Preferential Procurement Policy Bill: discussion

Meeting report

FINANCE PORTFOLIO COMMITTEE; FINANCE SELECT COMMITTEE - JOINT MEETING
12 January 2000
PREFERENTIAL PROCUREMENT POLICY FRAMEWORK BILL [B66-99]: DELIBERATIONS

Documents distributed:
Proposed amendments to the Bill (attached to end of these minutes)

Chairpersons: Ms B Hogan and Ms D Mahlangu

SUMMARY
The committee discussed the proposed amendments to the Bill. Many issues needed clarification and some were flagged for further discussion the following day. There were various disagreements around the preference point system and its operation, whether the implementation of a preferential procurement policy was compulsory or discretionary for organs of state, and what criteria should be used in connection with the affirming and upliftment of disadvantaged SMMEs were hotly debated.

MINUTES
The committee chairpersons met with the Finance Minister during the recess as a result of concerns raised at the public hearing in December. Consequently certain amendments have been drafted. Ms Hogan ran through the following proposed amendments:

Preamble/ Long title
The following phrase have been deleted, "To identify the institutions contemplated in section 217(1) of the Constitution" as this Bill does not identify these.

Definitions
Clause 1(ii) has been eliminated.

Clause 1(iv) has changed making the definition of 'organ of state' very specific. Parastatals have been excluded at this stage. The reasoning is that due to privatisation, they have to operate with a commercial interest and this Act would put them at a disadvantage. Their exclusion will allow parastatals more flexibility with regard to deciding what their affirmative action programme will be. The Minister has the power to review this in the future and extend the application of this Bill.

In response, Ms J Fubbs (ANC; Gauteng) concurred with this decision saying that the parastatals were involved with strategic developmental delivery and the country did not want to impede this delivery.

Mr D Schutte (NP) requested the addition of three more definitions to improve the conceptual understanding of the Bill. Amongst these were "disadvantaged by unfair discrimination" and "lowest acceptable offer".

Mr K Andrew (DP) pointed out to the Committee that this Bill did entail a trade-off in that whatever preference you use, you will get fewer goods and services delivered. If you pay 10% more for goods and services such as houses and schoolbooks, then you must expect fewer delivered for the same budget and thus the disadvantaged do suffer.

He reminded them that "one size does not fit all" and a uniform policy for different departments is not desirable as you get too tight a framework that tries to fit all into it.

Section 2(1)
Mr Andrew then looked at 2(1) of the new draft and said that the introductory sentence was poorly worded in that it was ambiguous. It could either mean that every organ of state had to have a preferential procurement policy (PPP) which it had to implement within the prescribed framework or if it had one it had to implement it within the prescribed framework. He felt that the previous draft had a better definition. It stated that "an organ of state implementing a PPP must do so within the following framework" This wording was more in line with section 217 and he proposed that it be used instead.

Ms B Hogan (ANC) asked Mr Andrews whether this in fact would mean that organs of state would be allowed not to follow a PPP. In other words, was he suggesting that a government department could choose not to implement a PPP.

Mr Andrew (DP) said that in terms of a legal requirement clearly with a government department falling under the Cabinet, the Cabinet could instruct them to implement the PPP. However according to the Constitution, it required that there is a framework for those organs of state that wish to implement a PPP.

Ms Hogan (ANC) said that if government enacts legislation, which says that government departments must implement a procurement policy, this would surely not be a contradiction of the Constitution.

Mr Andrew (DP) agreed that this would be constitutional.

Ms Hogan (ANC) engaged Mr Andrews further on his suggestion that it was the choice of government departments whether or not to follow a PPP. She asked whether for example the Public Protector should himself decide whether or not to implement a PPP.

Mr Andrew (DP) said that this Bill should not oblige the Public Protector or for example every local authority (whether they can afford it or not in terms of their priorities) to implement a PPP. Clearly the Public Protector falls within the national sphere and therefore if there is national legislation obliging national departments or national institutions which fall within the national sphere then one could have specific legislation dealing with it at that level. They would then be obliged to follow a PPP. He disagreed that national legislation should oblige every local authority to implement a PPP. Thus in essence provinces and municipalities should not fall under this legislation.

Ms Hogan (ANC) said that the PPP that presently applies in the provinces was enacted as a result of the clauses of the interim Constitution. If those clauses have fallen away, the PPP which now applies is a national competency. It is not in Schedule 4 or any of those competencies. Given this, she wanted to know whether the provinces still had to remain in there or not .

Ms J Fubbs (ANC Gauteng) said that the legislation on the table was in any event discretionary insofar as it applied to preferential procurement. Secondly there were various clauses in the Constitution that were not phrased in an obligatory manner. The Constitution provides for enabling legislation to be drafted. Within this fresh legislation it had to be indicated what may become obligatory within a particular sphere and also to which organs of state this applied.

The Gauteng legislature took the view that this Bill merely referred to the preferential side and in that respect the element of discretion is clear.

Mr M Ramgobin (ANC) said that the proposed legislation was an enabling piece of legislation establishing certain guiding principles for the implementation of a policy entrenched in the Constitution. He wanted to know from Mr Andrews that if the exclusions were admitted in the Bill, would these not defeat the ultimate objective since most delivery does not take place at the hands of central government. If most delivery takes place at provincial and municipal levels, the spirit of this legislation should relate to them. He however wanted to know whether he was correct in saying that Mr Andrews was arguing for the exclusion of these preferences on the municipal and provincial levels.

Mr Andrews said that the Bill, in terms of enabling legislation, should merely be enabling. The actual decision whether to use the enabling legislation and implement it is at the discretion of that organ of state/ local authority/ provincial government. The Constitution is very clear in 217(2) that there should be a discretion. It does not require every local authority, whether they can afford it or not in terms of their priorities, to implement a PPP.

Ms T Essop (ANC Western Cape) said that her understanding of the Bill is that it is discretionary because of 217(2) of the Constitution. Thus whilst national legislation must prescribe a framework through this legislation, every organ of state has a discretion. If it chooses to apply a PPP it must do so within the framework of the national legislation. The Constitution itself does not exclude any organ of state and no national legislation should do so either. Section 2(1) was not ambiguous since all it says is that if an organ of state chooses to apply a PPP it must do so within the framework of this national legislation.

Ms B Hogan (ANC) wanted clarity from Ms Essop: Did she mean that any government department could decide whether or not to implement a PPP in terms of the Act.

Ms T Essop (ANC Western Cape) said that unless there was legislation obliging them to do so, this was so.

Ms B Hogan (ANC) felt that an organ of state was not an independent institution but it existed to implement government policy. To allow these organs of state to make their own decisions seemed to be a contradiction of the Constitution in terms of the spelling out of the Executive in the Constitution and the relationship between the Executive and the Administration. In her view, in this relationship the administration did not have such primary powers.

Ms Mahlangu (co-chair) said that the issue should be flagged as the meeting had to move on.

Ms Hogan moved on to 2(a), which dealt with the preference point system (PPS). She said that the motivation was because of the question of SMME's in particular. SMME's are not able to tender for big numbers since they are simply not in that league (the 2billion numbers and so on). The Minister has to prescribe (in terms of big contracts) a threshold rand value up to which the 90/10 PPS would apply. In terms of smaller contracts an 80/20 PPS would apply. This was where the SMME's would feature.

Mr Andrew said that this 90/10 and 80/20 related to the trade off issue raised earlier. People who cannot compete with an 11% price differential are in fact not seriously in the bracket in which their goods and services should be accepted with tax payers' money at the cost to poor people in most cases in terms of delivery of services. He suggested that where it said 90/10 this must be deleted to allow for flexibility in applying a PPS.

Section 2(1)(b)
Mr Andrew suggested that "minimum" should replace "maximum". Read with this correction, an organ of state could award 90 points for price. According to some industries such as residential construction, the margins for turnover are nowhere near 10%. If one has a 10% preference policy, established businesses who do not qualify for bonus points will not be able to compete.

There may be in respect of a certain category of goods or services or a particular tender that a particular organ of state, local authority, provincial or national department may want to have a Preference Point System, but not as high as 90/10 on that particular category of goods simply because it would simply exclude many established operators from even entering the tendering process.

Besides his proposal with regard to "minimum" , he also suggested a new sub paragraph stating that the PPP would only apply in respect of tenders of R10 million rand or less. This figure was arrived at by a calculation after looking at the National Small Businesses Act.

Ms B Hogan (ANC) said that when looking at the 90/10 Preference Point System, cost was clearly an overriding factor. In order for SMMEs to compete on cost, the experience (of the Gauteng Tender Board) has been that they tend to produce false projections of cost at which they cannot actually deliver. So one is putting an imperative on an SMME to put in a costing which is untenable in order for it to be competitive because you are making cost the overriding consideration. She asserted that in the SMME sector the 80/20 is a more realistic and manageable ratio.

With regard to the ceiling of, for example, 10 million rand, this is exactly what the Bill is proposing but the details will be set out by the Minister in the regulations.

She differed on the issue of "minimum". One is not asking the tenderer to get the full 90 points. You are trying to say get as close to 90 as possible. When one is looking at the SMME and the "trade off", one has to recognise that the establishment of a black entrepreneurial class in this country is essential for the development of the country particularly in the SMME sector. The affirming of a black entrepreneurial class is part of the objectives of this 80/20 consideration. Secondly whilst you say that there is delivery at a slightly higher margin, it is not only the owners of SMMEs who benefit but also the workforce and thus these incentives encourage and facilitate job creation as well and the SMME sector is a sector that creates jobs.

Adv D Schutte said that the bottom line was that the 80/20 formula increased the benefit to disadvantaged SMMEs from 11% to roughly 22%. In certain areas such as construction 2-3% profit margin is a reasonable profit margin. Thus one is immediately eliminating established operators from this area. The argument for SMMEs is a very valid argument but one must not try and benefit them from both sides because they are going to be one of the categories which benefit. The 11% is a very generous margin.

Dr G Koornhof (UDM) said that in the memorandum to the Bill there was a paragraph on financial implications for the state. On the 90/10 formula the additional premium to the state is 11%. If it is changed to 80/20 the additional premium to the state would be 25%. As a finance committee they should ensure that this additional 25% would in fact go to promote SMMEs and create jobs.

Ms J Fubbs (ANC Gauteng) said that the Gauteng Tender Board has in fact being operating at 80/20. When one looked at the divisions or the categories and the break-down of the award, the experience was that people were not getting the full award of the 20 bonus points and the premium on which the budget had been based was certainly able to accommodate 20. Effectively this would only work out to between 12 and 15%.

Finally with regard to the "trade-off" for the higher premium that the government would have to pay, this would be compensated heavily by things such as skills transfer and so on. In Gauteng's point of view the 80/20 proposal would certainly be in line with Gauteng's negotiating mandate.

Section 2(1)(c)
It was pointed out that the formula had been removed as it was thought to be more appropriate placed in the regulations

Mr K Andrew (DP) felt that the Bill had already dealt with these issues such as the 90/10 and 80/20 PPS and could not see why the formula would be left out of the Bill. He felt that in this legislation, ministerial discretion should be kept to a minimum.

Ms J Fubbs (ANC Gauteng) said that even if the formula was in a regulation, one could still exercise some oversight over it. The Minister should be given a certain amount of discretion. It was better in the regulations since the economic climate could be assessed from time to time and the formula could be reformulated according to it.

Section 2(1)(d) and (e)
2(1)(e) deals with the specific goals with which tenderers had to comply to receive points under (d). The goals included contracting with parties disadvantaged by unfair discrimination and the principles of the Reconstruction and Development Programme (RDP).

Adv DPA Schutte (NNP) felt that there had to be further definition of the categories to be benefitted. He suggested including in the definition, amongst others: the promotion of persons previously denied the right to vote; the promotion of women; the promotion of physically handicapped; the promotion of South African enterprises located in specific provinces, regions or rural areas, the creation of jobs.

Ms B Hogan (ANC) said that the idea was to identify the groups that have to be affirmed because they have suffered from unfair discrimination. Adv Schutte's definition goes beyond this point.

Mr K Andrew (DP) said that the fact that 2(1)(e) says that "the specific goals may include" demonstrated that all the other suggestions of Adv Schutte could be included. Secondly, since it "may" include (I) and (ii) it clearly also "may not" include. He also wanted, perhaps in an appendix to the Bill, a definition of the principles of the RDP.

The provincial representative of the North West province said that they felt strongly that the "may" in 2(1) (e) should be a "must".

Section 2(1)(g)
Ms Hogan said that "sound reasons" had been deleted as it was too broad. The section should read "unless objective criteria as contemplated in paragraph (e) or (f) above justify the award to another tenderer."

Adv Schutte and Mr Andrew disagreed completely with this and said that the exact opposite should be the case. In other words it should read : "..objective criteria other than that contemplated in paragraph (e)or (f) above justify the award to another tenderer." This would result in the possibility of a person being awarded points twice. Mr Andrew said that this would in effect almost defeat the purpose of much of the legislation.

Mr Andrew (DP) felt that whilst it was fine for interested parties to come to the public hearings and promote their interests, he felt that merely because an amendment had been suggested at the hearings, this did not warrant the legislation to change as a result.

Ms B Hogan said that not every issue raised in the hearings was implemented but only those thought to be important. They were not simply responding to every single advocacy group depending on which way the wind blew, and rejected Mr Andrew's comments as insulting.

Ms T Essop (ANC Western Cape) suggested that (g) be re-looked at.

Ms Fubbs (ANC Gauteng) said that it was the view of Gauteng that as in the case of parastatals being exempt, so should, for example, strategic goods and services procured by the SANDF, be exempt from the Bill though for different reasons.

Section 2(1)(h)
This dealt with the situation where a tender was awarded on account of false information and the remedies applicable.

Mr Andrew suggested that "state" should be "organ of state" here and "must be cancelled" should be "may be cancelled ". His reasoning for the "may be cancelled " was that if for example you discover just before school is going to start, that a supplier of textbooks has tendered false information, if you have to cancel the tender, you may sit without textbooks. There had to be harsh treatment of a such a tenderer but it would not always be in the organ of state's best interests to cancel the tender.

Ms D Mahlangu (ANC Gauteng) said that "cancelled" could possibly be substituted for something like "penalise".

This concluded the discussion on proposed amendments to the Bill. The issues flagged and identified in this meeting would be raised the next day to obtain some finality and consensus on positions.

Mr Koornhof (UDM) wanted to confirm that the issue of a tenderer's ability to deliver a proper service or product was among the issues being flagged.
His point was noted.

Mr Schutte (NNP) suggested the following issues for flagging:
tenderers needing to show they were in good stead with the Receiver of Revenue; the concept of a review mechanism or sunset clause; should there be a limit on the numbers of tender awarded a particular disadvantaged person or does such a person not mature and thus forever benefit from this policy

Ms Fubbs said that a review mechanism had been discussed by Gauteng and there was thinking around the Bill including a review mechanism after ten years. There was also agreement in Gauteng that tenderers should have to show supporting documentation that they are registered tax payers.

Mr Andrew agreed with somehow limiting the number of tendering awards to a particular operator. He wanted to know what the thinking was around this. This point was not taken up.

Ms Fubbs raised the issue that a code of ethics for tender boards had to be made compulsory in the Bill. Ms Mahlangu agreed that this was important to combat corruption.

The meeting was concluded.

Appendix: Proposed amended Bill

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