Allpay V CEO of SASSA: Greater scrutiny of economic empowerment in government tenders?

This is the second article in a three-part series which considers the implications for public and private parties in concluding procurement contracts following the landmark judgment delivered by the Constitutional Court (CC) in AllPay Consolidated Investment Holdings (Pty) Ltd and Others v Chief Executive Officer, South African Social Security Agency and Others 2014 (1) SA 604 (CC) (AllPay 1).

On the facts in AllPay 1, the request for proposals emphasised the substantive participation by historically disadvantaged people in the management and control of the successful tenderer. 

The request for proposals provided that preference points for historically disadvantaged persons would be calculated on their percentage shareholding in a business, provided that they were actively involved in and exercised control over the enterprise. Equity ownership was defined as the percentage of ownership and control exercised by individuals in an enterprise.

In AllPay 1 the unsuccessful bidder challenged the tender process on numerous grounds, including that the South African Social Security Agency (SASSA), as the procuring entity, failed to assess the ability of the successful bidder's black economic partners to perform the tender. The bid of the successful bidder reflected that three black empowerment companies were to manage and execute approximately 75% of the contract value. The unsuccessful bidder argued that the capacity of the black economic companies to perform ought to have been assessed before awarding the contract.

The SCA approach to scrutinising black economic empowerment credentials of bidders

The Supreme Court of Appeal (SCA) held that SASSA was not required by law to assess the ability of the empowerment companies that formed part of the successful bidder's bid response. The SCA further held that there was no basis for the proposition that the failure to assess the black empowerment companies impacted so unfairly on the unsuccessful bidder as to taint the fairness of the process.

According to the SCA, SASSA would have been aware of the risk of non-performance by the three associated empowerment companies and SASSA could manage such risk by imposing appropriate contractual consequences upon the successful bidder to meet its empowerment obligations. In the SCA's view, the evaluation of bid responses was the prerogative of the procuring entity. In the circumstances, it was not appropriate for a court to interfere. Accordingly the SCA held that the procurement process did not require SASSA to investigate whether the assertion made by the successful bidder, that its black economic empowerment partners would manage approximately 75% of the projects, was correct. The SCA dismissed the complaint by the unsuccessful bidder as having no merit.

The Constitutional Court (CC) and substantive empowerment

The CC differed with the SCA on the approach to evaluating black economic empowerment in the context of procurement. As a starting point, the CC reiterated that substantive empowerment and not formal compliance is what matters, and, accordingly, black economic empowerment generally requires substantive participation in the management and running of any enterprise.

According to the CC, there was an obligation on SASSA to ensure that the empowerment credentials of the prospective tenderers were investigated and confirmed before the award was finally made.

Importantly, the CC clarified that an investigation into the proprietary of empowerment credentials does not become necessary only after a complaint has been lodged.

The CC noted that the successful bidder did not substantiate its claim that its equity partners would manage approximately 75% of the tender. The successful bidder merely provided particulars of the management capabilities of its workforce, which included previously disadvantaged people.

On the face of the information provided by the successful bidder, it was not possible for SASSA to determine whether the claimed empowerment credentials were up to scratch. The CC held that in light of the central and fundamental importance of substantive empowerment under the Constitution, the preferential procurement legislation and the empowerment legislation, SASSA's failure to ensure that the claimed empowerment credentials were objectively confirmed was a fatal flaw to the process. Accordingly, the failure to make such an objective determination fell foul of s6(2)(b) of the Promotion of Administrative Justice Act, No. 3 of 2000 (PAJA) (non-compliance with a mandatory and material condition) and s6(2)(e)(iii) of PAJA (failure to consider a relevant consideration).

Where to from AllPay?

The CC's approach and reasoning in AllPay 1 endorses a more interventionist role by courts and public procuring entities to achieve substantive transformation as opposed to formal compliance with the requirements in the tender documents.

AllPay is consistent with a previous judgment delivered by the CC4 which concerned allegations of fraudulent misrepresentations by a bidder in relation to historically disadvantaged individuals, where the CC held that the verification of the correct shareholding in the company register is irrelevant and that an investigation into what

happens behind the scenes is critical when the shareholding is said to be a façade. In order to achieve substantive empowerment, it may not be sufficient to confirm formal compliance with the requirements of the tender and it may be necessary to confirm the accuracy of a tenderer's claimed empowerment credentials.