Ramaphosa supports new procurement regulations

In January the new Preferential Procurement Regulations were issued into law, and will take effect from April, replacing the Preferential Procurement Regulations of 2011.

The regulations were issued in the nick of time, considering that in his 2015 State of the Nation Address, President Jacob Zuma said that government will set aside 30% of appropriate categories of State procurement for purchasing from SMMEs, co-operatives as well as township and rural enterprises. The 2016 State of the Nation Address takes place on Thursday.

The conversation on procurement emanated from dialogue on the New Growth Path, which saw government and social partners sign a Local Procurement Accord as far back as 2011. A commitment was made that government would leverage public procurement regulations to support SMEs, township and rural enterprises and co-operatives.

“We need to give more meaning to procurement processes and ensure that 30% of government procurement is set aside for SMEs and 100% black-owned companies,” said deputy president Cyril Ramaphosa, at an event on ‘radical economic transformation’ hosted by the Progressive Professionals Forum in Cape Town on Monday.

“We need to create opportunities for these companies,” he said. “We want to diversify ownership. Opportunities have been closed and taken away by existing big business and by monopolies. The IMF said as much when it recognised that our economy is dominated by monopolies and concentrated ownership. We need to look at ways of freeing that up.”

Among the revisions is the introduction of pre-qualification criteria, which allow the advancement of certain designated groups. The intention is to restrict the inclusion of well-established companies, unless they are willing and able to subcontract to these groups should they be successful.

In other words, organs of state may restrict a tender by stipulating that tenderers have a “stipulated minimum B-BBEE status level”, or that tenderers agree to subcontract a minimum of 30% to various categories of exempted micro enterprises and qualifying small business enterprises.

In addition, because high value tenders of R30 million and above tend to be awarded to established companies due to economies of scale and affordability, the revised regulations require that in these cases all those with ability to deliver the required service, subcontract to the categorised groups at a tendering stage.

Lastly, following the outcry of the categorised groups who felt that the threshold of R1 million was too insignificant for them to grow to a level of established companies, the new legislation increased the threshold to R50 million. This gives smaller companies better chances to compete in the economy in a meaningful way.

“Our people will not be relegated to beggars, bystanders and onlookers to the economy,” Ramaphosa said. “We want them involved in the productive sector, the innovative sector in order to drive growth in the economy and create a bigger entrepreneurial class.”

However, the new regulations could be challenged by those companies that are now being excluded, on the basis that they contravene the spirit of the Preferential Procurement Policy Framework Act 5 of 2000 in terms of which these regulations have been issued.

“The new regulations allow organs of state to apply a pre-qualification criterion, which intentionally excludes bidders that do not have a stipulated minimum B-BBEE status level. For example, government may reserve a tender for a multi-billion rand project for tenderers with a level 1 B-BBEE status level, with the result that other prospective bidders are automatically precluded from participating,” says Andrew Molver, a partner at legal firm Adams & Adams.

“This contravenes the limitations imposed by the Procurement Act in respect of the weighting attached to a tenderer’s B-BBEE status in evaluating and awarding a tender. While the Procurement Act specifically limits the effect that B-BBEE status and specific goals may have on the award of a tender, the regulations elevate the importance of B-BBEE status and specific goals to the extent that they can be relied upon to preclude certain bidders from tendering at all, irrespective of how functional and cost effective such bidders might be. This directly subverts the Procurement Act’s clear aim of promoting so-called “specific goals” in state procurement while still retaining functionality and price as the most determinative factors in awarding government tenders.”

Commenting at the time of the release of the regulations, Finance Minister Pravin Gordhan said 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. He said this is in line with the current dialogue on inclusive economic growth in South Africa.

However, Molver notes that the finance minister’s power to issue regulations in terms of the Procurement Act is limited to doing so for “any matter that may be necessary or expedient to prescribe in order to achieve the objects of this Act”. Any regulations which are directed at achieving an outcome which contradicts or subverts the objects of the Procurement Act are ultra vires and unlawful.

For this reason, it is possible that a challenge will be brought to have the new regulations declared ultra vires and invalid. This is likely to come from entities in the private sector which, in the past, have managed to secure substantial tenders, notwithstanding their B-BBEE status, on account of superior pricing and product or service offering. They will now find themselves automatically precluded from competing for government tenders where a minimum B-BBEE status level or other pre-qualification criteria is imposed as a barrier to participation.

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