03 Nov New developments in the preferential procurement policy framework regulations 2017
The revised Preferential Procurement Regulations, 2017 recently took effect on 1 April 2017. While broadly consistent with the 2011 Regulations, which are replaced in toto, the 2017 Regulations introduce a number of important changes that aim to provide greater opportunities for black-owned businesses and small enterprises to get more lucrative government contracts.
The headline change is the increased threshold for the application of the preference point system, a scoring system that credits bidders for functionality of goods and services (pricing) and for perceived ability to facilitate equitable access to government contracts for historically disadvantaged business owners or suppliers (preference). The 80/20 system, which allocates 80 points for price and 20 points for preference, is now applicable to price quotations and tenders with a Rand value equal to, or above R30 000 to R50 million up from R1 million. The 90/10 system allocates 90 points for price and 10 points for preference and is now applicable to tenders above R50 million. This means that a greater number of black-owned business and small enterprises, and individuals in designated groups – black people, women, people with disabilities – will be able to compete effectively for tenders of up to R50 million. This is indicative of a policy shift to attach more weight to preference considerations than had previously been the case in the 2011 Regulations.
PRE-QUALIFICATION IN TENDERS
Closely related to this policy shift is the introduction of pre-qualification criteria for preferential procurement. In essence, pre-qualification criteria means that an authority is authorised to advertise a tender specifically targeted at designated groups including service providers that have a stipulated BBBEE status level. The introduction of pre-qualification criteria is not only controversial but may be challenged as constituting an unwarranted exclusionary practice. This is due to the real and material risk of authorities keeping aside contracts for certain tenderers, on the pre-text of applying pre-qualification criteria, which would, in all respects, reduce competitiveness.
A wholly novel development is the introduction of the undefined concept of “market-related price”, ostensibly as a way to ensure that proposed bids adhere broadly to standards of pricing currently in the market. The 2017 Regulations require an authority to award a contract to a tenderer that proposes a price that is market-related. Where this is not the case, an authority is prohibited from proceeding with the tender. To facilitate the process of arriving at a market-related price, the 2017 Regulations direct authorities to “negotiate” such price with the top-three highest scoring tenderers in turn. If no agreement is forthcoming, the authority must cancel the tender. While noble in intention, the failure to define what “market-related price” means, introduces uncertainty on two fronts. First, there is no indication of the terms of such negotiation thereby casting considerable doubt whether a contract would ever be awarded. Second, where there are reasonable bids that do not satisfy the authority’s conception of a market-related price, there appears to be no way to ensure that an award will be made.
The 2017 Regulations introduce a compulsory sub-contracting requirement to extend opportunities for economic participation for designated groups. Organs of state must, where feasible, for contracts in excess of R30 million, advertise tenders with a specific tendering condition that the successful tenderer must subcontract a minimum of 30% of the value of the contract to cooperatives, exempted micro enterprises and qualifying small business enterprises in terms of codes of good practice on black economic empowerment issued in terms of section 9(1) of the Broad-Based Black Economic Empowerment Act, 53 of 2003. To ensure that subcontracting occurs in accordance with preferential criteria, service providers may only enter into subcontracting arrangements with the approval of an organ of state and with firms that are registered on an approved National Treasury database. Failure to disclose sub-contracting arrangements may attract a penalty of up to 10% of the contract value.
NATIONAL TREASURY RESTRICTION
The 2011 Regulations empowered authorities to restrict tenderers from conducting business with any organ of state, known as blacklisting, in instances where a tenderer made fraudulent claims about its BBBEE status level or where it performed defectively. Under the 2017 Regulations, a tenderer may not be blacklisted for defective performance but may be blacklisted for submitting false information relating to its BBBEE level status, local production or any other relevant matter affecting its tender evaluation. Importantly, unlike the 2011 Regulations, blacklisting in terms of the 2017 Regulations may only be effected by National Treasury after an authority has conducted the necessary investigation and has submitted reasons why the tenderer in question should be blacklisted.
Finally, in an effort to streamline defective tender processes, the 2017 Regulations permit authorities to cancel tenders that suffer from some material irregularity prior to an award. This is in keeping with recent jurisprudence from the Supreme Court of Appeal in City of Tshwane Metropolitan Municipality and Others v Nambiti Technologies (Pty) Ltd  1 All SA 332 (SCA); 2016 (2) SA 494 (SCA). The court in this case ruled that a municipality may cancel a public tender after reasoning that since a “decision not to procure services does not have any direct, external legal effect” and that “no rights are infringed thereby” (para 32), decisions to cancel prior to award do not amount to administrative action.
In conclusion, the changes introduced by the 2017 Regulations will impact both public entities and entities in the private sector that seek to be appointed as service providers for government projects. Public entities must begin to revise their price and preference assessment criteria and penalty provisions in their supply chain management policies so as to be aligned with the new Regulations. Public entities must also consider carefully the appropriate elements that would constitute pre- qualification criteria in their tender documents and the gatekeeper scenarios that would accord with their procurement strategy.
To be best placed to compete effectively in tenders, private entities must consider how they will engaged in negotiations with organs of state in order to achieve an agreed market-related price. Importantly, private entities seeking to be appointed as key contractors for projects in excess of R30 million, must make arrangements for sub-contracting, particularly with Qualifying Small Enterprises and Exempted Micro-Enterprises as contemplated in the 2017 Regulations.