National Treasury on the Preferential Procurement Review

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Finance Standing Committee

07 February 2012
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The Chief Director: Supply Chain Policy, National Treasury briefed the Committee on the revised Preferential Procurement Policy Framework Act Regulations that took effect on 7 December 2011.  The revised Regulations addressed the anomalies between the Preferential Procurement Policy Framework Act and the Broad-Based Black Economic Empowerment Act.  The Regulations applied to government entities listed in the Preferential Procurement Policy Framework Act and the Public Finance Management Act.

The main changes to the Regulations concerned the adoption of the Broad-Based Black Economic Empowerment Act scorecard methodology; the designation of sectors for local content and compelling organs of State to implement the legislative and regulatory provisions.  For practical reasons, exemption was granted to certain public entities until December 2012.  The National Treasury had issued implementation guidelines and conducted 47 workshops during the period June to December 2011.  A comprehensive internal review of preferential procurement policies and processes would be completed by the end of the 2012/13 financial year.

A major challenge was the small number of accredited rating agencies.  A process was underway to allow auditors to undertake the rating of companies and other institutions.

Members of the Committee welcomed the revised Regulations but urged the National Treasury to review all the legislation affecting procurement and to ensure the stability of the regulatory environment.  Members were concerned that the current procurement legislation was prohibiting small black-owned entities from benefiting from economic development.  Uncertainty in the regulatory environment was prohibiting investment in the country.  More thought needed to be given to the centralisation versus the decentralisation of State procurement processes.  Other issues raised by Members concerned the cost of doing business in South Africa; the lack of competency criteria and uniform standards applicable to rating agencies; the lack of regulations for rating agencies; the lengthy procurement process; the need to review the scorecard rating systems; the extent of the workshops held by the National Treasury; the need to manage public perceptions of State procurement; the need to take the national goals into account and the need to consider the impact on local government procurement.


Briefing by the National Treasury on the Preferential Procurement Review
Mr Henry Malinga, Chief Director: Supply Chain Policy, National Treasury presented the briefing to the Committee (see attached document).

The Preferential Procurement Policy Framework Act (PPPFA) Regulations were revised to address the conflict between the PPPFA and the aims of the Broad-Based Black Economic Empowerment Act (BBBEE Act).  The Regulations were promulgated by the Minister of Finance on 8 June 2011 and came into effect on 7 December 2011.  The National Treasury had issued implementation guidelines and conducted 47 workshops during the period June to December 2011.

The main changes to the revised PPPFA Regulations concerned the adoption of the BBBEE Act scorecard methodology; the designation of sectors for local content and compelling organs of State to implement the legislative and regulatory provisions.

The Regulations were applicable to organs of State in terms of Section 1 (iii) of the PPPFA, all public entities listed in Schedules 2, 3A, 3B, 3C and 3D of the Public Finance Management Act (PFMA) and municipal entities.  Public entities listed in Schedules 2, 3B and 3D of the PFMA were granted exemption from compliance to certain provisions contained in the Regulations until 7 December 2012.

The revised Regulations were considered to be an interim measure.  The technical work for the comprehensive review of preferential procurement would be completed by the end of the 2012/13 financial year.  The review process would include consultation with all relevant stakeholders but the public consultation process would only take place once the internal processes had been completed.

The major challenges included an insufficient number of rating agencies and the potential for corruption if rating agencies were not regulated.  There were approximately 800,000 registered companies and institutions requiring rating but only 68 rating agencies.  The challenges would be addressed by utilising qualified auditors to undertake the rating of companies and institutions and by issuing appropriate regulations.

Discussion
Mr D van Rooyen (ANC) welcomed the revised PPPFA Regulations.  Currently, rating agencies were not regulated and the gaps in standards had resulted in litigation and questions being asked about the work done by the agencies.  He asked if the utilisation of auditors to rate companies for BBBEE compliance would result in many queries.  Municipal procurement processes was a major issue.  Many municipalities had insufficient funds to employ people to carry out maintenance and development functions.  Another issue was the concern that compliance with the legislation added to the cost of doing business in South Africa.  Companies were already complaining that the cost of doing business in the country was too high.  The uncertainty around the regulatory framework had resulted in foreign investors being reluctant to do business with South Africa.  He asked if the Treasury had taken these issues into account.

Ms Z Dlamini-Dubazana (ANC) asked what progress had been made in implementing the resolutions concerning preferential procurement taken by the African National Congress (ANC) in 2007.  One of the resolutions concerned the elimination of monopolies.  She cited examples of the lack of uniformity in the processes followed by rating agencies, making it very difficult for previously disadvantaged persons to compete with large organisations.  She asked if standardised criteria for BBBEE compliance had been set.  The legislation was perceived to be an impediment to previously disadvantaged persons from entering the economy and failed to promote black economic development.  The points systems had to be reviewed as well.  All Government entities were required to have procurement divisions in place.  The procurement processes were too time-consuming.  The incorrect interpretation of regulations had resulted in officials being wrongly accused of corruption.  She asked if the revised regulations applied to the private sector as well as the public sector.

Ms P Adams (ANC) observed that only 1,236 delegates had attended the 47 workshops held by the National Treasury.  There were more than 800,000 entities in the country and she wondered if enough had been done to educate stakeholders on the revised regulations.

Mr D Ross (DA) said that preferential procurement was a critical aspect to the economic development of the country and regulation was essential for good governance.  He asked if the national goals for job creation had been taken into account.  Certainty of the regulatory environment was essential for encouraging investment.  The uniform system for determining the balanced scorecard was in place and all institutions should be required to comply with the regulations.  It was necessary to agree the competence criteria for rating agencies.  The controlling agency of registered auditors (IRBA) had to ensure the implementation of the criteria and regulations.  It was necessary to ensure that the regulations had no negative impact on local government procurement.  He welcomed the deadline of December 2012 for full compliance by exempted entities.  He felt that more research needed to be done on the impact of all legislation on procurement.

Mr Malinga responded that the workshops held by the National Treasury to date were attended by rating agency practitioners.  More workshops were being held.  The various provincial Treasury authorities were assisting with the implementation of the regulations.

Mr Malinga agreed with the issues raised by the members of the Committee.  The revised PPPFA Regulations were intended to address the gaps between the current regulations and the BBEEE Act.  He agreed that BBEEE rating points systems and the applicable legislation required review.  The National Treasury was aware of the criticism by the black business sector that the legislation was hampering small black-owned businesses from benefiting from economic development.  Rating agencies received formal accreditation and generally did good work but there were no regulations in place to address wrongdoing.  He was aware that auditors had to comply with existing legislation and conceded that it was necessary to have competence criteria in place.

Mr Malinga explained that the National Treasury had issued an Instruction Note on 31 May 2011 on how government institutions should deal with adjudication processes for tenders valued at more than R10 million.  Local government entities were required to align procurement plans with their budgets.  He agreed that more research had to be conducted into the role of the regulatory framework in creating uncertainty on the part of potential investors.  The terms of reference for the comprehensive review were scheduled for completion by the end of March 2012.  The issues raised by the Members were regarded as constructive and would be included in further discussions on the subject.

The Chairperson commented that the various challenges around the centralisation or decentralisation of government procurement required further consideration.  The previous centralised Tender Board was unable to cope with the workload.  It was necessary for the procurement process to be speeded up.  All government entities were required in terms of the PFMA to have procurement processes in place and to ensure that government received value for money.  There was a perception by the public that procurement equalled tendering.  The public understood exactly what was meant by the Auditor-General’s audit comments and findings.  It was necessary to ensure that the public’s perception was correct.

The Chairperson said that it was necessary to consider to what extent government policy advanced nation-building, the development of a non-racial society, the role of women in the economy and job creation.  Government institutions must be seen to take the lead in implementing reforms.  A comprehensive approach was required.  He suggested that the National treasury reviewed the applicable legislation and avoided correcting legislative anomalies in a piecemeal manner.  Speedy action was necessary to address the issues concerning rating agencies and to ensure compliance with the regulations.  The claims that the BBBEE rating of an entity depended on how much had been paid to get the rating did not advance the principle of BBBEE.  He thanked the National Treasury for the briefing and expressed the hope that fruitful interaction with the Committee would continue.

The meeting was adjourned.



Meeting report

Briefing by the National Treasury on the Preferential Procurement Review
Mr Henry Malinga, Chief Director: Supply Chain Policy, National Treasury presented the briefing to the Committee (see attached document).

The Preferential Procurement Policy Framework Act (PPPFA) Regulations were revised to address the conflict between the PPPFA and the aims of the Broad-Based Black Economic Empowerment Act (BBBEE Act).  The Regulations were promulgated by the Minister of Finance on 8 June 2011 and came into effect on 7 December 2011.  The National Treasury had issued implementation guidelines and conducted 47 workshops during the period June to December 2011.

The main changes to the revised PPPFA Regulations concerned the adoption of the BBBEE Act scorecard methodology; the designation of sectors for local content and compelling organs of State to implement the legislative and regulatory provisions.

The Regulations were applicable to organs of State in terms of Section 1 (iii) of the PPPFA, all public entities listed in Schedules 2, 3A, 3B, 3C and 3D of the Public Finance Management Act (PFMA) and municipal entities.  Public entities listed in Schedules 2, 3B and 3D of the PFMA were granted exemption from compliance to certain provisions contained in the Regulations until 7 December 2012.

The revised Regulations were considered to be an interim measure.  The technical work for the comprehensive review of preferential procurement would be completed by the end of the 2012/13 financial year.  The review process would include consultation with all relevant stakeholders but the public consultation process would only take place once the internal processes had been completed.

The major challenges included an insufficient number of rating agencies and the potential for corruption if rating agencies were not regulated.  There were approximately 800,000 registered companies and institutions requiring rating but only 68 rating agencies.  The challenges would be addressed by utilising qualified auditors to undertake the rating of companies and institutions and by issuing appropriate regulations.

Discussion
Mr D van Rooyen (ANC) welcomed the revised PPPFA Regulations.  Currently, rating agencies were not regulated and the gaps in standards had resulted in litigation and questions being asked about the work done by the agencies.  He asked if the utilisation of auditors to rate companies for BBBEE compliance would result in many queries.  Municipal procurement processes was a major issue.  Many municipalities had insufficient funds to employ people to carry out maintenance and development functions.  Another issue was the concern that compliance with the legislation added to the cost of doing business in South Africa.  Companies were already complaining that the cost of doing business in the country was too high.  The uncertainty around the regulatory framework had resulted in foreign investors being reluctant to do business with South Africa.  He asked if the Treasury had taken these issues into account.

Ms Z Dlamini-Dubazana (ANC) asked what progress had been made in implementing the resolutions concerning preferential procurement taken by the African National Congress (ANC) in 2007.  One of the resolutions concerned the elimination of monopolies.  She cited examples of the lack of uniformity in the processes followed by rating agencies, making it very difficult for previously disadvantaged persons to compete with large organisations.  She asked if standardised criteria for BBBEE compliance had been set.  The legislation was perceived to be an impediment to previously disadvantaged persons from entering the economy and failed to promote black economic development.  The points systems had to be reviewed as well.  All Government entities were required to have procurement divisions in place.  The procurement processes were too time-consuming.  The incorrect interpretation of regulations had resulted in officials being wrongly accused of corruption.  She asked if the revised regulations applied to the private sector as well as the public sector.

Ms P Adams (ANC) observed that only 1,236 delegates had attended the 47 workshops held by the National Treasury.  There were more than 800,000 entities in the country and she wondered if enough had been done to educate stakeholders on the revised regulations.

Mr D Ross (DA) said that preferential procurement was a critical aspect to the economic development of the country and regulation was essential for good governance.  He asked if the national goals for job creation had been taken into account.  Certainty of the regulatory environment was essential for encouraging investment.  The uniform system for determining the balanced scorecard was in place and all institutions should be required to comply with the regulations.  It was necessary to agree the competence criteria for rating agencies.  The

controlling agency of registered auditors (IRBA) had to ensure the implementation of the criteria and regulations.  It was necessary to ensure that the regulations had no negative impact on local government procurement.  He welcomed the deadline of December 2012 for full compliance by exempted entities.  He felt that more research needed to be done on the impact of all legislation on procurement.

Mr Malinga responded that the workshops held by the National Treasury to date were attended by rating agency practitioners.  More workshops were being held.  The various provincial Treasury authorities were assisting with the implementation of the regulations.

Mr Malinga agreed with the issues raised by the members of the Committee.  The revised PPPFA Regulations were intended to address the gaps between the current regulations and the BBEEE Act.  He agreed that BBEEE rating points systems and the applicable legislation required review.  The National Treasury was aware of the criticism by the black business sector that the legislation was hampering small black-owned businesses from benefiting from economic development.  Rating agencies received formal accreditation and generally did good work but there were no regulations in place to address wrongdoing.  He was aware that auditors had to comply with existing legislation and conceded that it was necessary to have competence criteria in place.

Mr Malinga explained that the National Treasury had issued an Instruction Note on 31 May 2011 on how government institutions should deal with adjudication processes for tenders valued at more than R10 million.  Local government entities were required to align procurement plans with their budgets.  He agreed that more research had to be conducted into the role of the regulatory framework in creating uncertainty on the part of potential investors.  The terms of reference for the comprehensive review were scheduled for completion by the end of March 2012.  The issues raised by the Members were regarded as constructive and would be included in further discussions on the subjectThe Chairperson commented that the various challenges around the centralisation or decentralisation of government procurement required further consideration.  The previous centralised Tender Board was unable to cope with the workload.  It was necessary for the procurement process to be speeded up.  All government entities were required in terms of the PFMA to have procurement processes in place and to ensure that government received value for money.  There was a perception by the public that procurement equalled tendering.  The public understood exactly what was meant by the Auditor-General’s audit comments and findings.  It was necessary to ensure that the public’s perception was correct.

The Chairperson said that it was necessary to consider to what extent government policy advanced nation-building, the development of a non-racial society, the role of women in the economy and job creation.  Government institutions must be seen to take the lead in implementing reforms.  A comprehensive approach was required.  He suggested that the National treasury reviewed the applicable legislation and avoided correcting legislative anomalies in a piecemeal manner.  Speedy action was necessary to address the issues concerning rating agencies and to ensure compliance with the regulations.  The claims that the BBBEE rating of an entity depended on how much had been paid to get the rating did not advance the principle of BBBEE.  He thanked the National Treasury for the briefing and expressed the hope that fruitful interaction with the Committee would continue.

The meeting was adjourned.


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