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The Legal Considerations of Transacting with South African Public Entities

Clinton van Loggerenberg, ENSafrica

ENSafrica

South Africa is ranked first in Africa, and 30th in the world, in terms of GDP. It is a member of the G20 and has high investment potential that encourages foreign investment in both the public and private sectors. South Africa leads the continent in foreign direct investment (FDI), with the sectors attracting the most FDI being energy, telecommunications and services. It boasts a free market economy, with abundant natural resources and a well-established democracy with a transparent legal system. It is a country with significant developmental and infrastructural needs and as a result there are opportunities for financiers in relation to transactions with public entities and state-owned enterprises, which are the entities in South Africa primarily responsible for driving infrastructure development.

What does South Africa have to offer?

Strategically located, South Africa is Africa’s economic powerhouse, enjoying one the most stable legal and political climates on the continent. It is a gateway to the rest of Africa, a market of more than 1 billion people.

South Africa has mature capital markets that serve the domestic economy and the wider continent. The Johannesburg Stock Exchange (JSE) is the 19th largest stock exchange in the world and the biggest in Africa. The JSE was ranked first out of 138 countries for financing through the local equities market in the World Economic Forum’s Global Competitive Index 2016–2017. Its debt capital market is easily the most liquid on the African continent, and provides for all types of debt instruments – ranging from conventional debt instruments, such as listed and unlisted bonds, to more complex classes of securities, such as asset-backed securities, structured notes and securitisations. The debt instruments offer very competitive yields and are – in the context of developing economies – relatively low-risk and highly stable.

South Africa has a wealth of natural resources. The mining industry remains one of its largest economic drivers, but capital investment is much needed to further the infrastructure of the mines. These infrastructural needs provide a significant opportunity for investment.

Investors should take the usual care when transacting in foreign jurisdictions, but there are some additional considerations to bear in mind when concluding financial transactions with state-owned and public enterprises in South Africa.

So what do you need to know before transacting with South African public entities?

Applicable legislative framework

Public procurement in South Africa is multifaceted; plays a significant role in the economy; and has been specifically used to pursue socio-economic transformation, social, industrial and environmental aims. South Africa is a developing nation, and therefore has many opportunities for investment.

When contracting with South African state-owned enterprises or public entities, it is important to note that public procurement is governed by section 217 of the Constitution of the Republic of South Africa, which states that all procurement must take place in a manner which is “fair, equitable, transparent, competitive and cost effective” (the Constitutional Principles).

The principal legislation governing public finance in South Africa is the Public Finance Management Act, 1999 (PFMA) and the Local Government: Municipal Finance Management Act 56 of 2003 (MFMA). The PFMA emphasises the importance of good management of public finance, transparency and accountability. The MFMA aims to modernise municipalities and provides a consolidated legal framework for a democratic and accountable local government. The PFMA and the MFMA provide an established, predictable and transparent framework in terms of which business with public entities can be conducted.

In addition to the PFMA, public entities are often governed by specific legislation in terms of which they have been established. This legislation must be considered together with the provisions of the PFMA/MFMA and any relevant National Treasury Regulations.

What is a public entity?

The PFMA/MFMA define a public entity as a national or provincial public entity and applies to, among others, government departments, constitutional institutions, municipalities, public boards and public entities listed in the schedules to the PFMA/MFMA. Entities not listed in the schedules may nevertheless be considered public entities if they meet certain requirements.

Specific legislative requirements

The PFMA/MFMA place specific prohibitions on public institutions. These include, for example, a prohibition from entering into any transaction that binds, or may bind, that institution to any future financial commitment, unless such borrowing or other transaction is authorised in terms of the PFMA/MFMA and other applicable legislation. There are serious consequences of non-compliance which may result in the transactions being void and further, may result in criminal conviction for the official or employee acting on behalf of the public entity.

It is therefore essential that transactions are properly authorised. Section 66(3) of the PFMA prescribes the persons through whom public entities may borrow money or issue a guarantee, indemnity or security, or enter into any other transaction that binds or may bind that public entity to any future financial commitment. A public entity listed in schedule 2 of the PFMA may only enter into such transaction through its accounting authority, namely, its board of directors or a party mandated by the accounting authority.

Regulatory authority

Although there is no regulatory authority governing public procurement, the Office of the Chief Procurement Officer (OCPO) was established in 2013 with the primary aim of modernising and overseeing South African public-sector supply chain management system and to ensure that public procurement is done in line with the Constitutional Principles.

Review of transactions

Public Procurement is governed by the principles of administrative justice. The Promotion of Administrative Justice Act 3 of 2000 (PAJA), allows for judicial review of “administrative action”, which includes all government procurement decisions, thereby allowing aggrieved private entities to take the procurement decisions of the public entities on review. Applications for judicial review brought under PAJA must be made as soon as possible and at most within 180 days from the date the person was informed of the decision, or the date on which any internal procedures are concluded (this 180-day limit may in certain circumstances be extended). The review process can, however, take as long as two years.

Additional South African market-specific considerations

South African transactions include a number of non-price factors. With a view to undoing the inequities of apartheid, the South African government initiated a policy of Broad Based Black Economic Empowerment and enacted economic empowerment legislation to advance economic transformation and increase economic participation of black people in the South African economy. Public procurement legislation has been aligned with this transformative legislation which empowers the Minister of Trade and Industry to issue codes of good practice on black economic empowerment. Legislation to bear in mind includes the Preferential Procurement Policy Framework Act 5 of 2000 (PPPFA), the Preferential Procurement Regulations, and the Broad-Based Black Economic Empowerment Act 53 of 2003 (as amended by Act 46 of 2013) (BBBEE Act) all of which aim to support the participation of previously disadvantaged South Africans in the economy.

Other non-price factors include job protection, socio-economic development and industrialisation. The structure chosen for the public-private partnerships (PPPs) is therefore incredibly important as it would need to take into account these non-price factors. These need to be understood by private investors but are not generally a hindrance to transactions.

Public-Private Partnerships

PPPs are defined as contracts between public-sector institutions and private entities, where the private entities perform functions that are usually provided by the public sector and/or use state property in terms of the PPP agreement. Although PPPs can be lucrative business, private entities must be aware that substantial project risk (technical, financial and operational) is transferred to the private party.

PPPs are tried and tested in South Africa and strong legislative and institutional frameworks were established in 1999 to support the implementation of PPP deals. The country leads the continent in FDI and to date 31 PPP projects have been concluded, with a value in excess of 65.3 billion rand. It is anticipated in the immediate future that 16.5 billion rand of public-sector infrastructure spending will be spent on PPP projects, which amounts to 1.7 per cent of the total public-sector infrastructure budget for South Africa. Africa’s largest PPP was the 23 billion rand Gautrain Rapid Rail project, where a design, build, operate and transfer (DBOT) model was used.

Most of the PPP projects currently under way are transport and accommodation projects, with a few in the health and correctional services sectors. However, energy and municipal solid waste projects are expected to play a larger role in PPPs over the next three years, providing many investment opportunities.

Reform to procurement legislation

A draft Public Procurement Bill is at an advanced stage of drafting. The Bill is aimed at consolidating the fragmented legal and regulatory landscape, in May 2017, the Minister of Finance stated that some of the key objectives of the draft bill included providing for supplier development for procurement, providing support for targeted designated groups, breaking down barriers to entry and reducing the administrative burden on prospective suppliers. Once promulgated it will set up a single procurement authority and will override the Preferential Procurement Policy Framework Act. It will modernise and transform procurement rules and is likely to increase commercial relations between private and public entities.

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South Africa has huge potential as a place for business in terms of infrastructural development and resources, and is a gateway to doing business in the rest of Africa. Public procurement and PPPs harness the strengths of what the private sector and government have to offer, and is a key mechanism for enabling socio-economic objectives as well as providing beneficial investment opportunities. The South African government has introduced many legislative reforms to align itself with international standards. It must, however, be noted that when concluding transactions with public entities, parties must ensure full compliance with the PFMA/MFMA and other legislation. A failure to do so could render the transaction void and therefore unenforceable. It is therefore essential to consult, at an early stage in any proposed transaction, with advisors who can help navigate the South African regulatory landscape.

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W11 1QQ, UK