Preferential Procurement – Constitutional Confusion

Preferential Procurement

Probably the most significant judgement the country has seen in public procurement, was handed down by South Africa’s Constitutional Court on 16 February 2022, on the Afribusiness versus Minister of Finance case, and is reflected upon here by Shaun C Scott, Johannesburg director, coach, consultant and supply chain management practitioner. 

The decision was not anticipated by the legal team at the National Treasury. It also caught them completely off-guard during one of their most hectic times, in the final days leading up to the Minister’s first budget speech.

The confusion and the impact were without doubt, severe.

National Treasury’s first communication to the public sector took place on a Friday evening, 10 days after the Constitutional Court’s decision. The words used to describe Treasury’s advice were “dumbfounding”, “bewildering”, “gobsmacking” and “startling”. The National Treasury advised the entire public sector to freeze all tenders. The word they used was “abeyance”.

Institutions from Eskom to Transnet to Denel and down to the smallest municipality in the country were told to freeze all tenders – one and a half months before the end of a difficult financial year.  And one and half months before the start of a new financial year, institutions froze the tenders they were planning to kickstart a brand new year.

In mid-February, municipalities were building momentum into the last 6 months of the year, and the service delivery rug was pulled from under them. In municipalities, tenders still start at only R200,000 (including VAT).

The decision to freeze tenders was taken so that the Treasury could get clarity from the Constitutional Court on a matter they did not anticipate. In a footnote in the minority judgement, the Constitutional Court said the “suspension period” ended on 2 November 2021.

A footnote in the judgement upset the nation’s apple cart.

The suspension period was the 12 months the Supreme Court of Appeal (SCA) gave the Minister of Finance. On 2 November 2020, when the SCA declared the Preferential Procurement Regulations of 2017 invalid, it suspended the order of invalidity for 12 months to give the minister the opportunity to rectify the 2017 regulations. In most circumstances, the Superior Courts Act would have put that 12-month period on hold when the Minister appealed the SCA’s decision. For some reason, the minority judgement declared that the suspension period was over.

So why did the National Treasury take the extreme option and advise over 700 buying entities in the country to freeze tenders? It was more than mere compliance. Every tender from 16 February 2022 was at risk of being legally invalid.

On 3 March 2022, National Treasury issued another advisory to clarify that their earlier correspondence was not binding and was merely an advisory. However, it clarified another concern.

The risk of invalidity extended to quotations as well. The Preferential Procurement Regulations do not differentiate tenders from quotations. The National Treasury has still not confirmed that its “quotations above R30 000” statement on 3 March 2022 was incorrect. The only mention of a R30 000 threshold is in the very regulations that are invalid.

Every contract whether by quotation or tender was at risk of being invalid. This is still a risk. If a contract is based on invalid Preferential Procurement Regulations, then that contract is considered invalid. 

The National Treasury has asked the Constitutional Court to clarify the suspension period issue. This could take time.

In the interim, organs of state are frantically requesting exemption from three small provisions in the framework ACT of 2000. The National Treasury has been positive and responsive to the requests. The exemption gives organs of state the chance to restart tender and quotation processes in a compliant manner. Policies, SOPs and templates have to change and be approved, often at a board level.

These policy changes have to account for multiple scenarios:  the possible reinstatement of the suspension period, in which case  the 2017 Regulations will still have to be complied with; and the possibility that the Constitutional Court confirms there is no suspension period, in which case the exemption becomes critical.

On top of these two scenarios, the National Treasury issued Draft 2022 Preferential Procurement Regulations to try and address the three small provisions in the Framework Act.

There is also the complexity that the Constitutional Court did not agree that the two offending 2017 regulations on pre-qualification and subcontracting are indeed illegal. Sakelige (Afribusiness) believes the Concourt confirmed that B-BBEE cannot be used to pre-qualify.

And finally, all this is happening in the context of a Draft Public Procurement Bill that is planned for enactment in 2023.

A legal and technical tightrope is the only way out.

By Shaun C Scott, WiL Managing Director for nearly 20 years. He has overall responsibility for the supply chain services business, consults on supply chain policy to public sector organisations and facilitates workshops. 

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