Draft Preferential Procurement Regulations: National Treasury Response to Comments on Regulations

Standing Committee on Appropriations

17 November 2009
Chairperson: Mr M Sogoni (ANC); Mr T Mufamadi (ANC)
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Meeting Summary

National Treasury presented their responses to comments received on the Draft Preferential Procurement Regulations. Comments were categorised according to four main groups: private sector, pubic sector, organised labour and State Owned Enterprises (SOEs).

The National Treasury agreed with the comments highlighting certain ambiguities in the definitions. They concluded that some of the ambiguities would be addressed in the final legal refinement of the document. However, certain definitions were captured in the Preferential Procurement Policy Framework Act (the Act) and could not be addressed through regulations. This applied particularly to the definition of Broad Based Black Economic Empowerment (BBBEE). Parliament had also asked the Treasury to look at the R 1 million ceiling and whether it should be increased. As to the minimum threshold, the comments generally asked for an increase in the current minimum threshold of R30 000, specifically an increase to R50 000. Treasury was hesitant to agree with this, as this could create openings for abuse of the system. The minimum threshold of R30 000 would remain at this stage to avoid potential abuse of the system. The current split was captured in the Act and could not be changed in the Regulations. Treasury was still open to discussion on whether the R 1 million ceiling would be increased. Additionally comments on using a 50/50 points system could not be accommodated because the points system was already captured in the Act. The Regulations aimed to maximise the Act and reduce its shortcomings.

The Committee postponed the engagement on the regulations and preferred to evaluate the Regulations, once a final draft could be provided. This was necessary because the National Treasury highlighted several areas that were not finalised. Members highlighted several issues that Treasury needed to address in the final draft -the extent and methods used for public participation, the matter of set-asides, abuse of verification agencies and the function of the ombudsman. The Committee asked Treasury to provide a final draft for their consideration in January 2010.

Meeting report

Draft Preferential Procurement Regulations: National Treasury response to Comments on Regulations
Mr Henry Malinga, Chief Director: Supply Chain Policy, National Treasury, reported that this was a follow on from the previous interaction the National Treasury had with Parliament in August. Parliament had requested that Treasury move the closing date for comments to 30 September 2009 and they had done so.
National Treasury had received 148 comments on the draft regulations. The comments had been classified according to the 4 main groups: private sector, pubic sector, organised labour and State Owned Enterprises (SOEs). With due consideration to the Parliament’s comments, the National Treasury had also considered the comments submitted in preparation of the response document. Treasury stated that they needed to compile another draft of the Regulations to incorporate the comments.
The target date for regulations to come into effect was still April 2010. This also included the lead time required to train the regulation practitioners.
The response document contained a summary of the comments (that were submitted) and the National Treasury’s response to them.

Regulation 1: Definitions
The National Treasury agreed with the comments highlighting certain ambiguities in the definitions. They concluded that some of the ambiguities would be addressed in the final legal refinement of the document. However, certain definitions were captured in the Preferential Procurement Policy Framework Act (the Act) and could not be addressed through regulations. This applied particularly to the definition of Broad Based Black Economic Empowerment (BBBEE).

Regulation 2: Application of the Regulations
No SOE had objected to the application of the regulations. Careful consideration would be taken when dealing with SOE’s given that they had Boards who controlled their operations. Treasury wanted to make the Regulations applicable to SOEs without tampering with the mandate of the SOE boards.
Organised labour suggested that the regulations should also apply to companies in which the state had 50% shareholding. Treasury were of the view that the regulations should apply to entities where government had a majority shareholding.

Regulation 3: Planning and stipulation of preference point system to be utilised.
Treasury responded that the special conditions of contract would always stipulate the evaluation criteria.

Regulation 4: The 80/20 preference point system for acquisition of goods works and/or services up to a Rand value of R1 million.
Parliament had also asked the Treasury to look at the R 1 million ceiling and whether it should be increased. As to the minimum threshold, the comments generally asked for an increase in the current minimum threshold of R30 000, specifically an increase to R50 000. Treasury was hesitant to agree with this, as this could create openings for abuse of the system. The minimum threshold of R30 000 would remain at this stage to avoid potential abuse of the system. The current split was captured in the Act and could not be changed in the Regulations. Treasury was still open to discussion on whether the R 1 million ceiling would be increased.
Additionally comments on using a 50/50 points system could not be accommodated because the points system was already captured in the Act. The Regulations aimed to maximise the Act and reduce its shortcomings.

Regulation 5: The 90/10 preference point system for acquisition of goods works and/or services with a Rand value above R1million.
Treasury felt that the difficulty in scoring in cases where there were joint ventures (JV's) and the danger this posed to jeopardising joint ventures was valid and needed further work.

Regulation 6: The 80/20 preference point system for the sale and letting of assets up to a Rand value of R1 million.
Regulation 7: The 90/10 preference point system for the sale and letting of assets with a Rand value above R1 million.
There was a need to look at Regulation 6. This was an area that would require a policy decision from government to respond to the danger of people appropriating land by using the Regulations. Treasury felt that the Regulations should be specific and that they may have to separate sale from letting.

Regulation 8: Evaluation of bids based on functionality
The comments had stated that the evaluation of bids based on functionality should also include goods. Treasury was of the view that functionality only applied to services and thus was always stipulated in the special conditions of tender.
The question of whether should or must were used in the Regulations was also raised in the comments. Treasury responded that this issue of semantics would be dealt with during legal refinement.

Regulation 9: Award contracts to bid not scoring the highest number of points
Concern was raised with Regulation 9. Treasury replied that the reason for the "passover" could only be provided once the award was made. The concern raised on reporting was noted and would be explored further. Regarding the matter of reporting - the reasons for the "passover" needed to be reported to the Auditor-General (A-G) and the relevant Treasury. The question was posed as to how the A-G would act on this information.
Treasury felt that the A-G might have to develop a separate way of dealing with this on an individual basis because the reasons for the "passover" may differ in different cases.
They also had to consider the mandates of the SOE boards in cases where fraud was suspected.

Regulation 10: Cancellation and re-invitation of bids
Negative comments were received on this regulation and Treasury agreed that some had merit. The matter needed to be explored further, given the unintended consequences. One such unintended consequence was that problems with reimbursement might compromise the entire process.

Regulation 11: General conditions
There were divergent views on local manufacturing. Treasury was of the view that procurement should be used to leverage and support local content. Procurement should not be used as Industrial Policy but as a support to the Industrial Policy. Treasury did see the need to engage with NEDLAC and other organisations on this issue.
Treasury acknowledged that there were very few accredited verification agencies at this stage. Authenticating verification agencies remained a challenge. Treasury needed to co-ordinate with the Department of Trade and Industry on this matter.

Regulation 12: Principles
Comments addressed in Regulations 5.

Regulation 13: Declarations
The comments broadly stated that declarations were not necessary. Treasury disagreed and stated that this regulation was necessary, especially in case of litigation.

Regulation 14: Remedies
Treasury agreed that an ombudsman was needed to handle appeals and penalties arising from procurement processes. It stated that there were a number of government services that already fulfilled the role of an ombudsman. There was also the Compliance monitoring Unit under the Minister of Finance. In light of this, Treasury was concerned that the current efforts would be duplicated.

Regulation 15: Tax Clearance
Treasury agreed that system had to be simplified. The comments had suggested that the tax clearance process be linked to the South African Revenue Services (SARS). Treasury admitted that it was currently a tedious process and had established a working group to investigate such a seamless approach where tax clearance could be done through SARS.

Regulation 16: Repeal of Regulation
No comments received.

Regulation 17: Short title
No comments received.

Additional Comments:
There was strong sentiment expressed about the use of set-asides. The legal view was that set-asides may be unconstitutional. The mandate of the Regulations was only to align BBBEE with the Preferential Procurement Policy Framework Act (PPPFA).

Discussion
Dr P Rabie (DA) stated that there was potential for abuse in the use of verification agencies. Treasury had referred to one instance where a business had paid for verification. He asked if the matter had been pursued and what steps had been taken to stop the abuse.

Mr M Swart (DA) asked Treasury to explain what was meant by “wide consultation”. He referred to the Treasury responses that stated that further work was needed and noted that this made it difficult for the Committee to comment. He suggested that the Committee wait for the final draft.

Mr D van Rooyen (ANC) asked how comments were collected and whether the public participation methods accommodated emerging entrepreneurs. He was of the opinion that the parliamentary constituency offices could assist in this process and were currently under-utilised to enhance public participation.
He queried the extent to which parliamentary constituency offices were utilised and asked whether Treasury’s public participation methods realised the constitutional mandate of encouraging public participation.

Mr Z Luyenge (ANC) addressed two issues. Firstly, he commented that the Committee needed a fully fledged draft as it was difficult to approach the current draft. Secondly, he asked what methods were used to authenticate verification agencies.

Ms Z Dlamini-Dubazana (ANC) agreed that the Committee needed a final draft, as it was difficult to respond to the current draft. She did however appreciate the update on the progress made. She did not agree that functionality excluded goods and felt that goods should be added. The National Treasury had overlooked the concern about the set-aside. She was of the opinion that set-asides were already in use through the Ministry for Women, Children, Youth and Disabled Persons and that this was a desirable preference in terms of the Act. She also commented on the assets being sold through auction. This was open to abuse, as bidders could collude to drive down prices. She thought the price needed to be approved beforehand.

Ms N Sibhidla (ANC) suggested that National Treasury finalise the draft. The Committee could come back to this in the next session.

Ms B Ngcobo (ANC) tackled three issues. Firstly, she agreed that the Committee needed a final draft. Secondly, she asked if the authentication by the verification agencies were equivalent to the verifications issued by the South African Bureau of Standards (SABS). Thirdly, she questioned whether the set-asides were in contravention with the Equality Act.

Mr E Mthetwa (ANC) agreed with the proposal to postpone the consideration of the Regulation until Parliament’s next session.

Mr Sogoni responded that National Treasury had made it clear that this was not the final draft. It was still not clear where the Committee’s previous proposals would be included in the Regulations. The response document was based on Treasury’s initial consultation. The final draft would take all the comments into consideration

Ms Sibhidla felt that there was not much that the Committee could do with the current draft. Members would be able to interact with the final draft, once all the comments were captured.

Ms M Tlake (ANC) noted the legal issues that had arisen, such as the set-asides and the ombudsman. She stated that the Treasury could not do anything that contravened the Constitution. That would be beyond the National Treasury’s mandate. Treasury had also stated that the function of an ombudsman was already addressed through other systems.

Mr Luyenge stated that there was sufficient consensus that the meeting should be adjourned. The Committee recognised the work that Treasury had done thus far, but the meeting must conclude. He reiterated the points he wished the Treasury to address in the final draft were-the extent and methods used for public participation and the matter of set-asides. The policy had to say something about these issues.

Mr Swart supported the proposal to adjourn the meeting and engage with the finalised draft in January.

Mr Mufamadi agreed to the proposal.

The meeting was adjourned.


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