New-look procurement rules punted as possible transformation game changer

26th May 2017 By: David Oliveira - Creamer Media Staff Writer

New-look procurement rules punted as possible transformation game changer

Major reform of the Preferential Procurement Policy Framework Act (PPPFA) regulations, which came into effect last month, has been held up as a key tool in driving radical economic transformation in South Africa by providing greater opportunities for small, medium-sized and microenterprises (SMMEs), particularly those owned by historically disadvantaged South Africans (HDSAs).

In former Finance Minister Pravin Gordhan’s Budget speech in February, he highlighted that government would spend about R1.5-trillion in the next three years and that public procurement is “an important strategic vehicle for developing local industries, broadening economic participation and creating work opportunities”.

In the same month, Small Business Development Minister Lindiwe Zulu stated during an Economic Sectors, Employment and Infrastructure Development Cluster briefing, held in Cape Town, that the new PPPFA regulations could potentially make available R150-billion a year in opportunities for such small businesses and cooperatives.

“Obviously, it’s not going to be . . . easy . . . because the small and medium-sized enterprises and cooperatives . . . have to be ready for this. I know that many are ready . . . they have been waiting for this for a very long time,” she said.

In his first speech as Finance Minister, Malusi Gigaba highlighted the Treasury and government’s commitment to “use State procurement strategically and vigorously, to ensure localisation, promotion of black-owned, women-owned, youth-owned enterprises and SMMEs, and to facilitate industrialisation”.

Gigaba reiterated this view in a recent address to the black business advocacy organisation Black Business Council (BBC), in which he indicated that the National Treasury planned to use the R500-billion yearly procurement budget to transform the economy and give more support to black-owned businesses. “The strategic use of State procurement is an important lever to grow black business,” Gigaba said. “The State getting value for money is important, but this aim should be considered in conjunction with our economic history.”

Commercial law firm Herbert Smith Freehills director Mzukisi Kota highlights that a significant change to the regulations is the increased threshold when applying the 80:20, 90:10 scoring principles.

Previously, tenders under R1-million were given an 80% weighting for price and a 20% weighting for nonprice factors, referred to in the PPPFA as specific goals. These goals include contracting HDSAs and using government spend to promote socioeconomic redress.

The current regulations have dramatically increased the tender threshold to R50-million, meaning that tenders between R30 000 and R50-million will be scored using the 80:20 principle, while tenders above R50-million will be scored on the 90:10 principle.

“This is a very significant change and it opens more tenders to be awarded on nonprice factors,” says Werksmans Attorneys director Pieter Steyn.

He adds that the PPPFA is an important policy for managing State procurement; however, it has attracted criticism for the dominant weighting given to price, even though the tenders taken into consideration are of far higher value, with detractors stating that the scoring system, in many ways, restricts black-owned businesses from entering the market.

The PPPFA states that the tenderer who has scored the highest number of points, using the 80:20 or 90:10 principles must be awarded the contract unless objective criteria in addition to broad-based black economic-empowerment (BBBEE) ownership status justify awarding the contract to a lower-scoring bid according to the criteria mentioned.

Such objective criteria may include the ability to supply local content, the supplier’s track record, experience and available financial and other resources, the need to rotate contracts among suppliers, the protection of the environment, the receipt of an abnormally low tender or the quality of the product or service.

Steyn notes that the use of objective criteria has itself been problematic, as the PPPFA or its regulations have never defined them.

This has led to uncertainty and some litigation.

“A key issue is the extent to which BBBEE, which is already taken into account by the 80:20 or 90:10 principles, can again be used as objective criteria to disqualify the highest scoring bid,” he explains, noting that the risks in using the objective criteria could be misuse to award tenders to favoured suppliers.

The new 2017 PPPFA regulations, however, require that objective criteria be stipulated in each tender document, mitigating some of the risk for companies by bringing transparency to the process.

Under the previous PPPFA regulations, which came into effect in 2011, points for specific goals were awarded according to a tenderer’s BBBEE level when allocating points for the nonprice factors.

Kota notes that this was a significant criti- cism of the regulations, as it meant tenders were awarded to companies based on “past good behaviour”, with BBBEE certificates awarded according to a company’s compliance performance in the previous year. “The focus on BBBEE [then also] prevented other socioeconomic factors [from being taken into account] on a contract,” he says.

This, arguably, was what led to the most significant change to the regulations – the introduction of prequalification criteria, which enables organs of State to stipulate, at their discretion, the criteria that a company must meet to apply for any tender.

“The regulations still have BBBEE as a criterion, but it also provides organs of State with a measure of discretion through the prequalification criteria,” Kota comments.

The regulations state that, when applying either the 80:20 or 90:10 scoring principles and, if feasible, prequalification criteria require that 30% of a contract over R30-million must be allocated to subcontractors from designated groups.

These designated groups include wholly or 51% black-owned exempted microenterprises (EMEs), qualifying small enterprises (QSEs) and cooperatives that are owned by women; youth; people with disabilities; people living in rural or underdeveloped areas, or townships; and military veterans.

EMEs are organisations with a yearly turnover of no more than R10-million, while a QSE is an organisation with a yearly turnover of between R10-million and R15-million.

The regulations stipulate that a tender must clearly state in detail the prequalification criteria that will form part of the process to prevent companies from tendering if they will not meet the requirements.

Kota notes that the prequalification criteria act as a gatekeeper and enable organs of State to assess each tender applicant’s ability to address various socioeconomic goals.

The criteria will prevent companies that have no aspirations of improving their BBBEE score from being awarded contracts, believing that, based solely on pricing, they stand in contention to win tenders, he adds. This encourages companies wanting to win government contracts to toe the line and commit to the transformation imperatives of the country.

“This is the sort of thing that needs to be dealt with and the prequalification criteria allows for that,” Kota states.

The BBC has long held the stance that the PPPFA be totally removed from local legislation, as the Act serves as a greater impediment to black businesses than an enabler of economic participation.

BBC president Danisa Baloyi asserts that the 80:20, 90:10 scoring principles of the PPPFA make it near impossible for emerging black businesses to compete against larger companies that have been operational for a long time and possess significantly larger balance sheets, enabling them to outprice smaller companies.

She notes that the 30% prequalification set-aside will assist in promoting greater participation in the economy by small black-owned businesses. However, Baloyi argues that rather than be applied at the discretion of an organ of State, the set-aside must be a condition of all tenders if government spend is going to be used to effectively allow greater economic partici- pation of HDSAs.

On the other hand, local business rights watchdog AfriBusiness manager Charles Castle contends that the prequalification criteria are contentious, as they place a likely insurmountable hurdle in the way of white-owned businesses wanting to secure government contracts, adding that it could amount to discrimination, as “there is no regard given to white people who come from a disadvantaged background”.

Kota acknowledges that it could, in some instances, be open to challenge if, for example, the pool of companies that meet the criteria is so small that the process becomes uncompetitive or cost ineffective.

“I think the new regulations, if used properly . . . [can] force companies to take transformation imperatives seriously or otherwise risk not getting any government contracts. But [they] also pose a greater obligation for organs of State to not be automatons, which they sometimes are by applying the tender process as a box- ticking exercise.”

He adds that organs of State will have to research more actively what is achievable in each industry and what is appropriate when setting out prequalification criteria for a tender.

Meanwhile, both Kota and Steyn highlight that the Constitution states that when any organ of State “contracts for goods or services, it must do so in accordance to a system that is fair, equitable, transparent, competitive and cost effective”; therefore, the regulations, in their view, promote constitutionality and any tender which does not meet the new stipulations is unconstitutional.

AfriBusiness law and policy analyst Armand Greyling says the new regulations’ using BBBEE as the determining nonprice factor “to the exclusion of functionality” is a debateable issue. He argues that functionality, or the quality of the product or service supplied, is what provides economic undertakings with their purpose for existence, and that this is at the heart of an economy, including one that must compete internationally, and that “by not making [competitiveness] an essential aspect of the tendering process . . . implies that the process has not met the ambit of the Constitution”.

Castle’s concern regarding the Act is in relation to whether race qualifies as an objective criterion in this vision of things. He argues that, because race is covered by the specific goals policy of the Act, which include HDSAs, using the BBBEE rating of a firm as an objective criterion to award a tender would be duplication, which the Act does not allow.

“Functionality rather than race should be the deadlock-breaking mechanism,” he states. To deny that the question has veracity, at least, surely amounts to disputing that industrial productivity is a concern of economics.

Meanwhile, Baloyi highlights that South Africa’s economic growth has become stunted, which he argues, would not be the case if black and small businesses were provided with enabling legislation that fostered real economic participation. “A lot of black-owned and small businesses would have been catalysed and enabled, which would result in more employment and more people spending in South Africa, helping revitalise our economy.”

Steyn highlights that, while the new regu- lations are generally an improvement over their predecessors, there are debatable policy issues, such as the extent to which government should pay a higher price on a contract to promote BBBEE.

A key factor is that BBBEE is measured in terms of the Department of Trade and Industry’s BBBEE codes of good practice with reference to a number of factors such as the level of ownership, management control, skills development, procurement, enterprise and supplier development, as well as socioeconomic development contributions, he explains.

“Government’s main policy goal of BBBEE is to promote broad-based empowerment, which is not restricted to ownership. BBBEE ratings should accordingly be used rather than only focusing on the supplier’s BBBEE ownership.”