Claire Barclay of DLA Cliffe Dekker Hofmey explores the significant changes to the South African Constitution relating to preferrential procurement awards.
Preferential procurement in South Africa is not only about proper financial management of public monies, it also presents an opportunity for government to correct the socio-economic imbalances of the past by awarding government work to individuals disadvantaged by historical practices.
Procurement is regulated in the South African Constitution – in the provisions dealing with general financial matters, imposing certain obligations on government entities to ensure the proper and responsible expenditure of public funds. The South African Constitution requires that when government entities engage in any procurement they must comply with five key principles set out in section 217(1) of the Constitution. These five pillars stipulate that the procurement process must be equitable, transparent, fair, competitive and also result in cost-effectiveness for that public institution.
In section 217(2) of the Constitution there is recognition that compliance with the five principles of procurement does not prevent government entities in their tenders from giving priority to certain socio-economic goals. This subsection stipulates that government entities, in the implementation of their procurement policies, can give preference to certain categories of persons. They can, during the procurement process, advance and/or protect categories of persons who have been disadvantaged by unfair discrimination in the past. This constitutional basis of preferential procurement may not meet an objective test for treating all tenders equitably, but is condoned given the socio-economic goals advanced by the Constitution.
To give effect to the overriding socio-economic requirements of the country, the Preferential Procurement Policy Framework Act was promulgated. This Act provides a framework for the implementation of the provisions and requirements laid out in sections 217(2) and 217(3) of the Constitution.
The Preferential Procurement Framework Act was enacted in 2000 and regulations to the Act were promulgated in 2001. The Act allows government entities conducting a tender process to evaluate tender submissions according to certain prescribed criteria. In evaluating a tender submission out of 100 points, 90 of those points have to be allocated to the price submitted by the tenderer. This is in line with what procurement seeks to achieve, namely getting best value for money. The 10 remaining points are allocated to the categories of preference referred to in the Constitution.
At the same time, there is a mechanism in the Act that stipulates that where the contract is below a prescribed threshold value (currently 1 million rand), then 80 of the 100 points go towards evaluating price tendered and the 20 remaining points can be used to evaluate the tenderer’s compliance with requirements relating to categories of preference.
The regulations to the Act give guidance to government entities on how to calculate the points for price and categories of preference. The regulations then require the tender to be awarded to the bidder that scores the highest number of points.
The regulations also allow government entities to evaluate tenders on the basis of what is called functionality requirements; that is, the bidder’s technical ability to undertake the services or works of the government contract. In this regard, government entities will assess a bidder’s past experience and financial strength, while mainly looking at their technical ability to perform the work that is being procured.
In December 2011, after receiving comments from interested stakeholders and many rounds of debate in the relevant Parliamentary Portfolio Committee, the Department of Finance finalised and promulgated the new Preferential Procurement Regulations. At the same time they made some amendments to the Act so that there was consistency between the Act and the regulations.
One of the biggest criticisms of the old regulations was that they were ultra vires in that they regulated matters (such as functionality) outside what the Act allowed. In fact, there had been a recent court decision in which it was held that government entities could not take into consideration functionality requirements in their tenders because the Act did not make provision for this, even though the regulations did. This was problematic in large infrastructure projects being procured by the government, where assessing the functionality of a bidder is a key component of a tender award. The new regulations repeal the 2001 regulations and seek to remedy the problems identified with the old regulations.
One of the most fundamental amendments in the new 2011 regulations, and to the Act, is that the application of the Act has been extended to public entities that are listed in the schedules of the Public Finance Management Act. For example, the Act and regulations now apply to the major public entities in their procurement, whereas previously they were not obliged to do so even though in practice they applied a preferential procurement system. It is now compulsory for them to use the framework set out in the Act.
The second innovation in the new regulations is how both functionality and local content are dealt with. In a procurement process, the regulations say that a government entity can first look at – as an initial prequalification criterion – the functional compliance of a tenderer. It does not count towards the ultimate scoring for purposes of contract award as the Act does not permit this, but it acts as an important filter. In the procurement process there might well be a threshold number of points that tenderers need to comply with in terms of meeting certain functional requirements or local content requirements in order to advance to the next round of evaluation. In the next round, those tenderers that prequalified are assessed on price as well as categories of preference.
The local content requirement is structured the same way as the functionality pre-qualification requirement. Very broadly, the objectives of local content are to ensure that goods and services procured are locally manufactured and produced. Under the regulations, the Minister of Trade and Industry can designate certain sectors to which local content should apply. When government entities procure goods from those sectors, the requirement is that the specified percentage of what is being procured must be locally manufactured or produced.
The third significant change under the 2011 regulations is that the new regulations have done away with the so-called “specific goals” relating to categories of preference and replaced it with a regime that complies with the Broad-Based Black Economic Empowerment (BBBEE) Act, 2003. When bidders submit their tender proposals they need to submit a certificate that has been calculated in accordance with a scorecard prescribed under the Codes of Good Practice (which are issued under the BBBEE Act). The certificate indicates what level BEE contributor the tenderer is, and, depending on their level, they score a certain number of points out of 10 or 20 (depending on the value of the contract) in terms of the regulations. These points are then added to the points scored for price for purposes of calculating an overall score.
The new regulations have therefore simplified the regime around measuring categories of preference. The process is now a lot less subjective and presents a clear yardstick, and is also consistent with other legislation promoting the advancement of previously disadvantaged individuals.
In other African countries, indigenisation laws have been passed to protect the local economy. However, these countries don’t have the same recent history of inequality as South Africa, so these laws seek to regulate foreign direct investment rather than correcting historical imbalances within the country.