President Jacob Zuma.
President Zuma’s State of the Nation address on February 9 was dominated by the need for “radical socio-economic transformation” in South Africa. Specific interventions he mentioned, which intended to give effect to this imperative, were “legislation, regulations, procurement and B-BBEE charters to influence the behaviour of the private sector and drive transformation”.

While the full import of this “radical socio-economic transformation” rhetoric has been the subject of much debate and writing, some of its impact in the area of public procurement should become apparent soon, with the coming into effect of the new Preferential Procurement Regulations (the revised regulations), published on January 20 and which come into effect on Saturday.

The revised regulations bring significant changes to the law regulating tender processes and give organs of state a powerful tool to drive their transformation agendas through their procurement spend.

According to Finance Minister Pravin Gordhan: “The regulations aim to use public procurement as a lever to promote socio-economic transformation, empowerment of small enterprises, rural and township enterprises, designated groups and promotion of local industrial development”, in line with the current dialogue on inclusive economic growth in South Africa.

Importantly, the use of preference in public procurement to drive economic transformation is not new or particularly radical - it has been a consistent feature of public procurement in the constitutional dispensation, being specifically enshrined in section 217 of the Constitution.

Equitable

To this end, section 217(1) of the Constitution states that an organ of state must contract for goods or services in accordance with a system which is fair, equitable, transparent, competitive and cost-effective. This is generally understood to require that organs of state must follow a competitive public tendering process when they procure goods or services.

This requirement is only qualified by section 217(2) which states that the requirement for a competitive tender process does not prevent organs of state from employing and implementing procurement policies that allow for “categories of preference in allocation of contracts” or for “the protection or advancement of persons or categories of persons disadvantaged by unfair discrimination”.

The Preferential Procurement Policy Framework Act of 2000, in terms of which the revised regulations were enacted, is the piece of legislation which seeks to give effect to section 217(2) of the Constitution and establish the system of allocating preference in procurement contracts.

Criteria

Notwithstanding the broad language of section 217(2) of the Constitution, the primary tool created by the act and the predecessors to the revised regulations is a fairly narrow one, which primarily caters for preference through the allocation of preference points in the adjudication of a tender.

This preference points system dictates that satisfactory tenders be comparatively scored out of 100, with a maximum of either 10 or 20 points being allocated to preference and the remaining 90 or 80 points being awarded in respect of the price tendered.

The decision on whether to use the 90/10 or 80/20 allocation is a mechanical one determined by the value of the tender in question, rather than the exercise of any discretion. In the ordinary course, the tenderer that scores the highest points in this comparative evaluation should be awarded the tender.

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This preference points systems remains in the revised regulations, however, they go a step further in that they do not limit organs of state to the allocation of preference points, but also enable them to effectively. limit the ability to tender for certain contracts to specified categories of persons.

Regulation 4 of the revised regulations provides that an organ of state may decide to apply certain pre-qualification criteria to tender processes.

This includes stipulating that certain tenders are only open to entities with a particular B-BBEE-status level, exempted micro enterprises, or qualifying small business enterprises, or tenderers who will subcontract a minimum specified percentage of the contract to businesses that are, for example, 51 percent black-owned or black woman-owned.

If an organ of state sets a pre-qualification criterion of this nature in an invitation to tender, it means that only those tenders that meet such criterion can submit tenders in response to the invitation.

Value for money

This is a material (one might even suggest “radical”) departure from the status quo. The conventional wisdom to date has been that the system established in the legislation is one which advances historical disadvantaged persons through the points system, not through the setting aside of contracts and the consequent exclusion of other persons from tendering.

The concern with any measure that is exclusionary is that it has the potential of unduly limiting competition and, by extension, the cost-effectiveness of a tender process. As the argument goes, the primary objective of public procurement is the acquisition of required goods or services cost effectively or put differently, the achievement of value for money.

Transformation

The pursuit of a transformation agenda is thus not a primary objective, but rather a secondary one. Accordingly, any measure which seeks to advance transformation at the cost of the primary objective is seen as an undue limitation of the primary objective of cost-effective procurement and the attainment of value for money.

The revised regulations seem to suggest a degree of parity between these objectives or even to reverse the order, where transformation can be a decisive factor before any consideration is had to the cost of the goods or services being procured, or indeed before even considering the quality of the goods or services on offer. As a matter of practical application, the operation of regulation 4 of the revised regulations has increased the importance of an entity’s B-BBEE-status level significantly, at least in the context of public procurement.

A heavily criticised feature of the existing regime is that it arguably allows untransformed entities to game the system, particularly in large contracts, by simply bidding very low prices and banking on being awarded the highest amount of points available for pricing (ie the maximum of 90 points out of 100) and disregard the impact of B-BBEE in the scoring as it only counts for 10 points.

Under the revised regulations, organs of state will be able to set a minimum B-BBEE-status level as a pre-qualification criterion, and thereby render companies which do not have the desired status level ineligible to tender. B-BBEE will thus now be able to work both as a gatekeeper and as a preference points-award factor in government tenders.

This means the practice of “double counting” in respect of B-BBEE by organs of state, which the courts condemned as unlawful under the previous regulations, is now legitimised to a degree by the revised regulations and that entities with the best B-BBEE-status levels will, more than ever, be best placed to win government contracts.

It is worth noting that while the intent behind the revised regulations is laudable and could be a great driver for economic transformation, there may well be some challenges to their constitutionality or the constitutionality of their application by organs of state. An organ of state may, for example, set a pre-qualification criterion which is unreasonable in respect of a particular contract - thereby rendering the tender open to challenge.

It may also be that some successful constitutional challenge can be brought against regulation 4 in general insofar as it establishes an exclusionary system rather than one of preference.

Kota is a director at law firm Herbert Smith Freehills.

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