May the best bid win

New pro­cure­ment reg­u­la­tions will change the way busi­nesses com­pete for ten­ders, write Ach­mat Toefy and Me­gan Ad­der­ley

CityPress - - Business - Toefy is a part­ner and Ad­der­ley is a se­nior as­so­ciate at law firm Web­ber Wentzel

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.

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