July 16, 2024

Why ethical procurement matters

4 min read

There can be no question that South African organisations are facing challenges on several fronts. Even without factoring in the country’s electricity crisis, the business landscape is beset with issues such as regulatory risk, global supply chain constraints and worker strikes.

Additional pressure is coming from soaring external spend, squeezing many companies’ profit margins. According to a December 2022 report by McKinsey, procurement functions in Africa are “likely to find it difficult to obtain the goods they need at historical cost”. “Procurement organisations have mobilised to manage and optimise external spend, but too many have not exercised the necessary muscles in recent times,” the report states.

In March this year, the South African government announced plans to ensure mandatory procurement of locally produced products by the state in some sectors of the economy. This is despite a February 2022 ruling by the Constitutional Court that did away with enforced local content requirements for organs of state.

The government says the move is aimed at reducing import leakage in government spending, but in its initial application to ConCourt, business association Sakeliga argued that preferential procurement was “harmful” and resulted in “misallocation of funds away from maximum value-for-money for the public”.

Sadly, South Africa’s track record in this regard is less than stellar.

In the wake of the State Capture Commission of Inquiry’s damning findings, some experts even suggested a state of emergency be declared to combat corruption and maladministration within the public procurement system.

The commission itself identified extensive political interference in the system, with now-Chief Justice Ramond Zondo remarking: “Corruption has strengthened its hold and extended its hold on public procurement over a very long period of time”.

What has become clear is that if South Africa is to emerge from its economic slump, concise ethical standards will need to be implemented, both in the public and private sectors.

The Chartered Institute for Procurement & Supply (CIPS), the world’s largest professional body for procurement and supply professionals, points out that ethical procurement practices should be employed at all levels of society.

At the most basic level, buyers should never act in their own interests for personal gain nor should they fail to act ethically toward suppliers. They should also adhere to formalised codes of conduct as stipulated by the organisation.

Any incident of unfair treatment, conflict of interest or corruption is very likely to be splashed across news websites or dissected on social media, so organisations have no room to slip up.

As a starting point, says CIPS member Lenushka Prannath, organisations should examine their own practices and ethics culture.

According to Prannath, who also serves as head of Procurement at Bidvest International Logistics, companies should offer ethics training to understand what could interfere with their jobs. They should also conduct frequent lifestyle audits to deter any unethical behaviour. 

A clearly defined ethics policy should make clear what the organisation deems ethical, and any breaches of basic standards such as corruption, fraud, bribery and modern slavery should be addressed immediately.

She emphasises that corruption is not restricted to money exchanges, as unfairness in procurement practice extends to instances where suppliers take people out for expensive dinners or other enjoyable activities in a bid to sway business in their direction. This is where procurement is important as the impartial party in purchasing decisions. Most companies have a gifting policy that allows gifts of a certain value before staff have to declare them. Procurement employees should hold themselves to a higher standard and not accept any gifts, no matter what their value.”

Ethics of suppliers can be analysed by implementing a supplier performance management system that measures suppliers’ delivery against their contractual obligations. Human rights violations can similarly also be assessed.

Tsholofelo TsholofeloPuma Minerals head of Energy Infrastructure Procurement for Africa/Australia/Dubai, recommends that the management system includes the following:

• Clear performance metrics and KPIs.

• Regular monitoring and evaluation.

• A collaborative approach.

• Integration with other systems.

• Risk management

• Data-driven insights.

• Comprehensive reporting.

• Feedback mechanism.

• Technology utilisation.

• Compliance management.

• Continuous improvement.

What is key to all these systems is that organisational and supplier ethics must be supported by the market.

Belinda West, head of Non-trade Procurement at Woolworths, says the CIPS ethics module does a good job of covering the priority issues encapsulated by the United Nations Sustainable Development Goals. “It also provides practical application with respect to maintaining heightened awareness to the flags of potential ethical concerns.”

She calls for greater testing of supplier performance management systems, as in her experience, failure to do so has led to outcomes misaligned with the perspective of the customer.

Where South Africa is lacking in this regard is benchmarking, where no proper services are available.

“Some organisations are using companies like Beroe, but their information in the African context is almost non-existent. We cannot only rely on requests for proposal or requests for quote for benchmarking purposes, as we know that in corrupt organisations, procurement is often part of the problem,” Prannath says.

For procurement to be professionalised, there needs to be a recognised ethics board that effectively disbars procurement professionals involved in corrupt activities. “Most professions have this. Lawyers can be disbarred and the Financial Sector Conduct Authority does it in the financial services industry. So establishing a board is integral to ensuring procurement is taken seriously in South Africa.”

It is a view supported by Tsholofelo. “While an ethics board won’t solve every procurement-related challenge in the region, it will go a remarkably long way in creating a consolidated legal framework, rebuilding public trust, promoting fair competition and efficiency, and emphasising sustainable and efficiency,” he says.

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