Preferential Procurement Draft Regulations: briefing

Meeting report

Mr Henry Malinga, Chief Director: Supply Chain Policy, National Treasury, stated that the Draft Preferential Procurement Regulations were aimed at ensuring that government's preferential procedures were aligned with the aims of the Broad Based Black Economic Empowerment Act (BBBEE Act).

The background to the draft regulations was presented, referring to the separate development of the preferential procurement legislation and the BBBEE Act. Within the legislative framework for public sector procurement, the uniform procurement directives to three spheres of government provided a standard for uniformity. The National Treasury provided best practice guidelines in the form of supply chain management guidelines, standard bidding documents and practice notes. Section 217 of the Constitution stipulated the obligation for national legislation to prescribe a framework providing for preferential procurement to address the social and economic imbalances of the past. Arising from this, the Preferential Procurement Policy Framework Act (PPPFA) of 2000 and its accompanying Regulations were promulgated to achieve these goals. The PPPFA incorporated the 80/20 and 90/10 preference point systems and used the promotion of Historically Disadvantaged Individuals (HDIs) and 13 Reconstruction and Development Programme (RDP) goals to determine preference in the scoring system.

Mr Malinga highlighted that this was a points system and did not refer to percentages. This system generated a score out of 100 where the 80 or 90 referred to the points assigned to price. The 10 or 20 referred to the points assigned to the promotion of the HDIs and RDP goals.

The original thresholds had applied the 90/100 scoring formula to procurement over the value of R500 000 and the 80/20 formula to procurement between R30 000 and R500 000.

Ambiguity was identified between PPPFA and BBBEE Act and therefore alignment of the two acts was necessary. Some of the identified shortcomings were the inconsistency in the policy application and that the definition of HDI was too broad and led to fronting. A work group was established between National Treasury and the Black Economic Empowerment unit of the Department of Trade and Industry to align the Preferential Procurement Regulations with the BBBEE Act and the Draft Preferential Procurement Regulations (the Regulations) had been the product of this alignment.

The long-term legislative goal was the repeal of the PPPFA. The new National Treasury regulations would incorporate the Supply Chain Management Regulatory Framework and the same process would be applied to municipalities. As the Public Finance Management Act (PFMA) was scheduled for review, Treasury was of the opinion that the review should be used to repeal the PPPFA. Treasury recognised that this process was still in its infancy and that it would take time to achieve this. This would be extended to municipalities through the review of the Municipal Finance Management Act (MFMA).

In the short-term the PPPFA would be retained and the Preferential Procurement Regulations would be amended to bring them in line with the aims of the BBBEE Act using the prescribed scorecard methodology and the BBBEE Act Codes of Good Practice. The BBBEE Status Level of Contributor was determined according to scoring in the 90/10 or 80/20 formulae.

Mr Malinga reported that the National Treasury and the DTI had made changes to the thresholds in the Draft Preferential Procurement Regulations. This was intended to provide more room for Small, Micro and Medium Enterprises. The 80/20 formula would now apply to procurement between R30 000 and R1million. The 90/10 formula would apply to procurement over R1million.

Entities with a total revenue of less that R 5 million were classified as Exempted Micro Enterprise and had automatic level 4 recognition.

EMEs needed only to prove revenue status. All non-EMEs had to submit a BBBEE verification certificate obtained from a Verification Agency that must be accredited by the South African Nation Accreditation System (SANAS). Verification Certificates issued by non-accredited Verification Agencies prior to 9 April 2009 would only be valid for 12 months from the date of issue.

The Regulations also provided remedies for false BBBEE claims. An enterprise awarded a contract may not sub-contract more than 25% of the value of the contract to a person who does not have equal or higher BBBEE status level. The Regulations would be extended to all organs of state for uniformity purposes.

The Regulations had been published in the Government Gazette and provincial gazettes. Closing date for public comment was 14 September 2009. The comments would be evaluated and legally refined by Treasury and DTI and then formally promulgated by the Minister of Finance. Treasury acknowledged that the roll-out of the Regulations would require a lead time of approximately three months, during which time they would run training, information sessions and workshops with government institutions. Treasury would monitor outcomes closely and the public sector would be required to monitor outcomes as well to influence its own policy.

Discussion
Dr D George (DA) asked how the exemption for EMEs was determined. He noted that according to a level 4 exemption, EMEs would receive 60% of points under the 80/20 formula and 50% of the points under the 90/10 formula. This appeared to disadvantage EMEs on larger contracts. Dr George asked Treasury to comment on this.

Dr P Rabie (DA) asked what the rationale was behind the specifications of the EME exemption. He asked why revenue had been chosen over profit or turnover as the basis for the exemption.

Mr Malinga responded that the National Treasury had debated this at length. Level 4 was proposed as a starting point. Treasury would gauge the response to this in the comments received. The comments would give them an idea of what the public and the business community considered a fair level. The R5 million revenue amount was defined by the National Small Business Act.

Mr N Koornhof (COPE) asked Treasury for their opinion on whether the new regulations were more fair or more strict.

Mr Malinga responded that he could not pronounce on what was fair and what was not. The Regulations responded to the need to remove ambiguity and develop a uniform public procurement system.

Mr Willie Mathebula, Chief Director: Contract Management, National Treasury, replied that unintended consequences had arisen due to the previous equity focus of procurement regulations and scoring, such as fronting. The BBBEE Act had a broader approach than just equity. Members would have to judge the fairness of this.

Ms Z Dlamini-Dubazana (ANC) referred to the point 2(ii) of the Explanatory Memorandum to the Regulations and asked what was meant by "new". She also pointed out that the Regulations were not clear as to whether BEE or BBBEE was used.

Mr Malinga responded that this should read "amended" and would be corrected.

Ms Dlamini-Dubazana stated that BEE was not equal to BBBEE and asked for clarity on the definition of BEE status according to Section 1(c) of the Regulations.

Mr Malinga responded that he had noted this observation and Treasury would look at this.

Ms Dlamini-Dubazana asked if National Treasury had looked at the social aspects of the Regulations. She expressed the opinion that the changes to the thresholds would not assist the poorest in the country.

Ms E Coleman (ANC), Chairperson: Portfolio Committee Economic Development, agreed with Ms Dlamini-Dubazana on the preference point system and thresholds. The process seemed to disadvantage smaller businesses and was vulnerable to manipulation by officials. This required further thought.

Ms Coleman asked if the threshold amounts were defined as being before or after tax. She asked whether it made business sense to include taxes. Did the revised thresholds really empower people, as this had been the aim of the revisions?

Mr Malinga responded that the BBBEE Act addressed transformation and the social contribution of the Regulations was realised in aligning the PPPFA scorecard to the BBBEE Act and its Codes of Good Practice.

Mr D Mavundla (ANC) asked for more detail on how the BBBEE Act and PPPFA were out of sync.

Mr Malinga replied that currently the PPPFA and BBBEE Act were two sets if legislation in the public domain and were not aligned with each other. The Regulations were aimed at removing this ambiguity for all organs of state.

Mr Mavundla asked for an explanation of the preference point system and BBBEE Status Level Contributors for those not acquainted with procurement systems.

Mr Malinga replied that the 80/20 and 90/10 preference point formulae still applied. The BBBEE Act and its Codes of Good Practice would be used as criteria for awarding the 20 or 10 points.

Ms B Ngcobo (ANC) asked who monitored SANAS and how SANAS was constituted.

Mr E Mthethwa (ANC) asked what would cause a verification agency not to be accredited by SANAS. He also asked what criteria were set for accreditation by SANAS.

Mr Malinga replied that SANAS was a statutory body and was monitored and controlled by the DTI. SANAS used set standards to evaluate verification agencies and accredited them on this basis. There had been no control of verification agencies for a long time and unless they were controlled, they would continue to create challenges in the procurement process. The process compelling all verifications agencies to be accredited by SANAS was enacted by the DTI. To date, only 20 of the thousands of verifications agencies had been accredited.

Ms Coleman asked why old verification certificates were allowed to remain valid for 12 months. This seemed to condone the practice of companies obtaining BBBEE verification certificates from verification agencies that were not accredited by SANAS. She felt this practice was wrong. She did not think they should be considered.

Mr Malinga responded that by the time the Regulations came into effect, the 12 month grace period for unaccredited verification certificates would have lapsed and therefore these companies would fall outside the parameters of the system.

Ms Ngcobo asked how Treasury would engage with the process of the PFMA review.

Ms Coleman asked Treasury to be more specific about the remedies for false BEEs and the 25% limitation on sub-contracting. This still seemed vague.

Mr Malinga that this was aimed at ensuring proper sub-contracting practices. The 25% was aimed at limiting undesirable contracting by setting a restriction on sub-contracting to enterprises on a lower BBBEE Status Level. This meant that the successful bidder had to sub-contract to enterprises with an equal or higher BBBEE Status Level once the 25% limit was reached.

In reply to Ms Coleman quering to what the 25% referred, Mr Malinga explained that it referred to 25% of the contract value.

Ms R Mashigo (ANC) referred to the contradiction to the highest bidder rule in Section 9(1) and the accompanying provision for a ten day notification period to the Auditor-General (A-G) and the relevant treasury in Section 9(2). She queried the role the A-G and Treasury might have in this instance.

Mr M Swart (DA) responded that he could foresee instances where the exception to the highest bidder rule in Section 9(1) could be applied. This could arise in cases where the highest bidder was found to provide a low quality product or do low quality work. He felt this was a necessary provision. He added that Section 9(2) needed to be more detailed on whether the National Treasury and A-G must approve the reasons for awarding the contract to a bidder that was not the highest bidder.

Ms Coleman asked why the A-G had to be notified in Section 9(2). The A-G was meant to audit the financial statement of organs of state. She asked if involving the A-G in procurement was not a confusion of roles.

Mr Mathebula replied that provision was made for awarding the procurement contract to a bidder other than the highest bidder. This was designed to apply to instances where the highest bidder did not have the necessary capacity to fulfill the contract. The “highest bidder wins” rule may be deviated from for a number of reasons. The reasons for this deviation had to be referred to the A-G. Treasury noted the comment that this might conflict with the A-G's role and would discuss exactly what the A-G would be required to do with the information and the implications for the A-G's objectivity when auditing the financial statements later in the financial cycle.

Ms Mashigo pointed that the provision in Section 10(4)(b) contradicted provisions for planning in Section 3. If planning was correctly done, funds should not be exhausted and a bid should not have to be cancelled.

Ms Mashigo asked Treasury to explain the difference between a bid and a tender.

Mr Malinga replied that they were the same thing.

Ms M Tlake (ANC) asked why Treasury had chosen the review of the PFMA and MFMA as a method to repeal the PPPFA. She specifically queried the choice by pointing out that Treasury acknowledged that the process would take time.

The Chairperson queried whether the repeal of the PPPFA would make the National Treasury vulnerable to litigation. Treasury had acknowledged that the new regulations did not address all the weaknesses of the PPPFA and therefore proposed that the PPPFA should be repealed. He felt that the process of repeal should be started and that the problem should be confronted head-on. He though that amending the regulations would delay the process. He asked why Treasury had chosen this route, as it might create problems.

Mr Malinga responded that the PFMA was not exclusively focused on procurement but had areas that referred to procurement practices. This was not a question of delaying the process. The process of repeal must go through the formal legislative process. Though the review of the PFMA was planned, he was not sure if it was on the Parliamentary calendar. He referred members Section 217(1) of the Constitution that conferred an obligation for national legislation to prescribe a framework for preferential procurement to address the social and economic imbalances of the past. This obligation had led to the PPPFA. The regulations did not remove the existing preferential procurement points system. The regulations redefined how the 10 or 20 points would be awarded. Instead of using the HDI or RDP goals, the preference points would be aligned to the BBBEE Act and its Codes of Good Practice.

A member asked what the distinction was between firm and non-firm prices as defined in sub-sections 1(k) and 1(m), respectively.

Mr Mathebula responded that certain prices could be reasonably accurately determined. This cost was set until the contract has been executed. Non-firm prices applied in longer term contracts where price adjustments over time may be applicable. In these instances an accurate price could not be easily determined. There were many good economic reasons for price fluctuation of this nature and this classification catered for this.

Mr D van Rooyen (ANC) noted that there should be a better definition for who qualifies as an HDI in the Regulations. If this was not done, the ambiguity would continue.

Mr van Rooyen asked what caused the resistance of State Owned Entities (SOEs) in applying the PPPFA to their procurement processes. What were their arguments against the use of the PPPFA?

Mr Malinga replied that the supply chain management practitioners used by SOEs wrote comments that indicated resistance. This was not formally a comment from the SOEs.

Dr George referred to Section 11(1) - specific bidding conditions for local manufacturers - and asked if the DTI was making progress on this and what format it would take.

The Chairperson referred to Section 11(1) and asked what was defined as "local".

Mr Swart pointed out that the Regulations did not make provision for local contractors. It was important to cover this in the regulations.

Mr Malinga responded that the Regulations stated that the DTI needed to pronounce on the classification of "local". He referred to the issues surrounding the textile industry and in this case the DTI pronounced that when it came to textiles, "local" would be defined as textiles produced by companies within South African borders. The DTI required proof that all local sources had been exhausted before foreign textile sources could be used. In the cases of other products/services, the DTI would have to make similar pronouncements and the DTI had more information on this.

Ms Dlamini-Dubazana stated that there were different types of public entities and asked how Treasury could set the same procurement process for all of them. There seemed to be a mismatch.

Ms Coleman asked if the extension of the Regulations to all organs of state would not delay procurement processes in municipalities and at provincial levels. She pointed out that municipalities and provincial government had their own supply chain management policies. Would they be expected to amend these policies and conform to the repeal of the PPPFA.

Mr Malinga responded that he would take all the questions raised in the meeting as comments that the National Treasury would use in consideration of the Regulations.

Mr Mathebula replied that the National Treasury had noted all the comments and would work on all the comments received from the public as well as those made by members.

Mr T Mufamadi, Chairperson: Standing Committee on Finance, stated that members had raised substantive issues and in fact these issues were so important that they should have already been processed by Treasury. Treasury should have clarified these issues long ago. They should report back to the Committee on these. They should be more prepared at the next engagement and should engage more robustly on economic transformation.

The Chairperson asked if the public comment closing date of 14 September 2009 was viable, especially in light of the substantive comments from members.

Mr Malinga replied that Treasury would take the comments on board and return to engage with the Committee.

The meeting was adjourned.