The link between Preferential Procurement and Enterprise Development

Procurement is an important tool for achieving economic growth, social and other objectives that leads to meaningful participation in the economy by black people to achieve sustainable development and general prosperity. These are measured with indicators such as Gross Domestic Product (GDP), life expectancy, literacy, poverty eradication and levels of employment.

Preferential procurement policy requirements include economic goals that prefer local firms and social goals, by giving opportunities to black people that were economically marginalised prior to 1994. It is an effective instrument to promote Black Economic Empowerment (BEE) in the economy. It results in an increase in market access for black companies and consequently, sustainable and competitive operating entities that contribute to the performance and development of the mainstream economy. This is underpinned by the Preferential Procurement Policy Framework Act (Act 5 of 2000).

For many suppliers of goods and services in South Africa, the government and other organs of state represent a significant part of their business survival. Through the trickledown effect of doing business with a public sector entity, the business imperative of a favourable BEE status is driven to virtually every business operation in South Africa. It is through preferential procurement that BEE leverages off government’s spending power and makes it more likely to have a positive impact on incorporating black people into the mainstream economy.

It follows that the BEE policy is designed to encourage measured entities to use Enterprise Development (ED) in conjunction with preferential procurement. The most effective manner of integrating the two is to invest in ED opportunities within the entity’s value chain. Encouraging the support of ED through preferential procurement stimulates reciprocal needs between the investor and the beneficiary that will ultimately lead to sustainable development of black business and economic growth.

Furthermore, to grow the economy, more enterprises are needed to produce value-added goods and services, to attract investment and to employ more black people in productive activities.

Therefore, Enterprise Development (ED) seeks to address the following in generating economic development:

  • lack of access to finance and other business support amongst black-owned businesses
  • the high failure rate amongst black-owned start up businesses due to a lack of market access
  • poor operational and financial capacity of black-owned businesses
  • the creation of jobs through the small business sector

In addition, the meaningful participation of black people and black–owned businesses in the mainstream economy is enhanced where the measured entity invests in a black-owned business for example, to achieve a foothold in a desired market. The measured entity is then also able to provide the operational and financial support to make start-up enterprises more sustainable.

As such, the sustainability of ED beneficiaries is significantly improved if companies supporting their development also procure from them. ED and preferential procurement drive the creation and sustainability of black businesses in the mainstream economy. Integrated ED is more likely to be a sustainable venture that supports economic development and it also acknowledges the role that the beneficiary organisations can play in developing the economy.

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