B-BBEE status and fronting in the Procurement Context: Enterprises seeking to win state tenders, take note…

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On 7 December 2011 the new Preferential Procurement Regulations, 2011 (‘the Regulations’) made under the Preferential Procurement Policy Framework Act, 2000 (‘the PPPFA’) came into effect. The Regulations have a broader scope of application than the 2001 Regulations: municipal entities, as well as schedule 2 and 3 public entities listed under the Public Finance Management Act, 1999 – such as the Airports Company of South Africa, Alexkor Ltd, Denel and the Accounting Standards Board – are now bound to procure goods and services in accordance with the system established under the Regulations. Broad-based black economic empowerment (B-BBEE) lies at the heart of this system in that one of the primary objectives of the Regulations is the alignment of government’s procurement procedures with the aims of the Broad-Based Black Economic Empowerment Act, 2003 and associated Codes of Good Practice.

Related to this objective, the Regulations also aim to curb the spate of tender fraud which continues to  riddle public procurement in South Africa. This most obviously takes place through ‘fronting’ which typically involves the practice of white-owned companies signing up previously disadvantaged individuals as ‘shareholders’ and/or ‘directors’ as ‘window-dressing’ to obtain a competitive advantage in tendering for state contracts. Recent case law, together with  key provisions in the Regulations, collectively serve as a strong incentive for companies seeking to win tenders from organs of state, to ensure that they accurately reflect their B-BBEE status.

The 2001 Regulations gave organs of state a discretion in the awarding of preference points for black ownership and the attainment of ‘specific goals’ pertaining to the Reconstruction and Development Programme, such as ‘the promotion of SMMEs’. Under the new Regulations, this latter category of specific goals fails to make an appearance. Should organs of state wish to further them by, for example, finding ways to support SMMEs in the procurement context, this will need to be done through extraneous interventions. For example, training programmes can assist these enterprises in the completion of complex tender documentation; shorter payment cycles will aid the cash flow of SMMEs who do not enjoy economies of scale; and improved channels of communication facilitate both a better understanding of what a particular tender entails and why it was not awarded in a given case. Under the new Regulations, preference points may be awarded solely for price and B-BBEE status in accordance with the 90:10 and 80:20 preference point systems. In respect of the B-BBEE component, tenderers are awarded a set maximum number of preference points based directly on their B-BBEE status level – gone is any discretionary wiggle-room that organs of state may have enjoyed in awarding preference for black ownership, for what matters now is the bottom line on the scorecard. All bidders (save for Exempted Micro Enterprises (‘EMEs’)) are required to submit B-BBEE rating certificates, issued either by an accredited verification agency or a registered auditor approved by the Independent Regulatory Board of auditors. It is noteworthy that in terms of sub-regulation 11(5)(a), where two or more tenderers have scored an equal number of points, the successful tenderer must be the one scoring the highest number of preference points for B-BBEE – the new procurement trump card.

Note, however, that this trump card can be played only once and only at the preference point stage. Any attempt to double count will be ultra vires the Regulations. The recent case of Rainbow Civils CC v Minister of Transport and Public Works (21158/2012) [2013] ZAWCHC 3 (6 February 2013) illustrates this point. The third respondent in this case, Safaz Signs and Electrical CC (‘Safaz’), was awarded the tender in question on the basis (amongst others) that its sole member was a black female and the decision-maker felt that the award would ‘promote the objective [of the B-BBEE Act] of increasing access of black women to an economic activity.’ Acting Judge Diane Davis held this to be an irrelevant consideration that rendered the award unlawful in the circumstances. The decision-maker was not permitted to ‘double count’ by giving additional preference on the basis of gender and thus he failed to appreciate his power which was ‘confined to the four corners of the Procurement Act, the Procurement Regulations and the Tender Document’. He thus had ‘no general discretion to take into account considerations of race and gender or affirmative action outside the specific parameters laid down therein’.

Organs of state also enjoy less discretion when it comes to functionality. Unlike the 2001 Regulations (which were declared to be ultra vires the PPPFA on this score) points for functionality may no longer be awarded within the preference points system. (Although note that the Rainbow Civils case holds otherwise – incorrectly so, in my view. This view is shared by Bolton – see P Bolton ‘An analysis of the criteria used to evaluate and award public tenders’ 2014 (1) Speculum Juris 1). Instead, insofar as a tender will be evaluated on functionality, this must be done at the pre-qualification stage. In other words, functionality may play a role as a gateway hurdle to render a tender ‘acceptable’ – it has no role to play at the actual award stage. The wording of the Regulations is clear on this score and equally constraining: the incorporation of functionality into the procurement process must be done in accordance with strict criteria set out in Regulation 4. As the facts of Rainbow Civils illustrate, (the Safaz tender did not hit the functionality mark in the way that the Rainbow Civils tender did) this can mean that the best man does not always get the job as an excellent functionality score only gets him past the gate – at award stage, it all comes down to price and B-BBEE status. And this status had better not be misrepresented.

On this score, the Regulations introduce specific provisions targeting fronting. For example, Regulation 11(9) prohibits successful tenderers from sub-contracting more than 25% of the value of the contract to any other enterprise that does not have an equal or higher B-BBEE status (save where that entity is an EME with the requisite ability to execute the contract). This provision seeks to prevent tenderers from employing a B-BBEE front to win the contract, only to outsource the work to an entity with a B-BBEE status horribly short of the mark. Like the 2001 Regulations, the new Regulations mandate organs of state to act against fraudulent tenderers. Regulation 13 provides that, upon detecting that the B-BBEE status level of contribution has been claimed or obtained on a fraudulent basis, the organ of state must act against the tenderer or person awarded the contract and may, in addition (amongst other things), blacklist the tenderer, its shareholders and directors, for a period of up to 10 years.

As if these stakes were not already high, recent case law has raised them even higher. In the benchmark fronting case of Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems (Pty) Ltd and Another2011 (1) SA 327 (CC), the court held that where credible allegations of fraud or corruption are levelled against an enterprise to which a tender has been awarded, the organ of state concerned is under an obligation to investigate the matter and an investigation into ‘what happens behind the scenes matters most when the shareholding is said to be a façade’. Fronting is abhorrent to our constitutional democracy in which the economic transformation of our country is so crucial. This cannot take place unless public procurement is done in accordance with the constitutional procurement principles of fairness, equity, transparency, competitiveness and cost-effectiveness.

Within this framework it is substantive empowerment and not mere formal compliance that matters. This point has been reiterated by our Constitutional Court in the noteworthy case of  AllPay Consolidated Investment Holdings (Pty) Ltd v Chief Executive Officer, South African Social Security Agency 2014 (1) SA 604 (CC). The court had to decide, amongst other things, whether ‘an investigation into the propriety of empowerment credentials becomes necessary only after a complaint has been lodged’. A unanimous  Constitutional Court found that it does not. It held that, ‘[g]iven the central and fundamental importance of substantive empowerment under the Constitution and the Procurement and Empowerment Acts, SASSA’s failure to ensure that the claimed empowerment credentials were objectively confirmed was fatally defective.’ The message is clear: organs of state are under a duty to confirm the empowerment credentials of a winning bidder before making the final award and failure to confirm as much will render the tender constitutionally invalid.

As the recent case law and the Regulations show: the procurement stage is not the arena in which to play dress-up. With B-BBEE taking centre stage, all ‘window-dressing’ best be left at home.

Lauren Kohn

Lauren has a BBusSci (cum laude) and an LLB and LLM (both magna cum laude) from UCT and was admitted as an attorney in 2010 after having completed articles at Webber Wentzel. She rose to the level of associate in the public law department at Webber Wentzel before leaving to complete her LLM at UCT in 2012. She has since joined the faculty as a lecturer and teaches constitutional and administrative law. Lauren has also published widely in the fields of constitutional, administrative, environmental, public procurement and contract law. Lauren joined Caveat Legal in early 2014.