Procurement rules elevate BBBEE status for state business
The South African Preferential Procurement Regulations are the legal basis for the application of broadbased black economic empowerment (BBBEE) and black ownership preferment by the government when they do business. The regulations were amended last week and the changes will take effect in April 2017.
The three important elements of the amended regulations relating to the preferential treatment of black-owned businesses by the government are:
● The retention of the 90/10 and 80/20 principle;
● The introduction for the first time of BBBEE status level as an acceptable prequalification criterion; and
● The exclusion of 51% black ownership of large businesses as an acceptable prequalification criterion.
The regulations and the Preferential Procurement Policy Framework Act were enacted to create a framework for how the government may “prefer” historically disadvantaged companies when buying goods and services. They were, however, primarily imposed by the Treasury to limit the application of such preferences by the state.
Through the act and the regulations, the Treasury seeks to limit the “premium” or extra cost that the state may incur through such preferences.
This premium arises because rather than simply appointing the party with the cheapest price, part of the consideration in choosing a contractor is a nonprice consideration.
For this reason, the 80/20 and 90/10 principle is a key feature of the act and the regulations. It provides that price is the dominant basis on which the government makes procurement decisions and so price must make up 80% or 90% of the total points awarded when scoring and ranking tenders by the government.
The regulations allow organs of state to include “BBBEE status level” as a criteria for only 20% or 10% of the overall points available. The 90/10 principle is applied to high-value tenders and the 80/20 principle to lower-value tenders.
The 80/20 and 90/10 principle drew criticism from stateowned enterprises, which sought to have this threshold raised to at least 70/30, arguing that the principle inhibited them in giving sufficient preference to black-owned businesses.
The 2012 presidential review committee on state-owned
enterprises proposed a 70/30 threshold. Earlier drafts of the regulations set a 50/50 threshold for tenders of below R10m.
That the 80/20 and 90/10 thresholds remained in place in the amended regulations indicates that to some extent the Treasury was successful in urging cost savings and financial prudency by the government.
While it has remained in
place, the 90/10 and 80/20 principle has been subjected to important changes in the amendments. The threshold for applying the 90/10 threshold has been raised from R1m to R50m. This means that for all tenders below R50m, a price premium of 20% rather than 10% is considered acceptable.
For most professional service providers to the government
such as lawyers, accountants and engineers, for example, whose contracts are generally worth less than R50m, BBBEE status level now becomes a much bigger determiner of who does business with the state.
The Treasury has also, for the first time, sanctioned the use of BBBEE status level as a “prequalification criteria” for government tenders. The Treasury has, since 2006, specifically outlawed this practice, which it termed a “set aside” (setting aside certain tenders for only a particular class of companies).
BLUNT INSTRUMENT
Prior to the regulations applying to state-owned enterprises such as Eskom and Transnet in 2012, most had as a standard tender requirement that all companies doing business with them have a Level 4 BBBEE status level.
This practice was considered by most to be outlawed by the regulations in 2012, as the Preferential Procurement Policy Framework Act only allowed the use of BBBEE status level in the application of the 80/20 and 90/10 principle.
The amended regulations specifically allow BBBEE status level as a prequalification criterion. This means there will likely be a return of a prior practice where most major state-owned enterprises have a gatekeeper requirement of Level 4 BBBEE contributor status.
In the past, this was used as a blunt instrument, depriving the government of competitive tenders where the pool of compliant service providers was small. It also led to a rise in fronting.
Fronting practices are already on the rise due to the much stricter provisions in the amended BBBEE codes and it is hoped that BBBEE status level thresholds will be set to encourage greater BBBEE targets while properly understanding what the market can offer.
Legal debate might continue around whether the introduction of BBBEE contributor status level as a prequalification criterion in the regulations is lawful as the restriction on this is arguably found in the act itself and the regulations must be subject to the act in terms of which they are published.
The introduction of this provision is also at odds with other provisions of the regulations, which provide that a company may not be excluded from a tender for not having a BBBEE status-level certificate.
The regulations appear not to allow the state to use 51% black ownership of large businesses as an acceptable prequalification criterion. There have recently been high-profile cases of major public entities saying they will only do business with 51% black-owned companies for major contracts. This approach has been said to contradict the Preferential Procurement Policy Framework Act and the BBBEE Act in terms of which a broadbased approach is taken towards empowerment.
The BBBEE Act and BBBEE codes, used to measure a company’s BBBEE status level, consider a range of factors including ownership, management control, skills development, enterprise and supplier development and socio-economic development relevant to determine BBBEE status level.
In this context, 51% black ownership on its own may be seen as a blunt measure that the Preferential Procurement Regulations only allow as a relevant consideration for prequalifying small enterprises.
Applying such criteria where the known pool of 51% blackowned companies is small, may reduce the pool of compliant tenderers and reduce competitiveness as prices rise due to the lack of competition. This has been said to offend against the Constitutional requirement that the government procure goods and services on a competitive basis and is arguably irrational and unreasonable where the procurer knows it is excluding competent competitive tenders.
It remains to be seen whether the Treasury intended the regulations to proscribe such prequalification criteria.