From 16 January 2023, New Preferential Procurement Regulations ("2022 Regulations") will take effect in South Africa. These will expand the aims of preferential procurement and reinforce the discretion of organs of state to implement their own procurement policies.
Background to preferential procurement in South Africa
South Africa's Constitution requires that when an organ of state in the national, provincial, or local sphere of government contracts for goods and services, it must do so using a "fair, equitable, transparent, competitive and cost effective" system. Organs of state may implement procurement policies which provide for certain categories of preference in the allocation of contracts, and the protection or advancement of persons disadvantaged by unfair discrimination.
In line with section 217 of the Constitution, Parliament also prescribed a statutory framework for preferential procurement, being the Preferential Procurement Policy Framework Act, 2000 ("PPPFA").
The PPPFA provides for a preference points system in terms of which contracts below a prescribed value be evaluated on the basis that 20 out of 100 possible points must be allocated to "specific goals" and 80 points allocated to price. For contracts above a prescribed value, 10 out of 100 possible points must be allocated to "specific goals", and 90 points allocated to price.
"Specific goals" include:
- contracting with persons, or categories of persons, historically disadvantaged by unfair discrimination on the basis of race, gender, or disability? and
- implementing the programmes of the Reconstruction and Development Programme.
Since the enactment of the PPPFA, there have been several sets of Preferential Procurement Regulations issued in terms of the PPPFA, including the Preferential Procurement Regulations, 2017 ("PPR 2017").
Afribusiness decision: the ConCourt throws out the PPR 2017
The validity of the PPR 2017 was challenged on a number of grounds relating to the Minister of Finance's powers to make the regulations. On 16 February 2022, the Constitutional Court handed down its judgment in Minister of Finance v Afribusiness NPC.
The Court upheld the challenge and agreed that the Minister acted beyond the scope of his powers and not in line with the PPPFA by allowing organs of state to use pre-qualification criteria that effectively disallowed certain bidders from participating in a tender.
The court declared the PPR 2017 invalid and set them aside in their entirety. Sending the Minister back to the drawing board.
The 2022 Regulations: state organs get more choice
A key difference between the PPR 2017 and the new 2022 Regulations concerns the application of pre-qualification criteria. Whereas the PPR 2017 provides that an organ of state may apply pre-qualification criteria "to advance certain designated groups", which includes black people, women, persons with disabilities, and small enterprises; the 2022 Regulations no longer provide for the use of pre-qualification criteria.
The 2022 Regulations also allow for some discretion for procuring institutions when allocating preference points. Although the scoring system of 80/20 (for contracts up to ZAR50-million) and 90/10 (for contracts above ZAR50-million) is still in place, the 2022 Regulations permit the procuring institution to decide on "the specific goal specified for the tender" (instead of only B-BBEE contributor status level, as was provided in the PPR 2017). Only "specific goals" may include contracting with persons historically disadvantaged by unfair discrimination, or the implementation of programmes of the Reconstruction and Development Programme.
Significantly, the 2022 Regulations cover tenders for income-generating contracts (including concessions and the letting of government assets or property) and tenders for the acquisition of goods or services. This confirms the position that contracts entered into by organs of state for commercial gain, rather than for the acquisition of goods and services, are also subject to public procurement rules (this was confirmed in a judgment by the Supreme Court of Appeal in Airports Company South Africa SOC Ltd v Imperial Group Ltd and Others).
An important exclusion from the 2022 Regulations is local content requirements. However, it is likely that local content will be included in the anticipated Public Procurement Bill, which is in development by National Treasury and should be introduced in Parliament in 2023.
The 2022 Regulations also refrain from regulating the award of contracts to tenderers not scoring the highest points, and the permissible grounds for cancellation of tenders. These are matters that organs of state can presumably cover in their own procurement policies.
Importantly, the absence of specific references to preference based on B-BBEE contributor status level and to local content in the 2022 Regulations does not preclude organs of state from allocating preference points to B-BBEE or localisation in a tender process, as "specific goals". In other words, it remains to be seen whether organs of state continue to apply B-BBEE contributor status level as the key consideration in preference point scoring, or whether they apply other specific goals such as job creation, employment equity, local or regional presence, participation by women or disabled persons, green procurement or other goals.
The promulgation of the 2022 Regulations brings some clarity regarding preferential procurement by organs of state, following the judgment in Afribusiness. However, the leanness of the 2022 Regulations also raises a number of questions. It is likely that the 2022 Regulations will be a temporary measure, as the Minister stated that they are a "placeholder" pending the finalisation of the Public Procurement Bill, 2020, which the minister expects to be finalised by March 2023.
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