2022 Procurement Regulations: Key issues

On 10 March 2022, draft Preferential Procurement Regulations were published for public comment, which closed on 11 April 2022. The most significant omissions in the draft 2022 Regulations are pre-qualification criteria, objective criteria, local production and content, subcontracting, and cancellation of tenders, and in particular, the omission of to the use of B-BBEE status as a specified goal to be used when allocating preferential points. The draft 2022 Regulations follows the Constitutional Court decision in Minister of Finance v Afribusiness NPC [2022] ZACC 4 where the Court upheld a Supreme Court of Appeal (SCA) ruling that held that the Minister of Finance had acted outside of his powers in enacting the 2017 Regulations under S5 of the Preferential Procurement Policy Framework Act. The SCA suspended the invalidity of the 2017 Regulations for 12 months.

The judgment created uncertainty regarding the suspension and the Minister of Finance launched an urgent application to the Constitutional Court for clarity regarding the validity of the Regulations. In the interim, Treasury advised organs of state that tenders advertised before 16 February 2022 be finalised in terms of the 2017 Regulations; tenders advertised on or after 16 February 2022 be held in abeyance; and that no new tenders should be advertised. Treasury later clarified that the note was advisory rather than legislative. 

In waiting for clarity from the Constitutional Court regarding the validity of the 2017 Regulations, the Department published the draft preferential procurement Regulations in the Government Gazette for public comment. National Treasury also published rationale behind certain omissions in the draft 2022 Regulations. The reasoning behind most of the omissions involves the determination that many of the 2011 and 2017 Regulations comes down to an ‘overreach’ and are not within the scope of the Preferential Procurement Policy Framework Act.

The draft regulations are most notable for the omission of B-BBEE status as a specified goal to be used when allocating preferential points:

“Reference to the use of B-BBEE status as a specified goal to be used when allocating preferential points has been omitted. Section 2(1) requires an organ of state to determine its own preferential procurement policy and implement it within a framework described in the Act. Section 2(1)(d) of the Act requires an organ of state to include specific goals in its policy. According to section 2(1)(e) of the Act an organ of state must, in the invitation to submit a tender, clearly specify the specific goals for which a point may be awarded. Using the B-BBEE status level of contributor does not provide for the opportunity to choose specific goals. The application of the B-BBEE Act by organs of state coupled with the limitation it poses on organs of state in determining their own specific goals for each tender suggests that B-BBEE as it was applied in the 2011 and 2017 Regulations would be an overreach, if included in the regulations.”

With regards to the pre-qualification criteria, Treasury states: “Regulations providing for prequalification for preferential procurement have been omitted since the Constitutional Court considered these provisions to be not necessary or expedient to be prescribed by the Minister as it should have been left to the organs of state to determine in their preferential procurement policies.”

The draft regulations contain a new proposed provision to described the formulae to be used when allocating preferential points in tenders to generate income, dispose of, or lease assets by an organ of state:

“The draft Regulations provide for new provisions (not regulated in the 2017 Regulations) and propose to prescribe formulae to be used when allocating preferential points in tenders to generate income, dispose of or lease assets by an organ of state. Although in most contracts the state pays for goods and services, which is a cost to the fiscus, the purposeful interpretation of the Act is that the same principles of awarding points for price and specific goals is applicable to disposal and leasing of state assets and other income generating procurement. This requires the current formulae to be provided 

for in reverse as an income to the fiscus. In the Supreme Court of Appeal judgment (Airports Company South Africa SOC Ltd v Imperial Group Ltd & Others (1306/18) [2020] ZASCA 02 (31 January 2020)) the legal position on the application of the Act (point system) on lease tenders as they were issued by Airports Company South Africa was explained and thus further supports the inclusion of this provision in the draft Regulations.”

The Department therefore specifically notes that the new provision is supported by the judgment of the SCA in the mentioned case.

There is also no mention of the methodology of functionality; defined as the “ability of a tenderer to provide goods or services in accordance with specifications as set out in the tender documents”. Functionality has long been the threshold for a bid to be scored using the 80/20 or 90/10 preference points system, excluding the bidders that did not have the necessary experience or capacity to perform the work. Functionality is one of the more contentious issues in public procurement as the process is frequently abused. 

Further important omissions pertain to local production and content and subcontracting as a condition of tender.

Treasury states that: “Regulations providing for subcontracting after the award of a tender have been omitted since these do not fall under preferential procurement and are therefore outside the scope of the Act. This could be contained in the procurement policies of organs of state. Alternatively, it may be prescribed through an Instruction in terms of section 76 of the Public Finance Management Act (PFMA), or by amending the Municipal Supply Chain Management Regulations under the MFMA, where required, or by adopting in the SCM policies of the municipalities, where permissible (i.e. the broader SCM prescripts).” 

And with regards to local production and content:

“Regulation 8 of the 2017 Regulations providing for local production and content has been omitted since it is, in the view of National Treasury, outside the scope of the Act and of the Minister’s regulation-making authority, i.e. ultra vires, and could be successfully challenged. The framework, in section 2(1) of the Act, does not provide for local production and content per se, but refers to implementing the programmes of the RDP and provides for points to be awarded for specific goals. It does not provide for local production and content to be used as a disqualification criterion.”

These events, once again, underscores the overwhelming need to create a single, overarching framework governing public procurement and to give better effect to the constitutional procurement principles. The draft Regulations will hopefully provide opportunity to strengthen transformation and preference in the allocation of government contracts and provide much-needed uniformity and coherence in public procurement.