May the best bid win
New procurement regulations will change the way businesses compete for tenders, write Achmat Toefy and Megan Adderley
N ational Treasury has recently published the final Preferential Procurement Regulations, more than seven months after publishing the 2016 draft.
The regulations came into force on April 1 and govern procurement, pending the promulgation of the Public Procurement Bill, which is expected to be introduced to Parliament later this year and which will most likely make more radical changes to the procurement framework.
Despite being somewhat of a “stopgap” measure, the changes introduced by this year’s regulations are significant.
It is important for those in business with government to understand the consequences of these regulations and adapt so that they are able to compete effectively for tenders once the regulations come into force, and until the Public Procurement Bill is introduced.
Overall, although the 2017 regulations provide significant scope for black-empowered businesses to grow, these opportunities will overall have less effect than those provided for in the draft 2016 regulations, and a number of the provisions may raise certain difficulties depending on their implementation. Key changes in the 2017 regulations include:
The threshold value of procurements subject to the 80/20 preference points system will be reduced from the proposed R100 million in the 2016 draft regulations to R50 million.
This means that the number of contracts that will be governed by the 80/20 preference points system, which is weighted more heavily in favour of transformation, will be dramatically reduced.
Contracts valued at more than R50 million will be governed by the 90/10 system, where price plays a larger role in evaluation. This “clawback” from the 2016 draft will most likely have been a controversial topic in the finalisation of the 2017 regulations.
This is, however, still a substantial increase from the threshold of just R1 million, which has been in place since 2011.
A contentious issue that emerged in the 2016 draft was the notion that prices offered needed to be in line with what the state viewed as “fair and reasonable after conducting market analysis”.
While the laudable purpose of preventing overpaying is clear, the implementation of such a provision was always going to be difficult.
The notion of market-related prices has, however, again found its way into the 2017 regulations, in the form of a negotiation tool that could be employed by the state.
The 2017 regulations allow the state to negotiate “a market-related price” with the winning bidder.
If, however, the winning bidder fails to meet the state’s demands, the next highest-scoring bidder could be awarded the contract, provided it meets the state’s demands.
This means that the second-best bidder could have a second bite at the cherry if the winning bidder does not agree with the state’s benchmarking of the market prices. These provisions are potentially a fertile area of dispute, depending on how they are implemented. The draft 2016 regulations included a list of objective criteria that justify awarding a tender to a bidder other than the highest scoring bidder. These included subcontracting to certain designated groups, and several factors relating to the ability of the contractor to meet deadlines and lead times before delivery. These factors have been removed from the 2017 regulations. Under the 2017 regulations, the bases upon which a tender may be removed from the highest-scoring bidder are unspecified. Other than the potential issue relating to negotiations on marketrelated prices, the state will need to specify in the tender document what criteria it views as “objective”, justifying awarding the bid to a bidder other than the highest scorer. The draft 2016 regulations also made it compulsory for bidders to subcontract 30% of the value of the contract to certain designated groups where the value of the contract exceeds R30 million. In the 2017 regulations, this requirement has been qualified and only applies “where feasible”. Thus, while the principle remains, the state is at least limited in the implementation of compulsory subcontracting – albeit an obvious limitation. Certain other provisions of the draft 2016 regulations no longer feature in the 2017 regulations. Most notably, the provision that extended the scope of the regulations to cover the hiring and letting of property by the state has been removed. This regulation was probably abandoned because such an extension falls beyond the scope of the Preferential Procurement Policy Framework Act. Controversially, the 2017 regulations allow procuring entities to introduce prequalification criteria that all bidders must meet to be eligible for a particular tender. The most contentious of these is that the state may include a requirement that a bidder has a minimum broad-based BEE status level to qualify for consideration. This provision could face constitutional challenges depending on how this prequalification criterion is implemented. The facts of any particular case will be paramount. Although the 2017 regulations provide significant scope for black-empowered businesses to grow, these opportunities are less than those provided for in the 2016 draft. Transformational regulations usually come at a cost to the established industries. Such disruptions to commerce will attract inevitable court battles, where the line between “business as usual” and “business unusual” will be drawn in dark ink. The 2017 regulations will be no different.