Drawing lines in the sand: The promulgation of new Preferential Procurement Regulations and what it means for organs of state and the public

On 4 November 2022, the Minister of Finance promulgated the Preferential Procurement Regulations, 2022 (2022 Regulations) in terms of the Preferential Procurement Policy Framework Act 5 of 2000 (PPPFA).

15 Nov 2022 7 min read Dispute Resolution Alert Article

At a glance

  • The 2022 Preferential Procurement Regulations were promulgated to comply with the Constitution, the Preferential Procurement Policy Framework Act (PPPFA), and a Constitutional Court judgment.
  • The regulations do not specifically mention Broad-Based Black Economic Empowerment (BBBEE) or local content requirements, but they do require organs of state to set "specific goals" in their procurement processes, which can include BBBEE and Reconstruction and Development Programme (RDP) objectives.
  • Organs of state will need to define their own "transformational" goals and allocate points accordingly in tenders, potentially aligning with the previous BBBEE requirements or incorporating other developmental priorities outlined in the RDP. Public participants in tenders should carefully review the tender documents to understand the specific goals and determine their eligibility.

Almost immediately after the Regulations were gazetted, (some) mainstream media publications were abuzz with reports that the new 2022 Regulations do not contain stipulations regarding broad-based black economic empowerment (BBBEE) requirements under the Broad-Based Black Economic Empowerment Act 53 of 2003 (as amended) (BBBEE Act) and local content requirements under the PPPFA, implying that organs of state would be free to procure goods and services without any regard to those concepts and criteria. In response to the media publications, on 8 November 2022, National Treasury published a media statement clarifying the situation (National Treasury media statement).

Specifically, National Treasury confirmed that the 2022 Regulations do not provide a mechanism for organs of state to ignore the BBBEE Act when procuring goods and services. The National Treasury media statement also clarified that the purpose of the 2022 Regulations is to:

  • comply with section 217 of the Constitution on procurement of goods and/or services by organs of state;
  • comply with the PPPFA; and
  • comply with the Constitutional Court judgment of February 2022, in respect of the 2017 Regulations.

Regarding the three points above, after reading this article, it would be useful to refer to our previous article on the topic, which can be accessed here.

Importantly, the National Treasury media statement said the 2022 Regulations would act as a “placeholder” for organs of state pending the enactment of the Public Procurement Bill, which, according to the statement is being finalised and will be introduced to Parliament in or before March 2023. For this article, it is important to note that (i) the Public Procurement Bill is meant to repeal the PPPFA, but (ii) is by no means guaranteed to see the light of day, given that it must still go through the complete legislative process, which includes a public participation process, and which is likely to be robust given the number of stakeholders involved in public procurement.

Of further importance is the fact that the 2022 Regulations would only be effective from 26 January 2023, which is the last day of the 12-month suspension of invalidity, according to the calculation of the Constitutional Court in its further judgment on the matter in May 2022. It may be recalled that pursuant to that “clarification” judgment, National Treasury published a media statement confirming, amongst other things, that the 2017 Regulations are still valid (until 26 January 2023) and that all new tenders must be published in accordance and compliance with the 2017 Regulations and that all exemptions granted during the period of uncertainty (i.e. between the Constitutional Court’s February 2022 and May 2022 judgments) would lapse. A copy of that media statement can be accessed here.

What the 2022 Regulations actually say

So, with the media hoo-ha behind us, what do the 2022 Regulations actually say?

Firstly, the 2022 Regulations confirm that they apply to organs of state as defined in the PPPFA, which includes all public entities listed in Schedule 2 and 3 of the Public Finance Management Act 1 of 1999 (such as Eskom, the Industrial Development Corporation, Transnet, SAA) and municipal entities as defined in the Municipal Systems Act 32 of 2000.

Secondly, the 2022 Regulations stipulate that an organ of state must, in every tender document published, set the applicable preference point system that will be used in the evaluation of that procurement process, i.e. whether 80/20 or 90/10. Like the 2017 Regulations, the 80 and 90 allotment is reserved for price formulae. However, unlike the 2017 Regulations, the /20 or /10 allotment in each scenario is reserved for “specific goals”, as opposed to BBBEE requirements, which were the focus of the 2017 Regulations.

Defining specific goals

The term “specific goals” is defined in the 2022 Regulations as meaning:

“specific goals as contemplated in section 2(1)(d)of the [PPPFA] which may include contracting with persons, or categories of persons, historically disadvantaged by unfair discrimination on the basis of race, gender and disability including the implementation of programmes of the Reconstruction and Development Programme as published in Government Gazette No. 16085 dated 23 November 1994”.

Interestingly, in terms of section 2(1)(d) of the PPPFA, the addressing of historically disadvantaged person/discrimination objectives (now enshrined as a BBBEE measurement) and the implementation of the Reconstruction and Development Programme (RDP) were referred to in two separate subsections. This is important because not all the programmes of the RDP relate to issues of historical discrimination – however, the wording of the 2022 Regulations seems to be trying to create a symbiotic link between these two concepts (i.e. BBBEE and the RDP Programme). The apparent linking of the two concepts is also important because, leaving aside the tragic fact that the legislature is still referring to a developmental policy which was formulated almost 30 years ago, the RDP is a policy document that contemplates a vast swathe of macro-economic goals and programmes, all of which could be considered by an organ of state in the course of formulating its “specific goals”. That could be interpreted as the PPPFA and the 2022 Regulations granting organs of state a carte blanche in their determining of their procurement policies, so the apparent linking of the two concepts must have been intentional. This seems to be reinforced by the National Treasury media statement.

The upshot of this is that, in accordance with the Constitutional Court’s judgment and its interpretation of the PPPFA, each organ of state will be required to set its own “transformation” goals and those goals will be allotted to the /20 and /10 share of the points in respect of each tender published by the organ of state for the procurement of goods and services.

This is especially important because practically it could mean that organs of state could decide that their “specific goals” align with what was set out in the 2017 Regulations and allocate all the points to BBBEE in a manner similar to the 2017 Regulations (most likely). Or it could mean that the “specific goals” change with each tender issued and these goals could refer to transformational / BBBEE requirements combined with other RDP goals, such as meeting basic needs or increasing export capacity.

Setting transformational goals

The main implication for organs of state is that their procurement departments will be required to focus a lot more energy on and synergise with other internal departments (or their executive authority) as to what specific “transformational” goals need to be set and how and when to deploy them into specific tenders.

This has the potential to be an opportunity for some of the state-owned companies which are currently in dire straits, to focus on transformation in conjunction with other developmental priorities referred to in the RDP. However, any such goals would need to be distilled into quantifiable and certain criteria, and aligned with other BBBEE legislation, in order ensure that the allocation of points for the specific goals is fairly done. This is where the challenge comes in as any departure from the 2017 Regulations would require very considered and well-crafted criteria to be developed by the relevant organ of state.

Implication for tender participation

On the other hand, the main implication for the public participating in such tenders will be to carefully read the tender documents to ensure that they identify the specific “transformational” goals that are required and, upon identifying them, to determine whether they, as bidders, meet those requirements. If not, they would need to consider whether there are ways in which they can meet the goals through, for example, bidding as a consortium or through subcontracting (assuming the specific “transformational” goal is not a subcontracting requirement itself, for example to incentivise domestic manufacturing or increase exports).

It is also important to note that the 2022 Regulations do not contain regulations that stipulate when an organ of state is entitled to cancel a tender. As such, it will be important, going forward, to carefully consider what tender documents say regarding the cancellation of tenders and equally important to consider the specific organ of state’s supply chain management policy to see what it says regarding cancellations.

As a last note, with respect to local content, although the requirement does not feature in the 2022 Regulations, it does not necessarily mean that organs of state will not be required to comply with any existing designations because it would appear that those designations would remain in place after 26 January 2023 unless, between the date of publication of this alert and the coming into effect of the 2022 Regulations, National Treasury says otherwise.

So, while the promulgation of the 2022 Regulations may not result in a revolution of public procurement in South Africa (that is likely to occur if the Public Procurement Bill is enacted), they do imply that there is some opportunity for organs of state to incentivise other key development priorities in conjunction with BBBEE objectives, provided it is done in a manner which is clear and ascertainable and does not fall foul of other applicable legislation.

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