State Procurement: The Changing Face of Public Procurement in SA

Sarah-Lawrence
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November 1, 2018
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Lauren-KohnPublic procurement is, by definition, procurement for the public – typically to ensure service delivery – using public money. As our Constitutional Court noted in the seminal case of AllPay, ‘[a]ny contract that flows from the constitutional and statutory procurement framework is concluded not on the state entity’s behalf, but on the public’s behalf.’ In light of this perhaps obvious –  and yet sadly often overlooked –  key principle, as well as the fact that public procurement accounts for a substantial part of South Africa’s Gross Domestic Product (GDP), it must be done in a manner that gives due effect to all of our ‘constitutional procurement principles’ weighed in the balance.

Section 217 of our Constitution is plain on this score. Sub-section (1) states that ‘[w]hen an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective. These five principles must be taken as whole in ensuring public procurement is constitutionally compliant, and a competitive tender process is the most obvious way of ensuring as much.

Sub-section (2) of the Constitution then provides a gloss on sub-section (1) and empowers those organs of state or institutions to implement a procurement policy providing for ‘(a) categories of preference in the allocation of contracts; and (b) the protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination’. In this respect, our Constitution contemplates the use of public procurement as an empowerment tool to help right the wrongs of our unjust past. This is important to further job creation; alleviate poverty; and effect meaningful economic redress.

Public procurement – and indeed, preferentialpublic procurement – is therefore an animating human rights matter, and so it must be conducted in a way that gives proper effect to allthe procurement principles. For example, a non-competitive process will likely reduce cost-effectiveness, which in turn decreases the state’s ability to provide service delivery expediently and effectively, and this necessarily has an adverse knock-on effect for those reliant on the services in question. Corruption is endemic in the procurement space and to this extent it is an affront to the realisation of human rights – particularly our social- and economic ones. A corrupt process may manifest from a lack of transparency, fairness, competitiveness and/or cost-effectiveness. It also all too often manifests because of fronting practices which undermine equity and the need to ensure substantiveeconomic empowerment.

The Preferential Procurement Policy Framework Act, 2000 (PPPFA), is the national legislation that establishes the methodology for ensuring an appropriate balance between these aims; particularly cost-effectiveness and equity. It is a dual-scale model pursuant to which tenders are scored on the basis of a preference points system determined by the Rand value of the contract: the logic being that the more costly the project, the greater the need for price to weigh more heavily in the balance relative to equity goals. The relatively new Procurement Regulations (20 January 2017) made under the Act have shifted the balance between price and equity in a rather significant manner.

Under these Regulations, the dividing line has moved from R 1 million  (which was the baseline under the 2011 Regulations) to R50 million. The result is that the price to equity ratio is 80:20 for contracts with a Rand value equal to or above R30 000 and up to R50 million, and 90:10 for those above R50 million. So, where under the 2011 Regulations, most contracts stood be evaluated under the 90:10 system (which kicked in when the contract value was above R1 million), under the 2017 Regulations, the 80:20 scale will be applicable to most of them given that few contracts will in reality exceed R50 million. This means that government is placing a greater premium on empowerment, but arguably at the expense of cost-effectiveness.

A second way in which the PPPFA’s equilibrium is upset is through regulation 9 which makes subcontracting to advance designated groups a mandatory condition of tender. Further, regulation 4 affords state organs a wide discretion to use tendering conditions more broadly to restrict or ‘set-aside’ the procurement to particular categories of bidders which catergories essentially all come down to the matter of redress. For example, government may set-aside a tender for entities with a stipulated minimum B-BBEE level. This essentially allows for a kind of double-counting not contemplated by the PPPFA. In other words, instead of equity weighing in the balance solely at preference-point-allocation stage, it may now also be used as a pre-condition to compete and thereby restrict the pool of possible bidders, in turn reducing competitiveness.

While the stronger emphasis on equity  is not necessarily a bad thing as a matter of policy, it is arguably beyond the scope of the empowering Act and thus unlawful. The state is seemingly seeking to address this issue (amongst other things) through the new Procurement Bill which is in the pipeline. Black Business Council Secretary-General George Sebulela was quoted earlier this year as saying that the Council was ‘very excited’about the new Bill ‘explaining that the existing procurement regime had not succeeded in bringing about broad based black economic empowerment (B-BBEE) as it was still strongly biased in favour of price.’

Businesses should be warned: the scales are being tipped and B-BBEE will weigh more heavily in the balance. Indeed, arguably it already does. While on the face of it, this may seem a good thing for our country, I fear it will reduce competitiveness, cost-effectiveness and in fact be subversive of economic empowerment to the extent that it will likely increase fronting practices. Both the public- and private sectors should be mindful of these implications in light of our over-arching constitutional vision for public procurement.

 

Lauren Kohn

Lauren has a BBusSc (cum laude) and an LLB and LLM (bothmagna 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 and is a senior lecturer teaching constitutional, public administrative law. Lauren has also published widely in the fields of constitutional, administrative, environmental, public procurement and contract law, and is a PhD candidate and fellow at Leiden Law School. She joined Caveat in 2014.

This article is based on a conference paper Lauren presented at the 2018 Annual International Procurement Law Conference and her full written paper is forthcoming through APLU.