential procurement, employment equity, enterprise development and general socio-economic upliftment of black people, women, the youth, people living with disabilities and under-developed communities. This has been achieved through the publication of the BBBEE codes of good practices, which explain how a firm’s BEE status should be derived (see table 3 below).

Table 3: Determination of a firm’s BEE status

Determination of a firm BEE Score

Firm’s Total BEE

Score

Resultant BEE’ Status

BEE procurement recognition

level Element Max. Possible

score >= 100 Level 1 135%

Ownership 20 >=85 <100 Level 2 125% Management Control

10 >=75 < 85 Level 3 110%

Employment Equity

15 >=65 < 75 Level 4 100%

Skills Development

15 >=55 < 65 Level 5 80%

Preferential Procurement

20 >=45 < 55 Level 6 60%

Enterprise Development

15 >=40 < 45 Level 7 50%

Socio-Economic Development

5 >=30 < 40 Level 8 10%

Total 100 Points

< 30 Non-compliant 0%

Source: BBBEE Codes, Code Series 000: Framework for measuring BBBEE, paragraphs 8.1.3 and 8.2

1 Definition of historically disadvantaged and previously disadvantaged


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2.3.3. The expanded public works programme

The Expanded Public Works Programme, whilst not formally legislated for, is a government programme designed to alleviate poverty through the creation of work opportunities for unemployed and poor people in South Africa. It requires public bodies from all spheres of government (in terms of their normal mandates and budgets) to deliberately adopt strategies that maximise the number of work opportunities for unemployed individuals to provide them an opportunity to acquire key work place experience and skills.

A key mechanism for creating these work opportunities is to promote the use of labour intensive work methods in the delivery of various services provided by public bodies. To incentivise municipalities to pursue EPWP opportunities, conditions are attached to funding grants provided to municipalities. In addition “Guidelines for the implementation of Labour Intensive Projects under the Expanded Public Works Programme (EPWP)”2 have being provided to assisting public entities to identify EPWP opportunities.

2 Source: http://www.epwp.gov.za/index.asp?c=Downloads


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3. Case study reports

The profiled programmes are discussed in this section.

3.1. eThekwini contractor development programme

The eThekwini contractor development programme highlights how a province can apply Construction Industry Development Board (CIDB) aligned construction procurement strategies to simultaneously ensure effective infrastructure delivery and contractor development on large scale municipal infrastructure programmes making use of South Africa’s globally competitive construction sector3.

3.1.1. Background and context

3.1.1.1. Overview of eThekwini Municipality

The eThekwini Municpality is the third largest municipality in South Africa. It is located on the KwaZulu Natal Coasts and services an area of 2300 square kilometres which includes the city of Durban and surrounding towns. The population of the eThekwini Municipal Area (EMA) is estimated to be just over 3.46 million.

The EMA recorded a Gross Regional Product (GRP) of R137.6bn in 2008, or 6.7% of national Gross Domestic Product (GDP), and has witnessed an average GRP growth rate of 5.2% over the period 2004 to 2008, which was above the national average of 4.6%. The region has a Gross Value Add in the region of R130-140 billion of which the largest contributors are the manufacturing sector (20.7%), the financial sector (19.2%), trade (16.3%), transport (15.6%) and community services (14.5%).

The eThekwini Municipality manages a total expenditure budget of R14-15 billion and in 2009 received an unqualified audit opinion with an “emphasis of matter” paragraph. The municipality has a gearing level (i.e., long term borrowings/funds and reserves) of 31%, a debt-equity ratio (i.e., Loans, Accounts payable, overdraft and tax provision/funds and reserves) of 60%, a creditors system efficiency (i.e., % of creditors paid within terms of the MFMA s65a) of 100% and has investment and high long and short term credit ratings. (i.e., long term rating of AA-, short term rating of A1 -very high certainty of timely pay out)4.

3 This case study is based research undertaken on a survey of South Africa’s Contractor Capacity Building Programmes undertaken by Global Sustainable Development on behalf of the International Labour Organisation

4 Source: eThekwini Municipality Annual Report 2008/09


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3.1.1.2. Overview eThekwini Supply Chain Management Unit5

The eThekwini Municipality Supply Chain Management Unit (SCMU) aims to seek value for money on all goods, works and services purchased by the municipality. The unit seeks to achieve this by continually improving its procurement process so as to obtain best value from the contracts entered into by the municipalities and to minimise the administration costs of buying. The unit is also responsible for helping to achieve local economic empowerment targets.

To achieve its mandate, the unit offers guidance, advice and support on aspects of procurement to all municipal departments and external stakeholders as well as administers the municipality's accredited contractors and suppliers database and ensures that all procurement complies with the municipality's rules and policies as well as provincial and national laws.

The key priorities for the supply chain management unit include:

� Increasing the use of local resources;

� Redressing skewed employment and ownership patterns through Black Economic Empowerment;

� The creation of opportunities for job creation and poverty alleviation;

� Stimulating skills development and transfer;

� Fast-tracking the growth and ensuring the sustainability of Small, Medium and Micro Enterprises (SMMEs).

Key functions within the unit include:

� The Policy and Support Services Department Functions which ensure that the eThekwini Municipality Procurement budget is effectively utilised as an instrument of achieving socio-economic transformation in a cost-effective, transparent and efficient manner;

� The Tenders and Contracts Co-ordination Branch Functions which are tasked with providing for the efficient and effective management of the Bid Committee and Public Tender Process;

� The Compliance Monitoring Branch Functions, which manage and monitor the effective facilitation of Black Economic Empowerment and Targeted Procurement throughout the municipality;

� The Supplier and Business Information Branch Functions which manage the registration and accreditation of contractors, suppliers, service providers and professional service providers onto the central contractor/supplier database;

5 Source: http://www.durban.gov.za/durban/government/scm


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� The Statistics Officer Functions which provide statistical and analytical support for the facilitation of effective Black Economic Empowerment within the Procurement Unit.

The eThekwini Municipality SCMU has developed a number of procurement policies which include:

� A Targeted Procurement Policy which gives effect to the Preferential Procurement Policy Framework Act and its regulations. It describes the preference points system used in the evaluation of tenders and quotations;

� A Supply Chain Management Policy which is a requirement of the Municipal Finance Management Act and Municipal Supply Chain Management Regulations. The policy outlines the Supply Chain Management processes within the eThekwini Municipality and sets the various thresholds for the procurement of goods, services and works. It should be read in conjunction with the Targeted Procurement Policy mentioned above;

� The Standard Operating Procedures which ensure that the Supply Chain Management and Targeted Procurement Policies are effectively implemented in all Units and Departments of the Municipality;

� The Code of Conduct which describes the manner in which the various role-players in the procurement cycle must conduct themselves.

3.1.1.3. Overview of eThekwini’s Targeted Procurement Policies6

The eThekwini Municipality’s targeted procurement policy was developed in July 2003. The policies key objectives include:

� To have a significant contribution towards job creation, poverty alleviation and economic growth;

� To have a procurement policy that links with the Integrated Development Plan (IDP) and Long Term Development Framework (LTDF);

� Enable eThekwini Municipality’s procurement to contribute in improving the quality of life of the majority of it’s citizens/customers, by optimising employment and economic empowerment in all its dealings; resulting in the annual procurement spend generally reflecting eThekwini’s demographics.

In general the policy allows for the application of a preference points system which awards tenders on the basis of points for price and/or the procurement priorities or developmental objectives of the eThekwini Municipality. It allows the application of the following specific methods either individually or in combination.

6 This section is derived from the Ethekwini Municipality Targeted Procurement Policy, February 2003 obtained from http://www.durban.gov.za/durban/government/scm/strategy


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1) Set asides (a specific market segment or sub-segment is set aside for particular enterprises). However, this approach has being outlawed by the National Treasury7;

2) Step-in mechanisms (certain enterprises are granted the opportunity to step in once the cheapest bid has been established provided that they match the terms and conditions of this bidder);

3) The prescribing of fixed contract participation goals (a fixed percentage of the contract price, wherever possible, must, in terms of the contract, be contracted out to specified enterprises);

4) The prescribing of the amount of the contract price which is to be spent on labour (a fixed percentage of the contract amount, must, in terms of the contract, be spent on labour);

5) The prescribing of specific employment-intensive technologies and methods of construction/ manufacture (contractors are, in terms of the contract, restricted in terms of their use of plant and equipment and/or are compelled to employ specific technologies/construction/manufacturing methods in order to maximize the use of relatively unskilled local labour);

6) Panel contracts.

The method to be applied for a procurement project needs to be discussed with the duly authorised Procurement unit official at project conceptualisation or feasibility stage.

The policy identifies 3 target groups as well as 4 different types of enterprises which get recognition during the application of a preferential points systems. The targeted groups include Historically Disadvantaged Individuals, disabled persons and individuals from Priority Population Groups (PPG) which refers to black individuals in population groups that were not offered a franchise in the national elections before or after the introduction of the 1984 tri-cameral parliamentary system and only received a franchise in 1994. The targeted enterprises are defined as:

� Black Business Enterprises (BBE) which are at least 26% black owned in terms of equity and voting rights/powers, with a corresponding management representation at all levels;

� Priority Business Enterprises (PBE) which are at least 26% owned by individuals who are from the Priority Population Group in terms of equity and voting rights/powers, with a corresponding management representation at all levels;

� Women Business Enterprise (WBE) which are at least 26% women owned in terms of equity and voting rights/powers, with a corresponding management representation at all levels;

7 National Treasury Supply Chain Management Practice Note # 2 of 2006 available from http://www.finance.gov.za/legislation/pfma/practice%20notes/scm/default.aspx


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� Disabled Persons Business Enterprise (DPBE) which are at least 26% disabled owned in terms of equity and voting rights/powers, with a corresponding management representation at all levels.

In line with the above key objectives and definitions, the scorecards shown in tables 4 and 5 are applied during the tender adjudication process. In order for an enterprise to qualify for preference points, it is important that the supplier is registered on the eThekwini SCM database and also applies for accreditation.

As shown in the tables, preference is given to eThekwini based suppliers, over and above suppliers from other regions. Indeed the policy explicitly defines local resources to mean eThekwini Municipality Area first, KwaZulu Natal second and South Africa third and where applicable, Africa fourth.

In addition to the above, the policy allows the application of early payment cycles for enterprise within the very small and micro categories. Further, it encourages the application of life cycle costs within the technical specification and evaluation section of the tender documents. The premise for this is that if it is applied appropriately, life cycle costing gives an additional advantage to eThekwini base suppliers, especially where travel time and distance impact the costs and the quality of service rendered by the supplier.

Table 4: eThekwini adjudication scorecard for contracts below R500,000

80/20 ( R500 000) Ownership % Ownership

Black PPG Women Disabled Total

26 to 50 Influenced 0.50 1.00 .075 .05 51 to 75 Empowered 1.50 3.00 1.50 1.25 76 to 100 Substantial 2.50 5.00 2.50 2.00 12.00

Status/Size SMME Total General 2.00 BBE At least Empowered 1.00 PBE At least Empowered 1.00 WBE At least Empowered 1.00 DPBE At least Empowered 1.00 6.00 6.00

Location Local Content Total SA 0.05 KZN 1.00 EMA 2.00 2.00 2.00 Amendments to the various weighting can be undertaken on specific contracts subject to the approval of the Head: Procurement or his/her nominee.

Source: eThekwini Targeted Procurement Policy of 2003


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Table 5 : eThekwini adjudication scorecard for contracts above R500,000

90/10 Ownership % Ownership

Black PPG Women Disabled Total

26 to 50 Influenced 0.25 0.50 0.38 0.25 51 to 75 Empowered 0.75 1.50 0.75 0.68 76 to 100 Substantial 1.25 2.50 1.25 1.00 6.00

Status/Size SMME Total General 1.00 BBE At least Empowered 0.50 PBE At least Empowered 0.50 WBE At least Empowered 0.50 DPBE At least Empowered 0.50 3.00 3.00

Location Local Content Total SA 0.25 KZN 0.50 EMA 1.00 1.00 1.00 Amendments to the various weighting can be undertaken on specific contracts subject to the approval of the Head: Procurement or his/her nominee.

Source: eThekwini Targeted Procurement Policy of 2003

3.1.2. The eThekwini contractor development programme

3.1.2.1. Introduction

The eThekwini Municipality is running a labour-based contractor development programme which draws on the management capacity and expertise of the established construction industry. It involves using an innovative procurement and contracting strategy requiring large contractors to subcontract and develop emerging contractors. Unlike most contractor development programmes in South Africa, the eThekwini programme does not involve formal training leading to National Qualification Framework (NQF) qualifications but instead draws on the capacity of established large contractors to provide on the job development and upgrading. This is achieved through using innovative contracting arrangements which, while legal in terms of South Africa’s construction procurement framework, are not widely utilised in the public sector due to a tendency to only use familiar approaches.

3.1.2.2. The eThekwini Water Mains Replacement Programme

The contractor development programme was implemented as part of the eThekwini water mains replacement programme. The eThekwini water mains replacement programme was a large scale infrastructure rehabilitation programme seeking to replace asbestos cement (A/C) pipelines in the eThekwini (Durban) metropolitan area. The pipelines were replaced because they had reached the end of their design lives and were frequently bursting. Due to the presence of many other unmapped services in road reserves and the resultant risk of cutting other services, it was not


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practical to use machines to excavate trenches and hence labour-based construction methods were the natural choice for most of the work.

The main objectives of the water mains replacement programme were:

� To spend R500 million on the replacement of A/C water mains, with the aim of reducing water leakage;

� To develop 16 small local contractors so that they move up at least two grades on the CIDB Register of Contractors.

3.1.2.3. Selected construction procurement strategy

In order to make significant in-roads into the water mains replacement backlog, the eThekwini Municipality opted to use a procurement strategy which entailed:

� treating the A/C pipeline replacement as a programme, as opposed to a series of projects to be implemented separately across the eThekwini Municipality;

� entering into framework contracts with a select number of large contractors;

� requiring the appointed large contractors to sub-contract and develop emerging suppliers by at least two CIDB grades;

� Using New Engineering Contracts 3 (NEC3) contracts amongst the range of available construction contracts.

3.1.2.3.1. Motivation for programmatic implementation

The treatment of the water mains replacement as a single programme, rather than a series of projects, was appropriate given the benefits which would not have been realised if the projects were managed independently. Secondly given that all the projects were linked to the same overall client organisational strategy the programme was managed as part of the normal expenditure programme of the Department of Water and Sanitation using existing institutional arrangements.

3.1.2.3.2. Motivation for use of framework contracts

Having opted to treat the replacement of pipelines as a programme, as opposed to a series of projects, the eThekwini Municipality opted to used framework contracts as the contracting arrangement for the appointment of lead contractors. The framework contracts allowed the large contractors to provide broadly defined construction services to the eThekwini Municipality over a period of time, without having to submit new tenders for works falling under the defined services. Lead contractors were appointed in terms of a pre-approved framework of rates or after a mini competition between framework contractors during the course of the contract. The framework contracts allowed for flexibility in terms of time frames, scope and level of service, and were appropriate given that:

� The budgets available and the detailed scope of the needs were uncertain;


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� The potential for additional funds to be made available existed;

� The need involved repetitive work of a similar nature;

� A quick response time was required; and

� Long term relationships (3 to 5 year) were desirable to achieve efficiencies.

In particular for the eThekwini programme, the extent of decay of the existing pipes was not known at the time of going out on tender, and hence a flexible contract was required.

3.1.2.3.3. Motivation for approach to contractor development

In order to realise the desired contractor development goals, the municipality wanted to have a model of large lead contractors subcontracting small local contractors and developing them. This approach was premised on the view that large contractors are best placed to undertake contractor development, as opposed to other contractor development programmes which required the large contractors to meet the costs of training programmes provided by third parties. However, as the municipality did not want to limit itself at the early stages of the programme, a social specification using a targeted cost strategy was included in the tender documents for the works. Thus the contractors were still required to tendered a cost structure for the social specification which covered the full range of social objectives that the client might want to deploy. The programme manager in the municipality then chose which of these to deploy in the implementation stage. These were local employment, contractor development, and work experience for eThekwini staff and students on bursaries with eThekwini.

3.1.2.3.4. Motivation for use of NEC contracts

Amongst the range of available construction procurement contracts, the programme used NEC contracts throughout. This is because NEC contracts are less adversarial than other forms of contracts and provide incentives for the parties to work together as a team. The NEC contracts also provide flexibility for changes to the cost of the works which occur during the course of the contract, and allow for a collaborative approach to determining target costs.

3.1.2.4. Roles and responsibilities during implementation phases

As stated above the programme was managed as part of the normal expenditure programme of the Department of Water and Sanitation in the municipality and no special institutional arrangements had to be made.

The design branch of the department prepared the tender documentation and did the initial consultation with the construction industry and managed the procurement process. The management of the project was then handed over to a special projects manager in the department, who was responsible for managing implementation. Due to the scale of the project, the design branch allocated a special projects manager to the project. The special projects manager was effectively the only eThekwini technical official managing the programme. However, this project manager was able to fulfil this role on a part-time basis as his key responsibility was to oversee the contract to be entered into with the external programme management firm which was responsible


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for overseeing the implementation of the construction works in accordance to the framework agreements entered into with the large contractors.

The external programme management firm was responsible for looking after quality, cost, budget, scope, and programme. This also entailed managing the design consultants, coordinating all the parties (i.e., main contractors, sub-contractors, design consultants, mentor and employer’s agent) and ensuring that everyone worked as a team. The programme management firm also subcontracted a cost consultant and was required to obtain the client’s approval for appointing additional resources.

3.1.2.5. Outcomes of the strategy implementation phase

To apply the strategy, the eThekwini municipality issued tenders for four contractors to implement packages of at least R30 million each. This required the bidders to have a CIDB grading of 7 or higher. Four large contractors were appointed: Icon Construction (CIDB Grade 7); WK Construction (CIDB Grade 8); Wilson Bayly Holmes Ovcon (WBHO) (CIDB Grade 9), and Sanyati (CIDB Grade 9). Three-year NEC target cost framework contracts were entered into with each large contractor. Each contractor was allocated a geographic zone to be allocated work. However, the number of packages that each contractor would be awarded was not specified in the contracts.

A firm known as Aurecon was appointed as the external programme management firm. Whilst eThekwini municipality only had a single programme manager for the programme, the Aurecon project team grow from a team of four people at the start of the project, to a team of 22 full-time people (including administrative staff) during the course of the programme. Aurecon further appointed a cost consultant team consisting of another 6 people.

Four consulting engineering firms for design and supervision of the works were also appointed by the municipality. To ensure the application of appropriate labour based construction methods the completion of the NQF Level 7 qualification in labour-based construction was a requirement for the appointment of the consulting engineering firms.

3.1.2.6. Selection of participants for contractor development

The participating sub-contractors were selected by the municipality with the assistance of the appointed programme management firm. The process followed involved sending out a notice in the local municipal newsletter and to all ward councillors with regards to opportunities in the programme for existing small contractors from each ward. The municipality then issued a Request for Expressions of Interest, with basic questions. Applicants were shortlisted using an 80:20 preference systems (i.e., 80% quality and 20% preference). The contractors were then ranked on the basis of quality and preference points scored. The top 16 contractors were then selected. The selected contractors were then allocated to the large contractors, by matching geographical areas.


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The key issue with this approach was that the small contractors were selected by the municipality without the involvement of the large contractors who were required to subcontract them, but not treat them as nominated subcontractors8, and thus carry all the normal risks associated with sub-contractors. Officials from the municipality felt that it would have been politically unacceptable to allow the main contractors to choose the small contractors and indicated that they tried to keep political influence out of the selection process and managed to choose the small contractors on technical reasons only.

Whilst the main contractors were not comfortable with this approach, they agreed to subcontract the small contractors because the risk was relatively small compared to the potential value of the contract. In addition, they had a degree of confidence in the selection processes which had been implemented by the municipality, were able to claim costs related to the development of the contractors and in terms of the NEC contract, if there were delays due to the subcontractor beyond the main contractor’s control, this could become a compensation event.

Notwithstanding the explanations above, the approach of effectively having nominated sub-contractors but not allowing them to be treated as nominated subcontractors is probably not widely replicable. However, it is important to retain the model of having the main contractors carry the normal risks of subcontracting the small contractors due to the incentives this model creates for the main contractors to develop the capacity of the small contractors. In order to address political concerns, an alternative approach could involve the joint selection of small contractors by the main contractors and the client with the main contractors having ultimate decision-making powers in this regard.

3.1.2.7. Nature of provided contractor development

The large contractors were contractually bound to subcontract and develop the selected contractors by at least two CIDB grades. To achieve this requirement, the large contractors were required to reserve sufficient work for the sub-contractors to enable them to do the quantity of work required to improve their CIDB grade. Further, penalty clauses were included in the contracts with the large contractors to ensure that this objective was met.

To meet their contractor development obligations, the 4 main contractors, jointly appointed a mentoring firm to oversee the contractor development component of the contract. The main contractors and the mentor organised seminars and workshops for the small contractors, regarding tax compliance, human resource management, health and safety, pricing and tendering, pipe laying, excavation, backfill, and traffic control amongst other issues. The selected contractors already had a minimum level of technical competence when they were selected onto the programme and thus it was not necessary to provide formal NQF qualification-related training.

8 For nominated contractors, the client (or employer) carries the risk of the subcontractor’s non-performance, rather than the lead contractor.


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To develop a subcontractor specific development plan, at the onset of the contracts, each of the subcontractors completed a self-scoring key performance assessment (KPA) report. The main KPAs included business management capabilities, tax management, and project management (i.e., cost control, production control, income and payment control). This helped the mentor to identify the subcontractor’s development needs and hence the key development areas to focus on during the course of the programme.

A common area of development across the small contractors was the building of teams within their companies and avoiding high staff turnover rates. Indeed, the contractors who were struggling were the ones who had high staff turnover rates, especially at a supervisor level. A key driver of this was poor human resource management, in terms of not building a team and mistreating people.

The municipality also specified that the main contractors must use NEC contract documents with the small contractors and apply a pricing approach based on a bill of quantities. Under this approach, with the assistance of a cost consultant, the main contractors agreed rates with the small contractors and then agreed these with the client. The mentor advised the small contractors regarding the pricing.

As per the contractual requirements, the sub-contractors had to build the capability to tender and deliver larger construction work packages (i.e., move up at least 2 CIDB grades). To realise this objective, the main contractors gave the subcontractors relatively small contracts to start with, based on negotiated prices. The mentors assisted with this process and helped the contractors to put in place tender documents and the bill of materials used for pricing purposes. The size of the contracts was increased and the level of support reduced as the programme proceeded. A success in this regard is that mid way through the programme, some of the contractors were able to compile prices, although others still relied on the main contractors to assist with compiling prices.

To assist the small contractors with their cash flow, the main contractors allowed the small contractors to draw materials from their warehouses, with the accompanying material costs been deducted from the small contractors monthly certificates. Secondly, the main contractors paid the small contractors within 7 days. However, the appointed mentor highlighted that the prolonged use of this facility could result in the small contractors failing to set up their own credit facilities and build credibility with suppliers. Similarly, the very short payment cycles did not expose the contractors to real-life situations of late payment and as such the small contractors were not learning to plan for this nor developing the necessary financial discipline to save for unforeseen events.

Lastly, to monitor the progress of the small contractors, the municipality received monthly reports from the mentor, and requested corrective actions by all parties where necessary. The municipal programme manager also had meetings every six weeks with the small contractors to identify issues to discuss with the lead contractors.


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3.1.2.8. Programme achievements against main objectives

As of October 2009, the achievements of the programme against its objectives included:

� R2 billion had been spent on the replacement of 2000 km of water mains;

� As a result of various initiatives, including the replacement of old pipes, the municipality had reduced the water leakage rate from 40% to 35%;

� Half the small contractors had reached or exceeded their target CIDB grade and the programme manager was confident that by June 2010 all 16 contractors would be on CIDB grade 6 or higher and be able to compete in the market;

� The small contractor’s performance ranged from “quite well to generally not bad” and most were seen to be complementing the capacity of the main contractors;

� The main contractors were meeting their obligations in terms of allocating sufficient work to the small contractors to enable them to rise by two grading levels on the CIDB register;

� Of the two main contractors interviewed, one indicated that they would voluntarily subcontract 3 out of their 7 small contractors on future projects, and the other main contractor indicated that they would voluntarily subcontract 3 out of their 4 small contractors on future projects.

Despite these positive outcomes from the programme, the mentoring company still had concerns about the long term sustainability of 4 of the 16 small contractors after the programme. Part of this concern arose from concerns about the current recessionary environment, rather than the small contractor’s performance. Furthermore, whilst the programme would succeed in uplifting the contractors to a CIDB grade 6, it would be challenging to get these contractors to grade 7 due to the size of the contracts required.

Based on this progress, the eThekwini Municipality was considering using the same model on the capital build programme for water and sanitation in townships. The municipality was open to extending the framework contracts for the replacement of the A/C water mains if additional funds became available, but this was no longer a priority as they had broken the back of the backlog in pipe replacement, and were of the view that the remainder could be done by their internal construction units. However, the municipality intended to continue to offer mentoring support to the 16 small contractors once the A/C water mains replacement project was completed.

3.2. Pursuit of socio-economic on the City of Joburg’s BRT project

The case study on the pursuit of socio-economic objectives on the City of Joburg’s Bus Rapid Transit Programme highlights the distribution of responsibilities across municipal departments with regards to developing and implementing “employment through procurement” projects. In particular, a municipality’s SCM or finance


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department can develop the procurement policies and procedures, the economic development unit can develop cross-cutting programmes and service departments can apply the appropriate strategies to leverage the expenditure within their control to ensure that socio-economic development targets are achieved.


3.2.1.1. Overview of City of Joburg

The City of Johannesburg Metropolitan Municipality (referred to as the City of Joburg – (CoJ)) manages the local governance of South Africa’s commercial capital Johannesburg. Johannesburg, also known as Joburg, is the largest city in South Africa and is also the provincial capital of Gauteng, the wealthiest province in South Africa. The Municipality oversees an area of over 1,645km2 and a population of approximately 4 million people.

Joburg generates 16% of South Africa’s GDP and employs up to 12% of the nation’s workforce. The City’s economy is dominated by four sectors, namely, the financial and business services, the retail and wholesale trade sector, community and social services and manufacturing.

In 2009, The City of Joburg managed a total expenditure budget of approximately R10 billion and generated an operational surplus of R65 million compared to a surplus of R1 billion in 2008. The municipality is one of the few South African municipalities to receive an unqualified audit9.

3.2.1.2. Overview City of Joburg’s Supply Chain Management Policy

The City of Joburg recognises that it can play a role in addressing South Africa’s key socio-economic development challenges. To this end, through its Growth and Development Strategy and the subsequent Integrated Development Plans, the City has identified a number of projects aimed at contributing to economic transformation, small business development and employment creation. Whilst the majority of the projects are based on the City’s role of creating a conducive environment for firms to develop and prosper, the City also seeks to leverage its own procurement and expenditure programmes to achieve certain socio-economic objectives.

A key enabler of the pursuit of socio-economic objectives through procurement is the City’s Supply Chain Management (SCM) Policy which regulates all supply chain management practices within the City’s departments, agencies and municipal entities. Key commitments made in the policy include commitments to10:

� Utilise the City’s buying power as leverage to ensure effective implementation of Broad Based Black Economic Empowerment objectives;

9 City of Joburg’s 2008/2009 Annual Financial Statement

10 Source: City of Joburg Supply Chain Management Policy, Section 5.


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� Enhance the City’s viability and competitiveness through effective and efficient supply chain practices and systems;

� Economic development of local communities, small medium and micro enterprises, women-owned enterprises, youth-owned enterprises and disabled owned enterprises within the area of jurisdiction of the City; and

� Fully support the Proudly South African Campaign and as far as practical seek to award business to service providers with high local content in their products and services.

To this end, as part of the City’s system of acquisition management, all bidding documents are required to indicate specific goals for which points shall be awarded in terms of the points system set out in the Preferential Procurement Regulations of 200111.

With regards to supplier development, the City ascribes to sound principles and practices of supplier management and development to ensure12:

� equal opportunities for all suppliers;

� development and management of SMME and BBBEE; and

� mutually beneficial relationships based on fairness, transparency, trust and good ethical conduct;

To ensure that the above mentioned objectives are met, the SCM policy commits the City to 13:

� keep a list of accredited prospective service providers of goods and services;

� at least once a year through public invitation including via the City’s website, http://www.joburg.org.za/, invites prospective service providers of goods or services to apply for accreditation and registration;

� specify the listing criteria for accredited prospective service providers;

� update the list at least quarterly to make provision for new registrations; and

� develop, implement and maintain a Supplier Management and Development Policy.

11 Source: City of Joburg Supply Chain Management Policy, Section 23.1. (f)

12 Source: City of Joburg Supply Chain Management Policy, Section 24.1

13 Source: City of Joburg Supply Chain Management Policy Section 24.2 and 24.4


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3.2.1.3. Allocation of roles and responsibilities with respect to preferential procurement and related enterprise development

Responsibility for applying the SCM Policy across the City has been delegated to the City Manager who is the City’s accounting authority. The council has retained a mandatory oversight role over the implementation of this policy. In turn, in terms of section 79 and 106 of the MFMA, the City Manager has sub-delegated the implementation of SCM responsibilities and activities to the Executive Director Finance and Economic Development. In the case of municipal agencies and entities, responsibility for the implementation of the policy and its related activities has been delegated to the CEO’s of the agencies who in turn can sub-delegate as appropriate14.

The City’s Finance Department responsibilities include15:

� developing and implementing an effective and efficient supply chain management system; and

� reviewing, monitoring and overseeing the affairs, practices, activities, behaviour and conduct of the municipal entities to satisfy the City of Joburg that the Municipal Entity’s affairs and businesses are being conducted in the manner expected and in accordance with commercial, legislative and other prescribed or agreed norms.

In recent years, key procurement related projects have included developing and promoting the adoption of procurement protocols, processes and practices, demand management and SMME/BBBEE support. With regards to SMME/BBBEE support, the finance department held a supplier day to educate SMMEs on procurement processes and to create awareness on the opportunities available within the City. The supplier day was attended by up to five hundred SMMEs and presentations were made by the representatives of the City including Municipal entities, the Department of Trade and Industry (DTI), Gauteng Enterprise Propeller (GEP), The Business Place (TBP), South African Revenue Service (SARS), Mendi, Gauteng Shared Service Centre (GSSC) and OHASA. As from the 2009/10 financial year responsibility for SMME / BBBEE development was transferred to the City’s Department of Economic Development (DED).

The CoJ’s DED which is now responsible for SMME and BBBEE development is also responsible for cross-cutting economic catalytic functions such as:

� Development of policies and strategies;

� Regulatory and enforcement;

� Compliance monitoring and reporting; and

14 Source: City of Joburg Supply Chain Management Policy Section 8 and 9

15 Source: City of Joburg 09/10 Integrated Development Plan


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� Catalytic projects.

In this context, amongst other responsibilities, DED is responsible for

� SMME development and support through various institutional arrangements;

� Monitoring Broad Based Black Economic Empowerment (BBBEE); and

� Policy and programme integration;

Catalytic projects initiated by the unit which seek to leverage the city’s procurement expenditure to achieve socio-economic objectives include the Jozi Equity Fund (JEF), also known as the SMME Fund or SMME Equity Fund. The fund seeks to provide equity financing to support the City’s own projects by developing the SMME business. Whilst the primary purpose of the Jozi Equity Fund is to facilitate the establishment of the SMME and continued running of the SMME, a component of the fund, is a SMME working capital fund to provide working capital funds to SMME that have a contract with the City. The intent is for the working capital funds to be disbursed in tranches to the SMME’s supplier or banker, and upon receipt of the goods and services, the City or the banker, disburses the margin on the contact to the SMME.16

The unit is also responsible for the Expanded Public Works Programme (EPWP) which has resulted in the creation of over 100 000 public works jobs.

In addition to these two catalytic projects the DED integrated development plan also identifies programmes to expand and continuously refine the city’s own targeted procurement; support the development of emerging industries through the city’s own procurement and the city’s BEE support programme. These programmes involve integrating the city’s BEE and SMME databases, developing a preferential procurement policy with the Supply Chain Management unit and linking SMMEs to the city’s Jozi Employment Fund. However, from the targets set in the City’s 09/10 Integrating Development Plan, the majority of these programmes are still in their infancy.

3.2.2. The pursuit of socio-economic objectives on the implementation of the BRT system

In parallel to the work being done by the city’s finance and economic development department, the city’s major departments and entities are already pursuing socio-economic goals within their procurement expenditure. A key example of this is the City’s Transport Sector’s pursuit of BEE and EPWP objectives during the implementation of the City’s Bus Rapid Transit (BRT) System. The transport unit is seeking to support and empower emerging contractors, increase Joburg Road Agency’s BEE spend to between 70-75% and create new jobs through its CAPEX programmes.17

16 Presentation to SMME Supplier Day Workshop – SMME Development

17 Source: City of Joburg 09/10 Integrated Development Plan


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3.2.2.1. Overview of the CoJ BRT system

The Bus Rapid Transit System is a mass public transport system which mimics rail systems and is being built in a number of South African cities including Joburg. The system is anticipated to make a significant contribution to reducing congestion and improving the quality of the public transport system.

The Joburg system is being built in phases, with the 1st phase of the system due to be complete by 2013. When complete, phase 1 of the system will consist of 330 route kilometers, make use of up to 1190 buses, consist of 150 purpose built stations and ferry up to 430,000 passenger per days. Park and ride facilities will also be built to encourage business professionals to use the system. Part of the route network, will use dedicated median lanes to be built on existing roads. In addition to the buses and physical infrastructure being built, the system will utilise a geographic information system based control centre to manage the flow of buses and will utilise a closed circuit television system to enhance security on the route.18

The total cost of the 1st phase of the project were estimated at R10 billion. Infrastructure costs (i.e., roads, stations, control systems etc.) were estimated to be in excess of R2 billion, whilst the bus acquisition costs were also estimated at R2 billion. The remaining amount is the anticipated value of the operating contracts. 19

3.2.2.2. Overview of implementation approach

Phase 1 of the system is being implemented in three phases. Phases 1a, 1b and 1c. Phase 1a consisting of a 40 km route and 48 stations, was completed and operationalised by September 2009. Parts of phase 1b, which will eventually consist of 86km route kilometres and 102 stations, were completed and operationalised in April 2010. Phase 1c is due to be completed and operationalised by 2013.

The implementation of Joburg’s BRT system is being overseen by the City’s Transport Department. The Department is using two municipal agencies, the Joburg Development Agency (JDA) and the Joburg Road Agency (JRA), as the implementing agents for various components of the project. The acquisition of the buses and the overall co-ordination of the project are being done by the department. The JDA is responsible for the appointment and management of all construction related contractors (i.e., roads, stations and depots). The JRA is responsible for the acquisition and operation of the Intelligence Transportation System (i.e., traffic signals, bus communication etc.).

18 Source: http://www.arrivealive.co.za/pages.aspx?i=2874

19 Source: http://www.engineeringnews.co.za/article/joburgrsquos-bus-rapidtransit-prototype-to-be-unveiled-near-joubert-park-later-this-year-2008-06-13


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3.2.2.3. Approach to achieving BBBEE and EPWP objectives

Whilst the city sought to pursue socio-economic objectives within the related procurement expenditure, the city faced a number of constraints in this regard. The most significant constraint was the short time within which phase 1A and 1B of the project had to be completed in. These deadlines were a result of the FIFA Soccer World Cup to be staged in June 2010 and its preceding tournament, the Confederations Cup, which was held in June 2009. The BRT project which was only approved at start of 2008, was intended to play a key role in providing transport during both tournaments as well demonstrate the long term developmental impacts of hosting the tournaments.

A consequence of these short timeframes, was a restriction on the time that could be spent on ensuring that the both the system design and the project implementation thereof maximised the realisation of various socio-economic objectives. Nevertheless, an overview of the achievements against local content, BBBEE and EPWP objectives and the contributing approaches is provided in the following paragraphs.

3.2.2.3.1. Maximisation of local content

Due to the design and the material inputs of the stations, all related manufacturing was done locally by Joburg based companies. The design entailed the use of locally sourced steel and concrete to manufacture prefabricated modules to be used at the various stations. All the steel and the required cement were available locally.

In terms of bus acquisition, the city’s ability to pursue local content objectives was restricted by local industry’s inability to supply the required buses within the required timeframes, and as such the first batch of buses was ordered from a foreign supplier. However, measures are being taken to ensure greater participation of local suppliers in subsequent bus purchases. Similarly, with regards to the purchase of the Intelligence Transportation System, it was necessary to award the tender to a non-South African based firm due to the lack of capabilities and experience amongst South African firms. However, it was compulsory for the firm to have local partners.

3.2.2.3.2. Maximisation of BBBEE

The greatest success in the pursuit of BBBEE objectives was realised in the construction component of the project, being overseen by the JDA. This was achieved through the use of contract participation goals (CPG), rather than the percentage Historical Disadvantaged Individual (HDI) ownership, during the tender evaluation process. This was the first time that the JDA had adopted such an approach for the award of preference points during the adjudication of tenders.

The application of CPG, rather than a percentage HDI ownership was partially driven by the size of the contracts being awarded and the state of the supplier market. Firstly, due to the scale of the projects, the average value per contract exceeded R100 million. Therefore in terms of the CIDB regulations, the work could only be awarded to firms graded as grade 8 or 9 on the CIDB register. However, the bulk of the firms targeted for contractor development (i.e., targeted enterprises) tend to have lower CIDB grades. Thus to ensure the inclusion of such firms in the construction works, CPG, rather than the empowerment status of the bidder was a more appropriate method for awarding preference points. Secondly, whilst the City could have issued smaller work


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packages, this was not feasible as the work packages were “design by contractor” contracts which meant that the City was not in a position to further subdivide the contracts. Further, doing so would have been contrary to the CIDB good practice guidelines which advocate the use of larger contractors to accelerate infrastructure delivery and empowerment20.

The applied approach to CPG was aligned to the South African National Standard (SANS) 1914-1:2002 and is one of the good practices for achieving social objectives and accelerating empowerment that is recognised by the CIDB. The approach allowed tenderers to apply a combination of four methods to maximise the involvement of targeted enterprises on their contracts. These methods were as follows:

� Method 1: by virtue of own targeted enterprise status as a prime contractor

� Method 2: by virtue of joint venture status as a prime contractor

� Method 3: by awarding contracts to targeted enterprises

� Method 4: by awarding contracts to joint ventures which have targeted partners.

In this instance “Targeted enterprise” refers to black owned contractors.

The computed score for each method is the recognised financial contract value expressed as a percentage of the tendered amount less the applicable sales or value added taxes. The CPG score is the sum of the score achieved for each of the methods. Salient features of how the score for each method is computed are highlighted below:

� In method 1, only 10% of the expenditure that is subcontracted to non-targeted enterprises by the target enterprise is recognised

� In method 2, the recognised contract value is the lesser of the financial value of the contract for which the targeted partner in the joint venture is responsible for or twice the financial value of the contract which the BEE partner performs using their own resources

� In method 3, all the procurement from subcontractors, manufactures and service providers who are recognised as targeted enterprises is fully recognised. However, only 50% of the procurement from suppliers can be recognised.

� In method 4, the recognised value of the contract is computed as per method 2, but is multiplied by the percentage share of the targeted enterprises in the subcontracted joint venture. Spend on suppliers, as per method 3, is further reduced by 50%.

20 Source: CIDB Practice Note 1: Scaling up delivery and accelerating empowerment


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Despite the success of the CPG approach in incentivising tenderers to include targeted enterprises, the JDA has expressed concerns about its ability to monitor and verify the actual attainment of the participation goals stated in the tender submissions. Further, the JDA notes that the current approach still relies on the lead contractors approach to contractor development and would prefer a situation where the JDA had its own guidelines or policy on how contractor development is executed on JDA projects. Such an approach will contribute to standardising the contractor development achieved on JDA projects, as well as assist in creating a pool of targeted enterprises that can directly be used by the agencies for smaller projects.

3.2.2.3.3. Maximisation of EPWP opportunities

With regards to the Expanded Public Works Programme opportunities, the City of Joburg predominately sought to maximise the retained community earnings during the implementation of the BRT project. This measure, measures the portion of the project budget that is spent within the affected communities through which the particular route passes. This spend consists of spend resulting from the utilisation of local labour, local sub-contractors and local purchasing of materials and fuel. In this instance, “local” means from the within the communities or wards that the construction site is in. In addition to the retained community earnings and its associated drivers, the City also tracks the total number of EPWP work opportunities created, the amount set aside for skills propagation and training, and the actual training provided.

With regards to local labour, the main contractors are encouraged to utilise labour intensive construction methods and to source labour from the immediate vicinity of the construction site. The sourcing of local labour must be from the regional labour database held at the City’s regional office. The local ward councillor must be consulted during the process. Where labour cannot be sourced in the immediate vicinity of the construction site, the main contractor must first look for alternative labourers from neighbouring wards, before appointing someone from further afield. Similarly, with subcontractors and the sourcing of materials, priority must be given to sub-contractors and suppliers from within the same area as the construction site. Both labourers and sub-contractors are appointed and paid directly by the main contractor. The works, which are typical done by local sub-contractors include transport, kerb laying, concrete work, brickwork, rock blasting, security and asphalt paving.

As of December 2009, the total retained community earnings as a percentage of the total value of the work being undertaken was 3%. A total of 195,155 work opportunities had been created as per the EPWP definition of 55 worker days being equivalent to one work opportunity. The majority of the main contractors had already appointed local sub-contractors for their section of the route and provided their labourers some level of training. The training undertaken ranged from civil engineering internship and construction courses, to site safety, basic first aid and flagmanship.

Whilst the transport department has certain targets it would like to see achieved, it has highlighted that due to the short project timeframes, it was necessary to give a lower weighting to EPWP consideration when the designs and implementation plans thereof were produced. Indeed, an emphasis was placed on completing the project phases by the due date to the potential detriment of the consideration of EPWP goals. However,


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it is hoped that ongoing measurement of the attainment of EPWP goals, will provide encouragement to the main contractors to maximise the attainment of these goals.

An example of a design choice made that favoured on-time, on-cost and on-quality completion of the project, but minimised the number of on-site number of construction jobs, is the choice to use prefabricated modular units during the construction of the stations. This approach entailed the off-site manufacture of the modules and the application of a relatively more mechanised construction process. However, it significantly contributed to a shorter construction time frame per station and enabled easier cost and quality control during the construction of the stations. This example highlights the trade offs that design engineers need to make between EPWP objectives and the primary objectives of completing a project on-time, within costs and within acceptable norms and standards.

3.3. Mafeking waste collection programme

The Mafeking Waste Collection Project provides an example of how a municipality can expand its services to un-serviced areas in a manner that promotes entrepreneurial development and creates work opportunities for local communities.21


3.3.1.1. Overview of Mafikeng Local Municipality

Mafikeng Local Municipality (LM) is located in the Ngaka Modiri Molema District Municipality in South Africa’s North West Province. It covers an area of 3,703km2 and has an estimated population of 290,268 people. The Municipality is divided into 28 wards consisting of urban areas, dense peri-urban areas, agricultural land, natural bush, industrial areas and tourist developments (primarily eco-tourism). Settlements in approximately three-quarters of the municipal area are considered rural.

The municipality has adopted the Executive Mayoral system, which places executive authority with the Executive Mayor. The municipality has eight Portfolio Committees. Domestic waste management services are dealt with by the Community Services Portfolio Committee.

There are high levels of poverty and unemployment in the Municipality. More than four-fifths of the households in Mafikeng live off less than R3200 per month, of which more than a quarter (28%), has no recorded income. It is estimated that 49% of the population who are deemed to be economically active are unemployed.

21 The Bulk of this case study is derived from interviews with the project’s implement agent and officials from the DEA as well as the Business Plan for a Domestic Waste Collection Project, prepared by Shisaka Development Management Services for the Department of Environment Affairs.


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Financially, the Mafikeng LM struggles to raise sufficient revenues to meet its costs, yet alone expand its services. In terms of refuse removal, the municipality runs its service at a loss and the existing waste collection tariffs are not set to cover the full costs of waste collection services.

3.3.2. The extension of Mafeking’s waste collection services

3.3.2.1. Initial quality of waste management services

In 2007, at the time the expanded waste collection services project was conceptualised, the Mafeking Municipality only provided domestic waste collection services to between 25-33% of the households within the municipality’s area (i.e., 14,000-18,000 households, out a total of 55,000 households). The serviced households were in six predominately urban wards, out of a total of 28 wards in the municipal area. However, even in the areas being serviced, the service was frequently interrupted due to a poorly maintained and unreliable fleet, and there was a proliferation of illegal dumpsites due to insufficient front end loaders and the misuse of skips. Furthermore, there was limited recycling in the municipal area and none was been co-ordinated by the municipality.

The 22 un-serviced wards were predominately in the peri-urban areas and the human settlements tended to be either informal or rural. The communities in these settlements were poor and had limited means to pay for additional municipality services. Furthermore, some of these settlements fell within tribal authorities hence the municipality did not collect any revenues from the communities, who instead paid fees to the traditional leaders in the area.

3.3.2.2. Development of proposal to extend waste collection services to un-serviced areas

In 2006, the then Department of Environmental Affairs and Tourism (DEAT), now know as the Department of Environmental Affairs (DEA), identified domestic waste collection as an area of expansion to fast track skills development and employment in un-serviced areas during a review of the Environment and Culture Sector of the EPWP. Accordingly DEA and the Department of Public Works (DPW) undertook an initiative to formulate a model to expand domestic waste collection services within a municipality to un-serviced households.

In 2007, the Mafeking Local Municipality participated in a DEA lead research in 6 municipalities to determine the feasibility of applying the model developed by DEAT and DPW. In 2008, the Mafeking Local Municipality was selected as the municipality to pilot the implementation of the proposed model.

Whilst, the DEA lead research found that it was feasible to implement the domestic waste collection model, implementation of the model constituted an “Expansion of Service” according to the Municipal Systems Act, 2000, (Act No. 32 of 2000) (MSA). Accordingly in order to implement the model, any Municipality will need to follow a decision making process as set out in Section 78 of the act which requires the undertaking of a status quo analysis and feasibility study to assess the internal and external capacity of the municipality to render the service. This decision making process is onerous and requires substantial technical expertise and funding and many Municipalities do not have the technical expertise or sufficient finances to procure them. Hence the pilot programme to being implemented with the Mafeking Local


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Municipality had to include assisting the municipality to comply with section 78 of the MSA.

The implementation of the pilot project consisted of two phases. The first phase was an implementation planning phase which involved:

� Reviewing the model for domestic waste collection that had been developed and formulating proposals as to how it should be structured;

� Conducting an initial status quo analysis of two selected municipalities;

� Conducting detailed feasibility studies for the two municipalities including the costing for set up and operation;

� Compiling a business plan with tangible deliverables for the implementation of the model through the two selected Municipalities;

� Selecting the municipality to pilot the model;

� Signing a service delivery agreement between DEAT and the selected municipality; and

� Identifying and appoint a service provider to implement Phase 2.

The second phase of the pilot project involved undertaking implementation in accordance with the Business Plan and monitoring and evaluating implementation in order to establish a best practice approach to waste management. Implementation of the pilot commenced in February 2008 and phase 2 of the pilot commenced in September 2009 and is due to end in September 2012.

The pilot project is being sponsored by the Department of Environmental Affairs (DEA) which is providing funding for the first three years of the project. This funding includes the cost of expanding the reach of the waste collection services as well as the cost of complementary capacity building and technical assistance being provided to the municipality with regards to managing and delivering waste management services. The Mafeking municipality is expected to start paying for an increasing portion of the project from year two onwards with the view of taking over the total cost of running the expanded services after year 3.

The pilot is being undertaken in close consultation with the Department of Public Works (DPW), the Department of Cooperative Governance and Traditional Affairs (CoGTA), and the National Treasury. A task team with representatives from these organizations and DEA has been established in this regard.

3.3.2.3. Project goals and scope

The overarching goal of the expanded domestic waste collection project is to extend domestic waste collection services to approximately 30,000 households, in the un-serviced densely developed communities within the Mafikeng (LM), by applying a domestic waste collection model, through a public-pubic partnership between the Department of Environment and Tourism and the Mafikeng LM.


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The project objectives include:

� Providing domestic waste collection services to 30,000 households using a community based collection model that uses SME and labour from local communities;

� Providing the SME with technical and financial support services, training and mentoring so that they are able to operate as sustainable businesses;

� Undertaking the domestic waste collection service within the requirements of the Expanded Public Works Programme;

� Providing technical support to the Mafikeng LM so that it has the finance and capacity to continue to render the service on an ongoing and sustainable basis, within the framework of an integrated waste collection policy that complies with national requirements;

� To review and monitor the project so as to determine its applicability for roll out nationally to other municipalities.

3.3.2.4. Overview of expanded waste collection model

As part of the implementation planning phase of the pilot project, a number of alternative waste collection models were explored, in addition to the initial model developed by DEAT and DPW. The considered models were as follows:

1) An expansion of the waste collection services using the existing Mafeking Municipal structures by hiring additional staff;

2) A simple outsourcing arrangement which would involve the appointment of a contractor to fulfil the waste collection and disposal function, with the municipality collecting the tariff from the communities and paying the contractor a fee for the service rendered;

3) A concession agreement whereby the municipality grants a single firm the rights to operate a waste collection services in the prescribed areas. The concessionaire will take on the risk of collecting tariffs from the communities as well as the risk of managing the costs of the services provided. The municipality may pay an annual subsidy to make the concession more attractive to potential concessionaires;

4) A community based model where local SME, employing labour from the serviced communities, are contracted and nurtured to provide the service.

Given the organisational constraints faced by the Mafeking LM, option 1 was deemed not feasible. These constraints included high vacancies rates within their existing structures and an HR function incapable of supporting the required increase in staff levels within the project time frames. The required additional staff was estimated at over 200 persons.

Options 2, 3 and 4 were evaluated against the following criteria which were informed by the principles of the EPWP, the MSA and the broad developmental goals of South Africa.


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1) Is the approach labour-intensive?

2) Does the approach foster and support entrepreneurship particularly at a community level?

3) Does the approach foster skills development?

4) Does the approach provide value for money?

5) Does the approach address the needs of the poor?

6) Will the approach be affordable for the municipality?

Due to criterion 2, options 2 and 3 were deemed to be inappropriate and greater emphasis was placed on developing a community based model. In this regard, two alternative approaches to implement a community based model were considered.

1) The Municipal- SME contractor model where the municipality contracts and manages SME to render the services;

2) The managing contractor model where the municipality appoints a managing contractor/service provider to appoint, manage and nurture SME on behalf of the municipality. A slight variation of this model is one where the municipality, rather than the contactor appoints the SME to be managed and nurtured by the contractor; and

3) The indirect managing contractor model, where instead of directly appointing a managing contractor/service provider, the municipality appoints a third party to serve as the implementing agent for the entire programme. The implementing agent assumes responsibility for appointing and managing the managing contractor/service provider, on behalf of the municipality.

Given the capacity and capability constraints faced by the Mafeking LM, especially with regards to contract management and SME development, as well as the project’s funding arrangements, the indirect managing contractor model was deemed to be more appropriate in this context.

To this end, the DEA appointed an implementing agent for a three year period and also entered into a separate agreement with the Mafeking local municipality. The cost of the implementing agent will initially be funded by the DEA with the Mafeking local municipality taking over these costs on a phased basis over the three year period. This arrangement, a public-public partnership between a national department and a local municipality, also avoided the complex procurement processes that could have delayed the implementation of the project were Mafeking to follow a public-private partnership route. Furthermore, under the public finance management arrangement, DEA would have been unable to transfer money allocated to the project to a local municipality.

3.3.2.5. Implementation of proposed model.

The implementing agent has assisted the municipality to meet the requirements of the section 78 of the MSA. This included undertaking a status quo and feasibility analysis to assess the internal and external options for the municipality in expanding their domestic waste collection services. The feasibility study entailed assessing:


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� the capacity of the municipality to implement the programme;

� the existence and appropriateness thereof of the local municipality’s integrated waste management plan;

� the availability of funds to take over the financing of the service on a phased basis;

� the sufficiency of existing landfill sites or plans to develop such sites to cope with the extended waste collection services; and

� the municipality plans with respect to implementing a recycling programme.

This MSA section 78 assessment was done as phase 1 of the pilot project and provided the basis for preparing a business plan for the implementation phase of the project.

To render the expanded waste collection services, the implementing agent, in consultation with the municipality appointed a managing contractor who has since selected the SME and continues to fulfil the entrepreneurial development and SME management role on the project. The selected service provider is a firm known as Tedcor which has extensive experience in waste management across South Africa.

3.3.2.6. Implementation progress to date

Following the appointment of the service provider and the formal launch of the implementation phase of the pilot project in September 2009, the service provider has established 5 community based SME to provide waste collection services to an additional 30,000 households.

The first steps in establishing these SME involved the definition of contract zones and the number of community based SME to be formed. This process was driven by the service provider in consultation with ward councillors, the municipality and the tribal authorities. The definition of the contract zones took cognisance of the need for the service in the wards and the feasibility of providing the service in the area in terms of access to location. The number of SME to be established was then determined after a service point audit was conducted in each of the contract zones. The service point audit determined the number of points to be serviced, the basis of how the waste will be moved from the service points to the landfills (i.e., either directly or via an intermediate collection site or skip), and the possible collection routes that the SME will take. The number of additional households was capped at 30,000 households due to the municipality’s inability to fund expansion of the services to all 55,000 households within the Mafeking local municipality area.

Based on this assessment and the consultations a total of 5 contract zones, broadly following the ward boundaries were defined. A total of 14 wards were covered. Each contract zone was allocated to a single SME with the view that the SME owner and his/her labourers would come from wards within the contract zone.

Having defined the contract zones and the required number of SME, the SME owners were selected by inviting applications from persons from wards within the contract zones. The preferred candidates needed to have a matric certificate, a code


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10 driver’s licence, a clean credit record and some previous work experience. After the initially shortlisting of applicants, shortlisted candidates had to undergo a month’s training before the final SME owners were selected. This final selection was based on assessment tests undertaken at the end of the month’s training programme and the candidates from each contract zone with the highest marks were selected.

Thereafter, the selected SME owners entered into 3 year agreements with the service provider. In terms of these agreements, the SMEs will provide waste collection services to the prescribed standards in the contract zones over a 3 year period. The service provider will also support the SME by providing the following services;

� Access to finance to purchase the required vehicles and other equipment;

� Training in administration, financial management and operational management;

� Assistance in contracting labour;

� Accounting and administration services including payroll administration;

� Access to cost effective maintenance services for trucks and other equipment; and

� Ensuring that the service provided meets agreed quality specifications.

With regards to access to finance for vehicles, the programme has assisted the SME owners access finance for the purchase of dedicated waste collection services vehicles. The vehicles are in the SME owners’ names to assistance them build a credit record and will be fully financed within the 3 year period. As of February 2010, the SME owners had completed a 2 week induction training, truck driver training, occupational health and safety training, disciplinary and grievance procedure training and leave administration training. Further, they have been enrolled on an UNISA accredited training programme on small business management.

With regards to assistance with hiring labourers, the service provider has assisted the SME to implement labour intensive waste collection services resulting in each SME employing an average of 14 unskilled labourers and 1 semi-skilled labourer. The labourers are paid at the EPWP daily rates of R91.14 per unskilled labourer and R273.80 per semi-skilled labourer. By February 2010, each labourer had undergone training in occupational health and safety. Similar to the SME owners, the labourers had to come from wards within the contract zones.

In terms of the agreement between the service provider and the implementing agent, the following penalties may be imposed on the service provider for service quality breaches such as:

� Incomplete waste services;

� Spillage from vehicle;

� Using a vehicle which does not comply with the statutory requirements;


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� A vehicle being driven by a person who is not in possession of the necessary driving permits;

� Inability to contact the service-provider or his/her agent;

� All workers not properly attired in terms of the project specifications;

� Deliberate disposal of refuse, litter, grass cuttings etc. in open catch-pits, manholes etc.;

� Failure to provide the letter of good standing from SARS within 1 month of the instruction to comply;

The service provider may only cascade 50% of the penalties to the SME.

In addition to the penalty clauses in the contracts, the launch of the programme included a launch of a community awareness programme and a customer complaints process. The former was designed to initially educate the communities on the waste management services and the services to be provided with an emphasis on the roles and responsibilities of the households vis-à-vis the roles and responsibilities of the SME. A secondary campaign with regards to the communities paying for the services will be launched in due course. The customer complaints process outlined how the community can make complaints to the service provider, municipality or the councillor and how these complaints will be logged and acted upon.

3.3.2.7. Programme impact on Mafeking municipality

As highlighted in the programme design, the Mafeking LM is expected to take over the management and costs of the expanded waste collection services at the end of the initial 3 year period. To this end it is anticipated that the municipality will retain the SME community based model using the existing service provider-SME contractor model. In preparation for this handover, amongst other initiatives, the Mafeking municipality has to put in place a funding mechanism for the expanded waste collection services as well as put in place appropriate contract management and contract monitoring capacity.

The funding mechanism was anticipated to impose financial administrative resource requirements to oversee the billing and revenue collection functions from the households. To this end an additional 25 staff consisting of cashiers, messengers, billing clerks and a financial officer was initially anticipated.

The contract management and monitoring roles will include monitoring the performance of the service provider and SME against the prescribed standards, reporting performance against contracts and receiving and addressing complaints. Only three additional staff were initially anticipated to fulfil these roles. (i.e., a permanent contract manager and 2 contract monitors).

Despite these forecast staff numbers, since the launch of phase 2 of the pilot project, rather than employ new resources, the Mafeking LM has proposed that the new roles be conducted by existing employees with similar responsibilities. For example, the contract management role is currently being done by the Director: Community


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Services and Legal Department. Alternatively, existing staff will be trained to fulfil the new roles.

3.3.2.8. Programme success to date

Whilst it is still too early to assess the success of the pilot project, overcoming the hurdles associated with the section 78 of the MSA and the formal and informal contractual complexity associated with a public-public partnership, the mere extension of waste collection services by an additional 30,000 households and the creation of 5 SME employing in excess of 70 people must be hailed a success. Further it is highlighted that new services are being provided at a cost of R24 per household per month compared to the current cost of R52 per household per month. The costs for the expanded service include the cost of management oversight of the SME, training of the SME and financing of the vehicles.

3.3.2.9. Key challenges and future plans

Despite the successes to date, the programme still has to overcome a number of significant challenges. The most significant of these is the continued funding of the expanded waste collection services and as a consequent, the funding of the SME whose major source of income is the indirect contract they have with the municipality.

The challenge with regards to the long term funding of the expanded waste collection service is twofold. The first entails defining and implementing a suitable mechanism for the Mafeking LM to increase the budget available for its waste management service. The options under consideration include:

� collecting a waste collection fee either directly from the communities or indirectly, through the traditional leaders for communities under tribal authorities; or

� subsidising the waste collection budget by using funds raised from increasing property taxes or through a mechanism know as the equitable share.

The second aspect of the challenge is the building the organisational capacity in terms of policies, plans and resources to address this issue. The technical support work stream of the .project is working with the municipality to resolve both these funding issues. It is highlighted that the resolution of how funds are raised from communities falling under the tribal authorities is likely to need the intervention of the South African Local Government Authority (SALGA) as it is likely to have implications for all tribal authorities in peri-urban areas across the country.

A second challenge arising from the qualitative better service being provided by the SME compared to the services provided by the municipality employees is the growing resistance from the unionised municipal unions. Whilst the focus on previously un-serviced area avoided such resistance at the onset of the programme, the municipality has on occasion used the SME to provide supplementary services in areas serviced by the municipality workers. This resistance may prevent the municipality from rolling out similar outsourced models in areas currently serviced by the municipality.


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Lastly, in terms of the long term sustainability of the SME, a number of issues affecting the profitability of the SME will need to be resolved. Firstly, the current pricing of the services rendered by the SME only allows for payment of the vehicle financing costs and does not allow for vehicle replacement at the end of the three year period. Therefore it will be imperative to ensure that the current prices remain unchanged in real terms, so that the SME are able to refinance new vehicles if needed, or at least earn enough to put aside for a new vehicle when the need arises. Secondly, the current labour rate that is being applied by the SME, whilst in line with the EPWP guidelines is lower than wage for non-EPWP projects. Thus once the project ceases to be an EPWP project, the SME owners would have to pay their labourers higher wages, hence reducing their profitability. Thirdly, to avoid creating single income source businesses, the SME need to find alternative income streams, either from other institutions or departments within the Mafeking municipality. To this end consideration is being given to using the SME to undertaken minor road maintenance in the areas that their services. In parallel to this, some of the SME have started offering other waste collection related services such as post event cleaning services to customers in and around the Mafeking area. The SME are also receiving training in business development. It is recognised that finding alternative revenue streams for the SME will not only benefit the SME owners, but will reduce the risk to the municipality of the SME holding the municipality hostage during future price negotiations. Further, the municipal will also be required to go on an open procurement process when the current contracts expire.

3.3.2.10. Key lessons to date

Whilst a number of factors have contributed to the above success (e.g., the commitment of all stakeholders), a success factor highlighted during the interviews is the effective monitoring of the project by all stakeholders. This monitoring has been done through two project governance committees, set up to oversee the implementation of the project. The first of these committees is a project steering committee which consists of operational representatives from the municipality, the implementing agent and the service provider. The steering committee meets on a monthly basis and ensure on the ground co-ordination between the municipality and the service provider. The second committee is a review committee which meets on a quarterly basis and compromises of representatives from the DEA, the municipality and the implementing agent. The review committee monitors the overall implementation of the programme including the effectiveness of the technical support being rendered and facilitates resolutions of key blockages.

A second lesson highlighted from the implementation to date, is the importance of proper consultation at all levels, in particular with the municipality. Given the funding challenges the Mafeking municipality is facing, the project needed to get input from the municipal Chief Financial Officer. Similarly, given the co-operation needed from the communities in terms of their roles and responsibilities with regards to waste disposal and possibly funding the service, ward councillors and tribal authorities also needed to be consulted in the early stages of the project. However, notwithstanding the preceding, a trade off between extensive consultation and speed of implementation needs to be made.


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3.3.2.11. Applicability of the programme to large metros

Whilst the waste collection model was implemented in one of the smaller municipals in South Africa, the model is still applicable to large metros which have large un-serviced or under serviced areas, either in the townships or in informal areas around the metros. Secondly, the large metros are also permitted to follow the EPWP guidelines. Lastly, if the large metro is in a better financial position than Mafeking, it will also be better placed to implement a similar model without the need for third party funding.

4. Analysis of results

The initial propositions which the researchers aimed to test included:

1) It is possible for municipalities to implement dedicated programmes to achieve socio-economic objectives through procurement;

2) The implementation of these dedicated programmes can be carried out within the existing regulatory framework;

3) Such programmes can have significant socio-economic impact; and

4) The implementation of dedicated programmes to achieve socio-economic objectives through procurement need not affect service delivery and the costs of service delivery.

Socio-economic objectives investigated included increasing employment, local content, SME and/or BEE involvement in municipal supply chains.

4.1. Feasibility of implementing dedicated programmes

The research undertaken indicates that very few municipalities have adopted dedicated programmes to pursue socio-economic objectives through procurement. Where programmes that purport to support SMME/BEE involvement in the municipality’s supply chain have been identified, these programmes are still in their infancy. However, municipalities have adopted a transactional approach to pursuing socio-economic objectives through procurement. This approach involves granting preferential points to tenderers on separate procurement events (i.e., targeted procurement) in accordance to the municipality’s preferential procurement policy as well as applying the EPWP guidelines where applicable. Whilst this approach may grant preferential points for contract participation goals, very few municipalities make enterprise development a contractual obligation during procurement events.

Observed exceptions to the above are the eThekwini contractor development programmes and the Mafeking expanded waste collection services project. In both cases, due to the length, size and contracting arrangement for the associated procurement, related enterprise development programmes were developed. In the case of eThekwini, the contractor development programme was a result of a decision to implement the replacement of the existing water mains pipes as a three year


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programme using framework agreements, rather than a series of individual projects using fixed project agreements. Similarly, the Mafeking project was conceptualised as an EPWP project rather than a simple procurement project.

These two exceptions indicate that in addition to the transactional application of preferential procurement and/or EPWP guidelines, the chosen procurement and contracting strategy for a particular commodity or spend category should inform any related enterprise development strategy. Secondly, it is easier to develop a formal enterprise development programme, where the contracts being entered into are of a long term nature and hence allow the sustained involvement of targeted enterprises on the programmes. Where, this is not possible and the municipal can only use the transactional targeted procurement approach, it will be necessary for municipalities to have standalone programmes to help the targeted enterprises over a period longer than the duration of the contract. However, such programmes must still be informed by the procurement and contracting strategy for the related commodities or spend categories.

The research also indicates that the development of a more programmatic approach to pursuing socio-economic objectives through procurement need not necessarily be driven by the municipality’s supply chain unit. Rather this process can be driven by the line departments who have a greater awareness and knowledge of their supplier industries and hence the applicable strategies and tactics to maximise the attainment of socio-economic objectives. The case studies show that the SCM units play a crucial role in setting policy, supporting its implementation and monitoring its compliance. However the line departments also play a crucial role in ensuring that best practices for their sector are applied within the existing municipal guidelines and policies.

4.2. Alignment to existing legislation

All the observed transactional and programmatic approaches to pursuing socio-economic objectives through procurement are being carried out within the existing regulatory frameworks.

Generally, the municipality’s SCM and preferential policies required by the MFMA and the PPPFA respectively and the published EPWP guidelines provide a framework within which transactional approaches to preferential procurement and EPWP opportunities are being applied. Further, the contract participation goals approach used by the City of Joburg on its BRT implementation is aligned to the best practice guidelines produced by the CIDB. These best practice guidelines, though not legally binding are aligned to the overarching public sector procurement guidelines and regulations.

Similarly, the programmatic approaches being used on the eThekwini contractor development programme and the Mafeking expanded waste collection services project are also aligned to the existing legislative framework. The former, builds on the best practice guidelines produced by the CIDB and the latter is aligned to the published EPWP guidelines. Further in the Mafeking project, steps were taken to ensure compliance with to section 78a of the Municipal Systems Act regarding the extension of municipal services.


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4.3. The socio-economic impact of municipal programmes

Whilst the profiled programmatic approaches have significant localised socio-economic impacts, the impact per procurement rand spent (or per household serviced on the expanded waste collection project), highlight a significant nationwide impact if approaches are replicated by other municipalities. For example, assuming that similar to the eThekwini Municipality, five other metro or municipalities spending R2 billion over a 3 year period to replace their water mains systems, also developed up to 16 emerging contractors to CIDB grades 6 or 7, at least 80 highly capable emerging firms will be created resulting in a significant contribution to meaningful transformation in a sector in need of more large black owned firms rather than more small and less capable black firms. Similarly, the Mafeking expanded waste collection service created an extra 70 jobs in the provision of services to an extra 30,000 households. Hence the adoption of similar models in small municipalities or under serviced informal areas in large metros could create up to 700 jobs if the services are extended to up to 300,000 households. Furthermore, what is unquantifiable at this stage is the increased ability of the programme beneficiaries to access other economic opportunities as skilled labourers with work experience or entrepreneurs with proven delivery records, business management and development skills and in certain instances credit records with lending institutions.

4.4. Impact of programmes on service delivery

The case studies highlights that the pursuit of socio-economic objective be it on a transactional or programmatic basis, need not affect service delivery nor the cost of service delivery. However, it is clear that case by case trade offs between achievable socio-economic objectives and service delivery, often need to be made. For example, during the implementation of the BRT system, the urgent, non-negotiable completion deadlines resulted in the adoption of less labour intensive construction methods and the acquisition of buses from an overseas supplier. However, one cannot dispute that the benefits to the public of fast tracking the improvements in the Joburg’s public transport system far exceeds the benefits that would have been gained from maximising the EPWP work and BBBEE opportunities on the project. Nevertheless, in some cases, the maximisation of socio-economic objectives does directly lead to improvements in service delivery and the costs of delivering that service. This is illustrated by the expanded waste collection service project where more households received services at a cost per household which was significantly less the cost per household achieved by the municipality.

4.5. Additional observations

In addition to the observations made with regards to the initial research propositions the following observations were also made.

4.5.1. Bridging the municipal procurement capability gap

Municipalities face significant skills and capacity challenges with regards to developing and implementing programmatic approaches to achieving socio-economic objectives


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through procurement. Indicators of this during the programme conceptualising and development phases, include the use of externally funded consultants during the development and implementation planning phases of the Mafeking expanded waste collection service project. Similarly on the BRT implementation, the JDA does not have a formal contractor development programme in place, and only apply a transactional approach to ensure the involvement of emerging contractors on their large scale projects.

With regards to the implementation phase of programmes, both the eThekwini and the Mafeking municipalities have relied on third parties to not only provide the overall management of the programmes within which enterprise development is being undertaken, to also conduct the enterprise development. Whilst this was designed for during the planning phases, it raises concerns about the municipality’s ability to continue providing support to the emerging enterprises once the third party service provider’s contract ends. However, the use of external service providers for overall programme management and enterprise development maybe necessary to bridge the capacity and capability gap within municipalities. Furthermore, the use of external service providers also allows the municipalities to retain their commercial objectivity as buyers of services from the mentored enterprises.

4.5.2. The sustainability of created jobs and enterprises

It is acknowledged that the EPWP work opportunities are only meant to be temporary jobs designed to impart skills to unskilled job seekers, to enable them to find permanent formal employment. However, for this to be successful, the actual training and skills development undertaken on EPWP projects needs to be formally monitored and linked to formal work opportunities.

With regards to the sustainability of the created enterprises, it is important to ensure that the mentored enterprises find other revenue streams to reduce their dependency on the municipality. Further, in cases where SME are formed as part of an EPWP project, it is important to ensure that their cost models are based on normal labour rates rather than EPWP rates to ensure their sustainability as standalone business post. Indeed, exposing the SME to real world business pressures is necessary to ensure their sustainability.

However, notwithstanding the above, it can argued that securing the long term sustainability of the created enterprises through guaranteed access to future business should not be a primary concern of the enterprise development programme. Rather, emphasis should be placed on ensuring the commercial success of the enterprise over the duration of the project (i.e., the entrepreneurs must make a meaningful profit) as well as imparting key entrepreneurial skills and business track records to enable the entrepreneurs to access alternative business opportunities. Indeed, the premise of the programmes should be on creating a dynamic entrepreneurial class and labour which can access further economic activities through competitive tender or recruitment processes.


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5. Conclusion

The key observation from the research into municipal approaches to pursuing socio-economic objectives through procurement is the tendency of municipalities to only use transactional rather than programmatic approaches. Indeed the application of preferential points system, and where appropriate the standard EPWP guidelines, in all tenders, appear to be the norm. Where a more programmatic approach has been adopted, this has resulted from the selected procurement and contracting strategy for the related spend category or set of projects. In these instances, a programmatic approach has been possible as the related contracts were of a high value and long duration (i.e., 2 to 3 years). No substantive programmes supporting firms in spend categories where short term contracts are the norm, were identified.

Two possible explanations for this tendency to only use transactional approaches rather than programmatic approaches are provided.

The first is a general shortage of capacity within municipalities which hinders the development and implementation of dedicated programmes. The two identified programmes extensively relied on external consultants and services providers to not only develop but to also implement the programmes.

The second hypothesis is that the general low levels of maturity of the municipal approaches to supply chain management and procurement when compared to best practices from both the private and the public sector, hinders the development and implementation of appropriate programmes. Indeed earlier research22 on the approaches to preferential procurement adopted by South African corporates indicated that the most successful corporates in pursuing socio-economic objectives through procurement are those which have adopted practices such as strategic sourcing, supplier relationship management and use cross functional teams. These corporates have also embedded their approach to preferential procurement within these practices. This has resulted in the selection of procurement and contracting strategies with the potential to maximise the realisation of socio-economic objectives as well as enabled the development of appropriate support programmes aligned to the sophistication and needs of the particular supplier market.

Therefore to enhance the ability of municipalities to pursue socio-economic objectives through procurement, municipalities must be encouraged to adopt programmatic approaches in addition to existing transactional approaches. This can be achieved if municipalities adopt a sector based approach to identifying and developing specific programmes aligned to the sophistication and needs of the particular sector. This approach will not only enable municipalities to apply identified best practice for the particular sector, but will also enable the building of a body knowledge as specific programmes are piloted and tested.

22 Source: S. Philips and M. Mpofu, 2010, “Overall case study report on the employment through procurement”., HSRC (CPEG).


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To bridge the capacity shortfall within municipalities, greater collaboration between municipal SCM units and their line departments will also be necessary. In particular, the line department’s knowledge and awareness of their supplier markets will need to be tapped into. Secondly, national bodies or knowledge networks can play a key role in helping to develop and disseminate sector best practices. The CIDB is already fulfilling this role within the construction sector and its best practices guidelines are already aligned to the existing legislative environment. Similarly the DEA is also playing a similar role with regards to improving waste management amongst poorer municipalities with a rural/urban demographic.

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