The preferential procurement regulations 2017

Procurement Law . 02 Apr 2017

A STEP IN THE RIGHT DIRECTION TOWARDS ACHIEVING RADICAL ECONOMIC TRANSFORMATION

“Public procurement is an important strategic vehicle for developing local industries, broadening economic participation and creating work opportunities”. These were the sentiments expressed by the then Minister of Finance during the 2017 Budget speech. It has been mooted in various publications by Treasury that almost R500 billion is spent annually on the procurement of goods and services.

The Office of the Chief Procurement Officer correctly concedes that “wisely and efficiently spent, this amount can also spread wealth to hard-working entrepreneurs who successfully tender for government contracts and, in doing so, create jobs”.
Even though section 217 (2) is clear on the need to advance and protect historically disadvantaged persons when it comes to government procurement, section 2(1) (a) of the Preferential Procurement Policy Framework Act (“PPPFA”) places undue weight on price by allocating 90 or 80 points (depending on the value of the contract) for the cheapest price with only 10 or 20 points reserved for BBBEE level contribution.

It is against this backdrop that the Preferential Procurement Regulations, which came into effect on 1 April 2017 and passed in terms of section 5 of the PPPFA, are a step towards the right direction in bringing about the much-needed radical economic transformation in the procurement spend by organs of state.

The Preferential Procurement Regulations go a long way to realise the dream of a more inclusive economy that benefits previously marginalized persons, the local economic development of certain underdeveloped communities and the development of small enterprises. The key features (there are obviously other important amendments that have been introduced but they will not form the subject matter of this article) of the Preferential Procurement Regulations are the following:

1.   Pre-Qualification of bidders
Regulation 4 provides that if an organ of state decides to apply prequalifying criteria to advance certain designated groups, the tender advertisement must include a condition indicating that the tender is specifically set aside for certain designated groups. The designated groups that may be pre-qualified to respond include amongst others:
  • bidders with a particular BBBEE level. For example, it can be a condition of a tender advertisement that only bidders that have a Level 2 and upwards BBBEE certificate are required to respond;
  • exempted micro enterprises or Qualifying small business enterprises as defined in the Code of Good Practice in terms per the BBBEE Act;
  • bidders that subcontract a minimum of 30% of their services to emerging micro-enterprises or qualifying small business enterprises that are 51% owned by either black people, black youth, black women, black people with disabilities, black persons living in rural or underdeveloped areas and black military veterans.
Any bidder that fails to meet the conditions specified in that particular tender, will be rejected as an unacceptable tender and its proposal will not be evaluated. For example, it can be a condition of a tender advertisement that only bidders that have a Level 1 and 2 BBBEE certificate are required to respond. Bidders whose BBBEE certificates fall outside of the stipulated threshold will thus have submitted unacceptable tenders, and their bids will be disqualified.
Previously, organs of state were prevented from applying such prequalifying mechanisms because of the constraints imposed by Treasury Practice 2 of 2006. In terms of the latter Treasury Practice Note, set asides were not allowed. Regulation 4 thus strengthens government’s efforts to promote BBBEE through set asides.

2.   Prescribed Sub-Contracting
Another significant new insertion is Regulation 9 that may be used to accelerate the economic empowerment of certain designated groups. It authorises organs of state to prescribe a condition in the tender advertisement requiring a successful bidder to subcontract a minimum of 30% of the value of its bid to certain designated groups indicated in Regulation 4. An organ of state will provide the successful bidder with a list of Treasury approved suppliers, from which the successful bidder can choose a potential subcontractor.

Once more, this is an important development because currently subcontracting is mainly at the behest of the bidders with limited control or force of law by an organ state on how such subcontracting takes place.

3.   Price Negotiations & Tender Cancellation

Section 2(1)(f) of the PPPFA provides that a contract must be awarded to the tenderer that scores the highest points unless there are objective criteria, in addition to the BBBEE related criteria, that justify the award to another tenderer. Generally speaking, the tenderers that score the highest points would be those that offer the lowest price as compared to other tenderers, irrespective of whether that lowest price is market related or not.  Regulation 6(9) and 7(9) now provides more flexibility for organs of state by stating that:

“If the price offered by a tender scoring the highest point is not market-related, the organ of state may not award the contract to that tender.”

Instead of awarding the contract to the highest scoring bidder that does not offer market-related price, an organ of state is now given the latitude of either negotiating a market related price with the said highest scoring bidder or cancel the tender. In the event that negotiations with the highest scoring bidder are not successful, then negotiations can be held with the second highest scoring bidder and thereafter with the third highest scoring bidder failing which the tender must be cancelled.

The ability to negotiate a market related price or cancel a tender despite a tenderer virtually being in line for appointment, is a powerful tool in the hands of organs of state considering the fact that in the old regulation 8(4) no such latitude exists. Previously a tender could only be cancelled if “the services/goods are no longer needed due to changed circumstances; funds no longer available; or no acceptable tenders were received”. If none of these requirements were met, an organ of state had no choice but to proceed to appoint the highest scoring bidder even if its price was not market related.  

4.   Objective Criteria not to award to the highest bidder

Before the Supreme Court of Appeal judgement in South African National Road Agency Ltd v The Toll Collect Consortium and Another (2013 (6) SA 356 (SCA), various courts gave differing views on whether it was necessary for organs of state to specify “objective criteria” upfront in the tender advertisements. This judgement to a certain extent clarified the matter.
Regulation 9(2) now amplifies the Supreme Court of Appeal decision by bringing the much-needed certainty on the requirement to state “objective criteria” upfront in the tender advertisement.

A transformation-oriented application of the “objective criteria” principle coupled with other empowerment measures in the Preferential Procurement Regulations may become useful tools for an organ state that seek to accelerate its empowerment objectives. By way of example, a municipality over and above setting condition/s for pre-qualification, may state in its tender documents that preference will be given to tenderers that are based within its municipal area as “objective criteria” contemplated in section 2(1)(f).

Conclusion
Despite the Preferential Procurement Regulations advancing the goals of section 217(2) of the Constitution, there is a view in some quarters that the Regulations might be ultra vires as they are perceived to be exceeding the authority granted by the PPPFA. On this basis, the Preferential Procurement Regulations may be visited with an ultra vires challenge purely because of the proverbial sins of the PPPFA, which restrictively narrowed down the framework for preferential procurement policy.
In his 2017 Budget speech, the former Minister of Finance alluded to the publication of a new Public Procurement Bill during the course of 2017 “that will consolidate the currently fragmented regulatory environment in keeping with section 217 of the Constitution.” It is hoped that the proposed Public Procurement Bill will go a long way to address some of the shortcomings experienced with the PPPFA.

It must be stated however, that the debates on the ultra vires or otherwise of any regulation are never as straightforward as they may sound. It is always best left to our courts to entertain any claim challenging the validity of the regulations on the basis of ultra vires. Up until that happens, the Preferential Procurement Regulations as they are, are of full force and effect.

WRITTEN BY:

TSHIAMO SEDUMEDI

Managing Director

  011 256 3546

  tshiamo@ndlovu-sedumedi.co.za

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