Member Article

The revised Preferential Procurement Regulations 2017 (“PPPFA Regulations 2017”) issued in terms of the Preferential Procurement Policy Framework Act, 2000, came into effect on 1 April 2017. The PPPFA Regulations 2017 have repealed the 2011 PPPFA Regulations (“2011 Regulations”) in their entirety, and have introduced a number of key changes aimed at using procurement to promote local industrial development, socio-economic transformation and the empowerment of small business enterprises, cooperatives, and rural and township enterprises. Companies and other organisations that wish to do business with any organ of state after 1 April 2017 will be subject to the PPPFA Regulations 2017, the key features of which are described below.

Notwithstanding the repeal of the 2011 Regulations, the designated sectors and minimum thresholds determined for local content and production in terms of regulation 9 of the 2011 Regulations remain valid. In addition, any tender that was advertised before 1 April 2017 must be dealt with in terms of the 2011 Regulations. Increased thresholds The thresholds for the 80/20 and the 90/10 preference point system have increased, such that a 20% preference points weighting will be applicable to the evaluation of procurement contracts with a rand value equal to or above ZAR30 000 and up to ZAR50-million; and a 10% preference points weighting will be applicable to procurement contracts with a rand value above ZAR50-million.

The ZAR50-million threshold is an enormous increase from the ZAR1-million threshold prescribed in the 2011 Regulations. Negotiation of market-related prices The PPPFA Regulations 2017 require a procuring authority not to accept the tender that scores the highest points if the price offered in such tender is not “market-related”. In such cases, the procuring authority may negotiate a market-related price with the tenderer scoring the highest number of points or, if such tenderer does not agree to the market-related price, the procuring authority may negotiate a market-related price with the tenderer scoring the second highest points and, if that fails, then the tenderer scoring the third highest points. As the term “market-related” is not defined in the 2017 Regulations, it is open to interpretation and, arguably, the kind of discretionary judgement on the part of officials that could be used to pursue hidden agendas. The procuring authority may cancel the tender process at any point during the negotiations with the tenderers. However, the procuring authority must cancel the tender process if a market-related price is not agreed on following negotiations with the tenderer scoring the third highest points.

This new provision creates material uncertainty in the bidding process, because the contract will only be finally awarded when the price is agreed. Therefore, the fact that a tenderer scores the highest points gives no assurance that it will ultimately be awarded the contract. Pre-qualification criteria Organs of state may elect to apply so-called pre-qualification criteria aimed at the promotion of tenderers with specified broad-based black economic empowerment contributor status levels, exempt micro-enterprises (“EMEs”) or qualifying small enterprises (“QSEs”), and/or tenderers that commit to sub-contracting at least 30% of the rand value of the contract to EMEs or QSEs with at least 51% ownership by black people, including those with disabilities and those living in rural or underdeveloped areas or townships, black youth, black women, black military veterans and, co-operatives owned by black people. If a procuring authority decides to apply one or more of the pre-qualification criteria identified above, the tender must be advertised with a specific condition that only tenderers that meet those pre-qualification criteria may respond. A tender that fails to meet the specified pre-qualification criteria will be considered an unacceptable tender and will be disqualified from adjudication.

The consequence of these provisions is that a procuring authority can set aside contracts for tenderers that meet its specified pre-qualification criteria. Set-asides were not permitted under the 2011 Regulations and it is debatable whether the framework for preferential procurement provided for in the Preferential Procurement Policy Framework Act is wide enough to permit exclusionary practices such as set-asides. Compulsory sub-contracting Where feasible, organs of state must impose a 30% subcontracting requirement in tender invitations for contracts in excess of ZAR30-million. The PPPFA Regulations 2017 contemplate that the compulsory subcontracting requirement, if applied, must be for the purpose of advancing the same categories of EMEs, QSEs and co-operatives as are provided for in relation to pre-qualification criteria. Where compulsory subcontracting is applied in a tender process, successful tenderers will be obliged to subcontract a minimum of 30% of the contract value to one or more suppliers registered on a database approved by National Treasury to provide the required goods or services. A person awarded a contract by an organ of state may enter into a subcontracting arrangement only with the consent of the organ of state. Cancellation of tenders Under the 2011 Regulations, there were three potential triggers for a decision to cancel a tender process: changed circumstances resulting in the goods or services no longer being required, non-availability of funds, and no acceptable tenders being received. The PPPFA Regulations 2017 establish a fourth ground for cancellation: a material irregularity in the tender process. Since the Supreme Court of Appeal has recently ruled that cancellation of a tender process is not “administrative action” and therefore can only be challenged on rationality grounds, this change means that an organ of state will have a great deal of leeway to cancel a tender process prior to award, without the risk of legal challenges. Remedies The provision on remedies in the PPPFA Regulations 2017 differs from the equivalent provision in the 2011 Regulations, in that the list of events that may give rise to disqualification of tenderers or blacklisting of suppliers has been narrowed to no longer include defective performance under a government contract. In the PPPFA Regulations 2017, disqualification or blacklisting may occur if a tenderer submitted false information regarding its black economic empowerment status, local production, or any other matter regulated in the 2017 PPPFA Regulations that will affect or has affected the evaluation of a tender, or failed to declare any subcontracting arrangements. The PPPFA Regulations 2017 expressly require an organ of state to inform a tenderer prior to blacklisting or taking any other remedial action against it and to provide it with an opportunity to make representations. Under Regulation 14(1) of the PPPFA Regulations 2017, an organ of state may, after considering any representations made, disqualify a tenderer or terminate the contract (in whole or in part) and, if applicable, claim damages from the tenderer. An organ of state may also penalise a tenderer up to 10% of the value of the contract where the tenderer has subcontracted a portion of the tender to another person without disclosure to the organ of state. The procuring authority is required to inform the National Treasury, in writing, of any actions taken in terms of Regulation 14(1). Importantly, the PPPFA Regulations 2017 make it clear that only National Treasury is entitled to blacklist a tenderer, and only after considering the written submissions of the relevant organ of state, the representations of the affected tenderer and any other relevant information. Reviewed by Pippa Reyburn, a director in ENSafrica’s corporate commercial department.

By Tumelo Ngwenya (associate) and Lerato Ramotsamai (candidate attorney) in ENSafrica's corporate commercial department.