The Supreme Court of Appeal has ruled that the 2017 Preferential Procurement Regulations do not provide the required framework for the application of considerations such as broad-based black economic empowerment contributor status and black ownership to be used for pre-qualification of bidders or as a condition for mandatory sub-contracting in public tenders.
The Preferential Procurement Policy Framework Act (PPPFA) was enacted to give effect to section 217 of the Constitution, which requires that a legislative framework be established for implementation of a procurement policy to provide for categories of preference in the allocation of state and public entity contracts. These categories must advance
persons or categories of persons who were disadvantaged by unfair discrimination. When a national, provincial or local sphere of government or any other institution identified in national legislation contracts for goods or services, it must be in line with a system which is
fair, equitable, transparent, competitive and cost-effective.
On 2 November 2020, the Supreme Court of Appeal (SCA) (in
Afribusiness NPC v The minister of Finance ) ruled that the Minister of Finance had exceeded his powers under section 5 of the PPPFA in promulgating the Preferential Procurement Regulations (2017 Regulations). The SCA declared the 2017 Regulations invalid and set them aside. However, the order was suspended for 12 months to give the Minister time to remedy the defects which means that
the 2017 Regulations remain effective until 1 November 2021.
The 2017 Regulations provide that broad-based black economic empowerment (B-BBEE) contributor status and black ownership can be used for pre-qualification of bidders and as a condition for mandatory subcontracting in certain state and public entity contracts.
Afribusiness challenged the validity of 3b, 4, 9 and 10 of the 2017 Regulations, applying for them to be reviewed and set aside in terms of the Promotion of Administrative Justice Act.
Under regulation 3b, an organ of state must determine whether
pre-qualification criteria should apply to the tender as envisaged in regulation 4. Regulation 4 requires that when an organ of state
decides to apply pre-qualifying criteria to advance certain designated groups, it must advertise the tender with the condition that
only one or more of the following can respond and if the pre-qualification criteria are not met, it will be an unacceptable tender:
- a tenderer with a stipulated minimum B-BBEE status level of contributor;
- a tenderer sub-contracting a minimum of 30% to an exempted micro enterprise in terms of a code of good practice on black economic empowerment (EME) or qualifying small business enterprise in terms of a code of good practice on black economic empowerment (QSE) or to an EME or QSE which is at least 51% black-owned, including by youth, women, people with disabilities, people living in rural or underdeveloped areas or townships, a co-operative or military veterans.
Regulation 9 provides that if it is feasible to subcontract for a contract above ZAR30 million, an organ of state must advertise the tender with the specific condition that the successful tenderer
must subcontract at least 30% of the value of the contract to the same groups as referred to in Regulation 4. The organ of state must make available a database of suppliers from the applicable designated groups, approved by National Treasury, to provide the required goods or services
from which the tenderer must select a supplier.
The High Court previously found that the 2017 Regulations are lawful and rational as they follow a preference point system as required by the PPPFA and
do not elevate race to a pre-qualification.
However, on appeal, Afribusiness argued that regulation 4 permits pre-qualification criteria to be applied before a tender is awarded on the preference point system. It argued that the purpose of the pre-qualifying and sub-contracting criteria is to prefer designated groups above other tenderers. Afribusiness said section 2 of the
PPPFA does not allow for pre-qualification criteria, which may disqualify a potential tenderer from tendering for state or public entity contracts. Afribusiness argued that section 2(1)(f) of the PPPFA provides that the first step in the award of a contract is the determination of which tenderer has scored the highest points for price and special goals,
such as addressing historic unfair discrimination on the basis of race, gender and disability. Preference is given to disadvantaged persons through the award of 10 or 20 additional points to them before price is taken into account in the scoring process. Only then may objective criteria be considered to determine whether the tender could be awarded to a bidder who does not score the highest points, Afribusiness said.
The SCA found that the Minister may only make necessary or expedient regulations to meet the objectives of the PPPFA. The
2017 Regulations do not provide organs of state with a framework to guide them in the exercise of their discretion if they decide to apply the pre-qualification requirements. It held that regulation 4 did not comply with the requirement of section 217 of the Constitution that organs of state must contract for goods and services in accordance with a system which is
"fair, equitable, transparent, competitive and cost-effective." The SCA held that the Minister acted outside his powers in section 5 of the PPPFA.
The PPPFA does not allow for preliminary disqualification of tenderers without any consideration of the tenderer.
In a media statement on 4 November 2020, the B-BBEE Commission confirmed that the
SCA's decision has no effect on the B-BBEE Act. It said
state entities and departments may accelerate economic transformation by setting qualification criteria of 51% black ownership under the B-BBEE Act, but not under the 2017 Regulations.
Section 9(6) of the B-BBEE Act permits organs of state and public entities
to set qualification criteria for procurement and other economic activities and to exceed criteria in the B-BBBEE Codes of Good Practice
with Ministerial approval. Section 10 of the B-BBEE Act requires
all organs of state and public entities to apply any relevant Codes of Good Practice issued under section 9 of the B-BBEE Act in, among other things, developing and implementing a preferential procurement policy.
The B-BBEE Commission stated that
any organ of state or public entity may set the 51% black ownership qualification criteria for tenders with permission from the Minister of Trade, Industry and Competition. Under section 10(2) of the B-BBEE Act, the Minister can permit a deviation or exemption from the Codes of Good Practice
if objective facts or circumstances necessitate it. The Minister must publish notice of deviation or exemption in the Government Gazette.