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GOVERNMENT: Gordan's Decision to Regulate State Procurement is Unlawful


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The decision by the Minister of Finance Pravin Gordan, to rule that public entities must use a preferential state procurement point system that does not recognise black ownership when awarding tenders is unreasonable and unlawful! The Minister must reverse his decision to gazette the Preferential Procurement Regulations that comes into effect in December and amend the Preferential Procurement Policy Framework Act (PPPF Act), the Act that regulates preferential procurement by public entities. (I think there has to be a better way to put this across, it’s very technical. Can we just not say something like; “ The Minister must reverse his decision to change the current procurement scoring system which recognises black ownership for one that doesn’t and rather amend the Preferential Procurement Policy Framework Act first.

Background on BEE and the Minister’s Decision on State Procurement

The Broad-based Black Economic Empowerment Act (BEE Act) makes the implementation of the the DTI Codes of Good Practice mandatory for public entities when entering into public partnerships, issuing licenses and preferential procurement. In June this year, the Minister gazetted preferential procurement regulations and went against the submission by black business to rather amend the PPPF Act in order to promote preferential procurement. The preferential regulations are intended to align the PPPF Act with the provisions of the BEE Act on preferential procurement.

BEE was made into law in 2003 to promote the constitution right for equality, increase participation by black people in the economy and increase employment. BEE also seeks to promote equal opportunities and access to government services by black people. The alignment of preferential procurement regulations comes eight years after the BEE Act came into effect and four years after the DTI Codes were gazetted.

In 2009 the Minister published Draft Preferential State Procurement Regulations for public comment. Section five of the PPPF Act allows the Minister from time to time to publish regulations to promote preferential procurement. The gazetted regulations that will come into operation in December includes a point system to evaluate tenders and select companies that score the highest points even if they don’t have black ownership. The system does not recognise black ownership and bonus points that companies achieve when they exceed BEE targets.

Implications of the State Procurement System Gazetted by The Minister

The gazetted system also allows companies to completely avoid complying with BEE in exchange to offering lower prices compare to empowered companies. This is due to the allocation of the ten points to BEE from the 90/10 on tenders above One Million Rands and the twenty points to BEE from the 80/20 points on tenders below one million. Because BEE and price points are scored alongside together in one system, companies can avoid BEE by making lower offers than competing bids that score high on BEE.

The current point system that will come to an end in December recognises equity, even though black ownership is narrowly defined to include historically disadvantaged individuals (HDI) which includes white women. The system includes HDI, price and functionality in one scoring system unlike the new system which excludes functionality.

The separation of functionality from BEE and price makes the gazetted system to be completely different form the current system. There is lack of transparency on how functionality will be scored. This promotes corruption in the way government procures as it will allow end-users to influence the adjudication decision and cost government more money as bidding companies who pass the functionality stage could compete on higher prices than what is charged in the market. Not only the most cost effective and competitive companies will score high points but the one that pass functionality and charge whatever price they like when there will be only one or few companies that would have met the functional requirements of the tender.

It has been proven that end-users are able to influence procurement by inserting clauses that can only be met by one or few selected companies. The functionality clauses are designed to eliminate participation by many companies in order to reduce competition. Including functionality, price and BEE into a single point system allows bidders to trade-off areas where they score low and make up on areas where they score high.

These regulations will have a negative impact on BEE compliance, black business and particularly small black businesses that depend on government procurement for survival. The gazetted regulations make it difficult for companies to use BEE as an advantage. The regulations underscore and reverses the gains of empowerment as they create an environment for companies not to be empowered. Companies with black ownership will no longer enjoy any advantage as it is the case now, particularly companies with turnover of less than R35 million since you can easily achieve a Level One BEE Status without black ownership; a status that gives you the highest point. Companies will not use bonus points allocated in theDTI Codes for exceeding BEE compliance as an advantage. The Minister did not hold public hearings to communicate the impact the gazetted regulation will have on black business as required by the Promotion of Justice and Administrations Act which makes his decision unlawful.

The Minister must keep the current regulations in place until the PPPF Act is amended to include a point system that recognises black ownership, overall BEE status and bonus points allocated for exceeding BEE compliance. The scoring system must be based on the same principles contained in the DTI Code 500, the Code for preferential procurement. The DTI scoring system prioritises state procurement from small black owned, medium and large companies respectively.

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