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Revised procurement regulations to be in force in April 2016

16 June 2016 | Government Contracting and Public Procurement

In a broad-ranging announcement in early March the National Treasury made, without much fanfare, a significant announcement regarding the law relating to public procurement.

It stated that the Office of the Chief Procurement Officer (OPCO) had “finalised reviewing the Preferential Procurement Policy Framework Act (PPPFA) Regulations to accommodate requirements for supporting SMMEs, township and rural businesses, youth and women owned businesses, and localisation” and explained that, “The review is an interim measure pending comprehensive review of the existing legislative framework, and the revised PPPFA Regulations will take effect during April 2016”.

This announcement was published a Supply Chain Management (SCM) Review Update as well as a media statement reporting on progress of the work of the OPCO in the last two years.

This amendment to the PPPFA Regulations will potentially impact all tenders which State-Owned Companies (SOCs) put out after April 2016.  The final version of these regulations has not yet been made public, but the drafts published last year proposed a fairly radical change to the way in which tenders are administered and preference points are awarded in a procurement context.

The PPPFA was enacted to give effect to the preference system contemplated in section 217(2) of the Constitution of the Republic of South Africa, 1996 (Constitution).  It was not intended as, and does not purport to be, general procurement legislation. It does not state for example, that it was enacted in terms of section 217 generally, or section 217(1) specifically.  These are the Constitutional provisions that set out the general principles of public procurement and require that all SUCH procurement be fair, equitable, transparent, cost effective and competitive.

The National Treasury has confirmed that general procurement legislation is being prepared through the OPCO in the National Treasury, and that a draft Procurement Bill will be published for public comment in the next few months.

Nevertheless, in the absence of general procurement legislation, the Preferential Procurement Regulations, 2011 included some requirements, prohibitions and penalties/remedies which apply to tendering generally and are not relevant only in the context of preferential procurement.

These general provisions are not contemplated in the PPPFA itself and are arguably unlawful because they go beyond the ambit of the empowering legislation.  This was also somewhat at odds with the approach of regulating procurement by public entities through the Public Finance Management Act 1 of 1999 (PFMA) and the Treasury Regulations.

The Draft Preferential Procurement Regulations 2015 continued this trend and expanded on it substantially, purporting to regulate various matters relating to procurement generally, presumably in order to ‘plug’ perceived gaps in the PFMA and the Treasury Regulations.  These include: introducing the concept of an “acceptable price”; regulating “price negotiations”; further limits on the use of the “functionality” criteria in a tender context; regulation of disposals of State assets; and further remedies for “abuse” of tender processes.

These general procurement matters were inappropriately dealt with in the Draft Preferential Procurement Regulations 2015, as they (among other things) make decisions taken in terms of the Regulations vulnerable to challenge, on the basis that the regulations in terms of which the decision was taken were unlawful.  The general procurement matters should be also dealt with in a way that is properly authorised by primary legislation, and is comprehensive – which we understand to be the intention of the proposed Procurement Bill.

The Draft Preferential Procurement Regulations 2015 (like their predecessor, the Preferential Procurement Regulations, 2011) are also more restrictive, in relation to the way in which black economic empowerment status is used in a tender context.  More flexibility would in fact be preferable allowing procuring institutions to identify and award appropriate preference points for bidder commitments and also allowing more flexibility for large infrastructure projects to set additional socio-economic objectives which are appropriate in the context.

A significant feature of the Draft Preferential Procurement Regulations 2015 was the introduction of a specific preference points system for contracts under ZAR 10 million.  These provide that only 50% of the tender evaluation for such contracts will be based on price and other 50% of the available evaluation points will prioritise: “individuals who had no franchise in national elections before the 1983 and 1993 Constitutions”;  51% or more ownership by females; 51% or more ownership by persons with a disability;  small, medium and micro-enterprises and  local economic development.

The Draft Preferential Procurement Regulations 2015 did not define the terms used above which in practice  are simply headings for different types of criteria and it  was not at all clear on how these various preferences would be combined in a tender context.

The Minister of Finance was given the authority to prescribe “targets that must be procured from certain categories of person or commodity groups” from time to time (Draft Regulation 7(2)).  However, in the absence of any such targets prescribed by the Minister, a procuring institution was to apply the specific goals or specific goals “as determined by the particular organ of state, depending on the specific tender and analysis of the market”.

Since the Minister of Finance is already the person with authority to make regulations under the PPPFA, and any “targets” referred to in Draft Regulation 7(2) would also have to be prescribed by regulation, it was not clear what the purpose of making special provision for such possible future/supplementary regulations in the Draft Regulations was – nor was it clear what exactly is intended by the term “targets that must be procured from certain categories of person or commodity groups”.

It is also not entirely clear which demographic group is being targeted by the term “Individuals who had no franchise in national elections before the 1983 and 1993 Constitutions”.  Taken literally, this term includes non-South Africans, anybody who was under the age of eighteen in 1983 and a range of other – presumably unintended groups.

It was also noteworthy that the categories of preference and the way the preference points were allocated in tenders for contracts under ZAR 10 million – in particular the “all or nothing” scoring was not aligned with the targets and scoring philosophy reflected in the Codes of Good Practice for B-BBEE.

No revised version of the Draft Preferential Procurement Regulations 2015 has been published, and as such, there will be a significant process required for State entities and departments to align the tenders they expect to put out in mid-2016 with these changes.