Draft Preferential Procurement Regulations: Parliamentary Researchers' Analysis

Standing Committee on Appropriations

01 September 2009
Chairperson: Mr E Sogoni (ANC)
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Meeting Summary

The Parliamentary Research Unit presented an analysis of the Preferential Procurement Regulations (the Regulations) was to highlight certain issues surrounding the Regulations. The Committee was appraised of the specific sections of concern within the Regulations ahead of the meeting scheduled with the National Treasury. The Parliamentary Researchers explained that the Regulations were aimed at ensuring that government's preferential procedures were aligned with the aims of the Broad Based Black Economic Empowerment (BBBEE) Act. The two formulae used to determine preferential points were outlined, as well as the concept of determining the highest bidder as the bidder with the highest score according to the formulae. According to the Regulations, only the highest bidder could be awarded the contract.

The researchers highlighted Section 9(1) on exceptions to the highest bidder rule, Section
10(1) on cancellation and re-invitation of bids, Section 10(4)(b) on exhaustion of funds, Section 11(3)(b) on accreditation, Section 11(6) on Exempted Micro Enterprises and the required tax clearance by South African Revenue Services (SARS) in Section 15 for the Committee's attention. Members’ agreed with the comments made on Sections 10(4)(b), 9(1) and 9(2). In regard to Sections 9(1) and 9(2) they agreed that the Auditor-General and National Treasury should be allowed an opportunity for inputs. Members felt that Section 11(1) should contain a definition of which enterprises could be classified as "local" firms and felt that local manufacturers should receive a percentage preference discount as a guaranteed local advantage. The correct term for contracts of this nature was discussed.

Members sought clarity on the distinction between bids and tenders as well as the concept of “highest bidder”. They suggested that a database containing all BBBEE scores would streamline the process. They also highlighted the possible difficulties with SARS tax clearance. The use of variation orders and non-firm prices was seen as undesirable and members agreed the variations in costs should be limited. They recommended that the concept of “unconditionally” in Section 11(9) should be reviewed as it could be interpreted in a number of ways and lead to abuse. Generally the Chairperson was unsure as to whether R 1 million (the upper limit of the 80/20 formula category of bids) was really sufficient to empower people. Members also wondered if government would be able to handle and store the volume of paper that would be generated by the procurement system. They specifically expressed concern about the impact this would have on implementation and monitoring.

Meeting report

Draft Preferential Procurement Regulations (the Regulations): Parliamentary Research Unit briefing
Mr Phelelani Dlomo, Parliamentary Researcher, stated that purpose of the draft of Preferential Procurement Regulations (the Regulations) was to make sure that Government’s preferential procedures were aligned with the aims of the Broad Based Black Economic Empowerment (BBBEE) Act as well as the Codes of Good Practices. The Regulations focussed on the acquisition of goods and services, and the BBBEE Act further provided that the Historically Disadvantaged Individual (HDIs) status and Reconstruction and Development Programme (RDP) goals should be used in order to determine the preferential point system.
This was done according to two formulae. The first was a 80:20 (price:BBBEE) preference formula applied to competitive bids or acquisitions from the value of R30 000 to R1 million. The second was a 90:10 formula applied to competitive bids or acquisitions above R1 million.
Only the highest bidder was selected. That was the bidder with the highest score according to the formulae. Bidders who were fully BBBEE compliant received the full 20 points in the 80:20 formula and the full 10 points in the 90:10 formula.

Mr Dlomo outlined that Part One of the Regulations covered definitions and application.

Part Two stipulated a pre-bid planning process. This meant that the relevant organ of state must make accurate estimates of cost before the bidding process could be opened. Given government’s poor planning capacity, this might prove difficult.
Before the organ of state could open for bidding, three sub-committees for Evaluation, Specification and Adjudication had to be formed. This may also be problematic, if the roles of the sub-committee overlapped.  Section 9(1) indicated that a contract could be awarded to the bidder who did not score the highest number of points, as long as there were reasonable and justifiable grounds. This was in conflict with Sections 4(5), 5(5), 6(5) and 7(5), which emphasised that only the highest bidder could obtain the contract. Mr Dlomo said that the question was how this exception would be adjudicated and how ulterior motives could be accounted for. There should be clear grounds for measuring this exception and they should be specific.

This view was also supported by Section 9(2) which provided that such process should immediately be motivated to the relevant Treasury and Auditor General (A-G) within 10 working days, as to why the highest bidder was not selected. This was a window for the National Treasury and A-G to look at the process and make inputs.

Mr Dlomo said that S
ection 10(1) on cancellation and re-invitation of bids stated that if bids were outside of the scope of the original formula, the process had to be shelved. The potential for delays was cause for concern. Sub-section 10(4)(b) stated that a bid could be cancelled if "funds are no longer available to the total envisaged expenditure". Mr Dlomo recalled the provisions for planning of the expected costs of the bids and noted that if the planning process as properly done, funds should not be exhausted. Furthermore the provisions around the cancellation of the bids were not clear.

Sub-section 11(3)(b) under Part Three contained general conditions stipulated for accreditation by the South African National Accreditation System (SANAS), and he asked Members to consider that. Sub-section 11(6) stipulated that enterprises with an annual revenue not exceeding R5 million per annum were deemed to be a BBBEE level contributor status, and therefore qualified as exempted micro enterprises. Mr Dlomo queried whether this exemption was automatic. He said it was necessary to find out what checks were in place to ensure that these enterprises were really below R5 million per annum. He felt this was dangerous and did not solve the problem of compliance with BBBEE.

Lastly, tax clearance by South African Revenue Services (SARS) in Section 15 was flagged as an area for discussion with the National Treasury, as it meant that only individuals/enterprises who had obtained tax clearance could bid successfully.

Mr Sizwe Nyanyisa, Parliamentary Researcher, suggested that the Committee review the BBBEE Code of Good Conduct and the formulae proposed in the regulations. He reiterated that the Committee should investigate the issues around the role of the A-G and National Treasury in evaluating exceptions to the highest bidder rule. He noted that the cancellations and re-invitations on bids may have undesirable consequences for spending targets.

Mr M Swart (DA) referred to Subsections 9(1) and 9(2) and noted that he could foresee situations where other information about bidders became known, especially information on the quality of products. He agreed that the A-G and National Treasury should be allowed an opportunity to make inputs on this.

He agreed that Subsection 10(4)(b) was problematic, as planning was supposed to be done properly.

Mr Swart referred to Subsection 11(1) and asked if it was not better to give local manufacturers a percentage preference discount. This could be stated clearly in the bid document along with the exact percentage discount to local manufacturers.

The Chairperson asked if there was a precise definition for “local” as this may mean many things.

Mr Dlomo agreed on the issue of the local discount and that there should be a definition as to which enterprises could be classified as local firms. He felt that the National Treasury would better address other questions raised by members in the following week.

Mr Swart remarked that it was fairly important for rural bidders to be given a discount for a guaranteed local advantage. The exact details of this should be in the tender document.  

Mr N Singh (IFP) noted complaints he had received in his constituency that came down to a dispute about whether a country should give preference to enterprises in its immediate area, or whether enterprises within the greater district could be given the same local preference. If “local” was not properly defined, it could cause problems. Officials should not be allowed to award contracts outside the real local area.

Mr Singh asked for clarity on whether the correct term for contracts of this nature was "bid" or "tender". Furthermore the concept of “highest bidder” was confusing, as he had understood that the contract was awarded to the lowest tender.

Mr Swart pointed out that there was a specific definition for “bid” in Part One of the Regulations.

The Chairperson replied that Mr Singh was correct in his call for clarification. The terms “bid” and “tender” were often used interchangeably.

Mr Nyanyiso explained that because BBBEE compliance was also considered, the final score based on the formula may be the highest even if the bid price was not the most competitive. This was the difference between evaluating a bid on price alone and evaluating a bid according to the formula.

Mr Swart pointed out that more points were awarded for price.

Mr Singh explained that when two price bids were relatively close, the BBBEE compliance aspect of the bidders' scores would be the deciding factor in awarding the contract.

Mr Singh noted that the issue of how various sub-committees interacted had arisen in the Standing Committee on Public Accounts (SCOPA) hearings. Specifically, this Committee had looked at the cases where one sub-committee overruled other sub-committees. He was therefore in favour of the suggestion for the sub-committees’ roles to be clarified.

Mr J Gelderblom (ANC) noted that more clarity on which enterprises could be classified as local was a good idea and it would be useful to be strict about this.

Mr Singh suggested that the departments should have a database with all BBBEE scores.

Mr Dlomo replied that while the database was a good start, the regulations should provide for the evaluation of the database. This should be aimed at ensuring the circulation of opportunities in order to promote real empowerment. This was important, as empowerment would be stunted if contracts were continuously awarded to the same companies. 

Mr Singh pointed out possible difficulties with SARS tax clearance. This was a matter to be addressed with National Treasury and was pertinent, as people hade been ruled out of tenders on technicalities like this, even if they had the lowest tender.
Mr Swart noted in cases he had dealt in George, tender contracts had been awarded to people who had some debt. The contract had therefore stipulated that the debt should be paid in a prescribed manner.

The Chairperson asked if the National Treasury would want to prescribe everything and asked if the specific technical prescriptions were not a matter for guidelines.

Mr Dlomo replied that this was an issue that could be taken up with the National Treasury.

Ms R Mashigo (ANC) referred to the implementation of the Regulations and noted that Parliament had often found that the problems around tenders had arisen from the internal procurement processes and specifications. The reason for underspending in departments was often internal procurement problems. She asked if the Regulations were supposed to address these problems.

Mr Dlomo replied that the regulations did not address delays due to procurement problems. An issue that also arose was fronting behaviour, where companies only had the semblance of compliance.

Mr Nyanyiso responded that the Regulations also did not address remedies to non-compliance within departments or organs of state. Rather they focussed on the non-compliance of service providers. He added that this issue should also be raised with the National Treasury.

Mr Singh referred to the variation orders in terms of the current tender process. Once a contract was awarded, the companies would keep invoicing differently and the costs could escalate beyond the original tender price. The Committee should also raise this possibility with the National Treasury.

Mr Swart agreed that concepts such as “non-firm prices” and “variation orders” were an issue. He felt that cost should be stipulated clearly in the bid document.

The Chairperson asked if Section 3(1) was really sufficient in terms of planning. The plans often changed and costs were increased by companies, and very little could be done at that point because the contract had already been awarded. He reiterated that Subsection 3(1) did not seem to cover everything. He added that the aim was not to achieve perfection, but rather to limit the variation in costs once the contract was awarded.

The Chairperson queried the R30 000 to R1 million category and asked if R1 million was really sufficient to empower people.

Mr Gelderblom referred to Section 15, relating to tax clearance, and asked what the position would be if a bidder was blacklisted. He wondered if this would negatively affect the contract and noted that officials could be quite petty about the reasons for blacklisting.

The Chairperson agreed that the Committee needed to guard against this.

Dr P Rabie (DA) referred to used of “unconditionally” in Section 11(9) and stated that this word could be interpreted in a number of ways. The Committee should ask for further clarity on this as it could lead to abuse.

Mr Gelderblom pointed out that the Regulations and the resulting procurement system would create a large amount of paperwork. He asked if government would be able to handle and store this volume of paper. He was concerned about the impact this would have on implementation and monitoring.

Mr Swart remarked that the system would be advantageous to Small, Medium and Micro Enterprises (SMMEs) and would assist them in getting government contracts more easily.

The meeting was adjourned.


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