Eskom's black economic empowerment (BEE) strategy and affirmative procurement spending is the most powerful among the country's public-sector corporations. Over the past seven years the utility has spend more than R27bn with BEE companies, much of this with 9 000 small and medium-sized enterprises (SMEs). Last year affirmative procurement totalled R7,9bn.
Some of the world's largest industrial companies have been persuaded to sell part of their SA operations' equity to BEE firms to remain suppliers to Eskom. These include Germany's Siemens; ABB, a Swiss-Swedish engineering group; and France's Alstom. Eskom's procurement spending is an effective tool for change.
Yet this programme started out with a small R500 000 initiative in 1994, with the aim of giving a few black women the contract to make half of Eskom's protective clothing. "It was a slog," recalls Eskom commercial GM Reuben Mamorare, who was involved in setting up the programme, and who now oversees the utility's procurement spending.
He faced resistance from some Eskom managers, who were worried about the quality of the clothing delivered by the black suppliers. Eskom's traditional contractors were obviously not pleased and bought up most of the material from the material suppliers to make it difficult for the black operators to meet schedules.
"We kept intervening for more than nine months to get the programme to work. But it was a learning experience and four of the original seven suppliers have expanded and are still operating," says Mamorare. Crucially, he had the backing of the Eskom council and senior management, particularly then-CEO Allan Morgan.
In 1995 the programme was formalised under the corporate commercial division, with the aim of developing and supporting emerging black entrepreneurs. Eskom's electrification programme presented the next opportunity for Mamorare and his team to implement the strategy.
Eskom was given the task of connecting 1,75m homes in five years, so with subcontractor ABB it trained and established teams of residents in villages and townships to implement house connections. Eskom also began encouraging some of the subcontractors who supplied the electrical equipment to team up with black partners.
Mamorare approached all Eskom divisions to explain the benefits of the programme. "It wasn't easy because many of the white managers at the time were conservative and reluctant to change old processes. However, after some early resistance they bought into it and are now committed to the programme," he says.
Eskom's affirmative procurement policy has become increasingly sophisticated and now sets the standard for the public sector and many private-sector companies.
In 1995 Eskom spent R15m with BEE suppliers; today that figure is about R8bn. Mamorare says that in the 2004 financial year Eskom spent 52% of its discretionary spending - spending on all contracts excluding those on primary energy (coal, water and nuclear fuel) - with BEE companies; 60% of affirmative spending is with S MEs. This amounts to more than R5bn of the discretionary spending bill. In addition 38% of all coal - worth about R2,5bn - is now procured from black-owned coal miners such as Eyesizwe.
Eskom's procurement policies have been widened to promote black women entrepreneurs, with almost R800m having been spent in 2004 to facilitate their participation in the programme. "Along with our effort to help SMEs, we have a strong bias towards black women-owned businesses," says Mamorare.
With a supplier base of more than 40 000 companies - of which about half are active suppliers - Eskom has had to introduce mechanisms and processes to ensure that no fronting takes place and that vendors meet small-business and BEE criteria.
They must provide Eskom with a statement of their empowerment performance on ownership, control, employee statistics and their own procurement using a points system. Eskom often compels contractors to use black subcontractors.
"All vendors must meet our criteria and we do random checking to ensure they have given the correct information," Mamorare says. Many of the vendor requirements used by Eskom have formed the basis of government's balanced scorecard approach, he says.
S MEs are defined as companies with a turnover of less than R25m, and Eskom insists that they are at least 50% owned by black firms or individuals who actively participate in the running of the company. Eskom provides these companies with supplier support, including tendering guidelines, special payment terms and price matching.
Eskom insists that larger firms have a BEE ownership of at least 10%, a strong black management presence, extensive socioeconomic programmes and that they procure goods from black suppliers.
The initiative has affected Eskom's SA supplier base as well as multinationals, says BusinessMap consultant Fiona Thomson. In an assessment of Eskom's procurement policies in 2003, Thomson says the dominance of Eskom in the energy industry compelled large global engineering firms to meet the utility's BEE standards.
In 2002 ABB sold 20% of its SA operation to black women's group Wiphold as a strategy to win public-sector contracts. France's Alstom went further, selling 42% of its R2bn-plus SA business to two empowerment groups. Siemens, previously part-owned by the Industrial Development Corp, has sold a 26% stake to BEE companies. However, Mamorare says Eskom assisted these large groups to meet the BEE criteria because it would have been impossible to substitute the products and services of these multinationals with local ones.
"Almost 60% of our discretionary spend is with these large industrial companies and with most of them we have had a successful long-term partnership. Substituting them was not in our interests and would have led to significantly higher costs," he says.
