Preferential procurement and BEE: Why Afribusiness v Minister of Finance is so important:

Two of the most common complaints against BEE are that (a) it’s frequently used as a vector for the corrupt to plunder the economy and (b) that there is substantial policy uncertainty around it (and therefore the risk that the approach you take now might fall out of favour in future). The recent judgement handed down by the SCA in the landmark case of Afribusiness v Minister of Finance goes a long way to addressing both of those complaints and is thus important to understand.

Since the SCA ruled in favour of Afribusiness, who are against BEE on principle, this judgment may be seen as a blow to black owned businesses and therefore to black economic empowerment. But we see it very differently, why?

Background:

As we have previously explained, there are provisions in our constitution to specifically allow for racial discrimination where the discrimination is intended to address the wrongs of the past.  A raft of legislation was passed to achieve this objective including the Broad-Based Black Economic Empowerment Act 2003 (“the BEE Act”).  But, importantly this Act came after the Preferential Procurement Policy Framework Act 2000 (“the Framework Act”).

The Framework Act was necessitated because of section 217 of the Constitution.  This section requires Government (including SOEs and municipalities) contracts to be awarded “in accordance with a system which is fair, equitable, transparent, competitive and cost-effective”.  But if the Constitution stopped there, it would not facilitate economic transformation necessary for South Africa to put its past behind it.  So, section 217 goes on to allow government to implement procurement policies that provide for “(a) categories of preference in the allocation of contracts; and (b) the protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination.”  The Constitution does not detail these policies but does call for legislation to prescribe the preferred framework…. hence the Framework Act.

The Framework Act then allowed points to be allocated in awarding government contracts for specific goals.  These goals include “contracting with persons, or categories of persons, historically disadvantaged by unfair discrimination on the basis of race, gender or disability”.  Goals must be clearly spelt out in in any invitation to tender and must be “measurable, quantifiable and monitored for compliance.”

Points for these goals are limited to 10%-20% of the total points, depending on the size of the transaction (unless there were equal tenders when extra preference could be given to attaining these goals).  Translated correctly, this means that while 90%-90% of a government tender must be awarded based on price/quality (i.e. the intention is that government spend shouldn’t be wasted), a BEE Company is given an advantage of between 11% and 25% over others, assuming they score equally for the other points in a tender. This is fair and equitable in the context of our history and is also transparent.  In theory, government gets the services it needs without wasting money, and competitive BEE companies win the work. In theory, a BEE company that isn’t competitive on price/quality doesn’t get the work and government doesn’t waste the taxpayers’ money. In theory. But what was actually happening was quite different…

Afribusiness v Minister of Finance.

Importantly, the Framework Act also empowers the Minister of Finance to make regulations.  The matter concerned the validity of the Regulations, promulgated by the Minister on 20 January 2017.

These Regulations included pre-qualification criteria which resulted in only qualifying tenderers to be allowed to submit bids for Government work.  These pre-qualification criteria concerned any or all of three criteria (i) BEE levels (ii) EME or QSEs or (iii) if no less than 30% was subcontracted to businesses that are majority black owned. In other words, if a tenderer didn’t meet these conditions, they couldn’t even put in a bid. It didn’t matter that the resultant bids received might be 2 or 3 or 20 times higher than the market rate, so long as the qualifying criteria were met. The cart was before the horse, with the result was that government departments ended up choosing between over-inflated tenders without reference to market pricing. Add a little collusion and corruption and you have a perfect storm of government departments significantly overpaying for under-performing contractors (but maybe receiving a bit of a kick back to ease their consciences).

Afribusiness argued that these 2017 Regulations put the cart before the horse by providing that the tenderers who qualify to tender, may first be determined according to, inter alia, race, gender and disability, and only thereafter in terms of the preference points system.  Afribusiness argued that the Framework Act does not allow for qualifying criteria, which may disqualify a potential tenderer from tendering for Government contracts.  They submitted that the first step in determining to whom the contract must be awarded is to determine which tenderer has scored the highest points on the basis of points for price and for special goals, including historic unfair discrimination on the basis of race, gender and disability.

Afribusiness argued that the Framework Act requires a two-stage enquiry: first determine which tenderer scored the highest points in terms of the 90/10 or 80/20 points system; the next stage is to determine whether objective criteria exist which justify the award of a tender to a lower scoring (i.e. higher price/lower quality) tenderer. Accordingly, parliament, through the Framework Act, seems to have limited discretion to organs of state about the award of a contract to a bidder who does not score the highest points.

What the court said:

The Court also heard that blanket ‘permission’ to apply pre-qualification criteria without creating a framework for that criteria, lends itself to abuse and the manipulation of tenders to the detriment of potential bidders (and ultimately to the detriment of all South Africans who receive less value for their taxes).

The Court held that the Minister may only make regulations ‘regarding any matter that may be necessary or expedient to prescribe in order to achieve the objects of the Act’ and that the Minister failed to create a framework with would guide organs of state in the exercise of their discretion should they decide to apply the pre-qualification requirements.

Furthermore, the Regulations do not meet the Constitutional requirement for tenders to be fair, equitable, transparent, competitive and cost-effective.  The discretion which is conferred on organs of state under the Regulations to apply pre-qualification criteria in certain tenders, without creating a framework for the application of the criteria, may lend itself to abuse and is contrary to the Framework Act.

Therefore, the Minister’s promulgation of the Regulations was unlawful.

In exercising the powers to make the 2017 Regulations, the Minister had to comply with the Constitution and the Framework Act.  The framework providing for the evaluation of tenders provides firstly for the determination of the highest points scorer and thereafter for consideration of objective criteria which may justify the award of a tender to a lower scorer.  The framework does not allow for the preliminary disqualification of tenderers, without any consideration of a tender as such. The Regulations cannot create a framework contrary to the Framework Act.

There is a year still to go:

The Court suspended its order of invalidity to enable the Minister to fix this error.  The Court has given the Minister a year. This means that we can expect ‘pre-qualifying’ criteria to remain in place for a while (and with it the ability to influence who gets the work).

What does the judgement mean?

First, it’s worth noting that the judgment goes to constitutional matters and there is therefore possible that the Minister appeals the matter to the Constitutional Court.  But even without this, the Regulations and pre-qualification criteria remain in effect for another year.  There is a hope that Government will take note immediately of this judgment and stop pre-qualification of tenders.  Unfortunately, there is also the possibility that those abusing Government procurement processes see this as their last window of opportunity and that they accelerate their nefarious work. Given the ‘hyenas’ feasting on the Covid PPE opportunities we think there is a serious chance of the latter.

Unless the Constitutional Court finds fault with the Supreme Court of Appeals well-reasoned judgment, pre-qualifications will disappear from 1 November 2021.

Does this mean that BEE Ownership will become obsolete?

First, it’s important to note that this case did not concern the BEE Act.  It was limited to the Framework Act.  The Framework Act only concerns Government contracts, while the BEE Act is broader (and more recent).  Therefore, the judgment does not change anything in respect of the private sector in and amongst the private sector.  As the BEE Act is not in question, the BEE points that any business gets from being black owned or from procuring from black businesses are unchanged.

Government contracts cannot pre-qualify as set out in the Regulations, but they must still give between 10% and 20% of their points to goals like BEE.  Therefore, it is clear that BEE remains at least partially relevant. The more commoditised your product/service/industry, the more likely that you will need to have a competitive BEE score to get anywhere. There are very few companies who can get away with a low BEE score.

All that the Court did was to confirm that BEE is not the BEE-all and everything.  The Court simply confirmed a fundamental business principle – one cannot ignore other important criteria (price, quality, capabilities etc).  It has become all too apparent from testimony at the Zondo Commission that such common sense has not been common at Eskom, SABC, PRASA, Denel, SAA and so on.  This is a travesty, but the Courts have, once again, come to our rescue and this is to be welcomed.

Thanks to Afribusiness, there is now renewed hope that South Africa can operate with less corruption, that taxpayers get more for their money, and that legitimate transformation can still be attained.