PPPFA - South Africa's Preferential Procurement Policy Framework Act

By: Shaun Scott and Helen Venter

PPPFA Regulations 2017 are the best yet, but still fall short of SA's public sector transformation expectations

South Africa's Preferential Procurement Policy Framework Act (PPPFA) was first gazetted in 2000. Whilst the Act has not changed in 17 years, we have seen three versions of the Regulations, the latest being effective on the interesting date of 1 April 2017.

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The Preferential Procurement Regulations 2017 fall far short of the transformational expectations that exist in South Africa's public sector. They do for the first time, however, begin to effect some of the transformational goals envisaged in the PPPFA.

This gap between the transformational expectations and the reality of what is contained in the regulations is, however, significant. This is one of the reasons that led to the challenges South African Airways (SAA) faced when Parliament's Standing Committee on Public Accounts (SCOPA) pointed out in late August that although SAA's procurement policy contained "brilliant ideas", it was indeed unlawful.

South Africa's system of preference

The idea of a system of preference in the context of procurement is that one bid will be preferred over others because it meets or exceeds specific criteria or conditions. This may mean that the award criteria supersede a selection criteria. In the private sector, "value for money" is sometimes used to explain why a more expensive proposal is preferred over a cheaper proposal. The argument is that the organisation will ultimately realise more value if it awards the deal to the supplier with the more expensive proposal.

Section 217 (2) of South Africa's Constitution recognises "categories of preference in the allocation of contracts" and states that these categories can be for the "protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination".

A fundamental assumption, built into all Preferential Procurement Regulations, is that the state is prepared to pay a premium to achieve transformation. Under the 80/20 preference system the maximum premium is 25% and under the 90/10 preference point system, the maximum premium is 11.11%. The arm-chair critic should not be too quick to point out that preferential procurement can result in the state spending up to 25% more to acquire goods and services. In the 90/10 system the premium could be a little over 1% if the award is between a supplier with a level one B-BBEE certificate/affidavit and one with a level two B-BBEE certificate/affidavit.

The Preferential Procurement Regulations 2017 places a far greater emphasis on small business and - at last - specifically recognises black designated groups: black youth; black women; black people with disabilities; black people living in rural or underdeveloped areas or townships; co-operatives owned by black people; and black people who are military veterans. The definition of black is consistent with that in the Broad-Based Black Economic Empowerment Amendment Act (B-BBEEA) 2013.

Develop a Preferential Procurement Policy

Section 2(1) of the PPPFA has always been in place, but its significance has not always been recognised. It clearly says that "an organ of state must determine its preferential procurement policy". It is interesting that the statement appears twice in the text of the act. Public sector SCM management always immediately looks at paragraph (f) of the act, which speaks about objective criteria, and as a result they often overlook 2(1).

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The need for public institutions to determine a Preferential Procurement Policy is far more important than with prior Regulations under the PPPFA. This policy will inform many of the decisions that will be taken for the successful implementation of the Preferential Procurement Regulations 2017.

The following aspects should be kept in mind:

Update procurement and SCM policies and processes in accordance with the 2017 regulations

The policies and processes need to be updated, specifically related to:

  • Market-related pricing. Defining market and ensuring delegations are clear on who is empowered to negotiate and when negotiations on market-related pricing can take place.

  • Prequalification criteria. The basis on which decisions will be made to apply the pre-conditions. Remember that the conditions around cancelling a tender are more stringent in Preferential Procurement Regulations 2017.

  • Standard Bid Documents (SBD) 6.1 and 6.2 (MBD6.1, MBD6.2). These have changed.

  • Evaluation spreadsheets must be updated and controlled. The table of scores has changed and care must be exercised during the transition period where two sets of tables will be applicable.

  • Feasibility of subcontracting. Public institutions will probably have to demonstrate that they determined the feasibility of subcontracting before issuing the tender. Market research will have to be performed to demonstrate the feasibility. We have already seen tenders being issued without assessing the subcontracting criteria and the bids were cancelled.

  • Objective criteria (for award). The tender documents must include the process for determining and the delegations for approving the objective criteria. This will possibly be used to award a contract to a bidder that did not score the highest points.

Manage the expectations of stakeholders, the accounting officer and accounting authority

Expectations exist amongst stakeholders in national and local government and particularly amongst board members of public entities, that the Preferential Procurement Regulations 2017 will help them increase the institution's expenditure on black designated groups such as black women-owned enterprises. Without a clear Preferential Procurement Policy, this will not be realised. Unfortunately, Preferential Procurement Regulations 2017 only include the designated groups as subcontractors to the primary contractor. This expectation needs to be managed particularly with stakeholders in local government and with public entities.

Recognise the distinction between selection criteria from award criteria

The principle that the selection criteria should be separate and distinct from award criteria is fundamental in South Africa's system of preference. This principle is a universal one and is embedded in European Union (EU) procurement law and European case law (European Court of Justice Case C-532/06).

The Preferential Procurement Regulations 2017 make this requirement far more distinct. The criteria used to award bids cannot be the same as the criteria used to select or shortlist bids. This is vital when it comes to determining the objective criteria.

Determine objective criteria for the award

The objective criteria used to award a contract to a supplier that did not score the highest points can only apply if the objective criteria have been included in the tender documents (prior to publication).

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This is a significant change and could pose challenges to Bid Adjudication Committees, accounting officers and accounting authorities. A result of the previously mentioned principle that the selection criteria must be distinct from the award criteria, functionality and any element of the B-BBEE scorecard may not be used as objective criteria.

This is further emphasis of the importance of each organ of state's Preferential Procurement Policy. This should not be a document that is quickly put together to achieve compliance. The development process needs to be underpinned by research, and analysis. It requires that leadership in public institutions apply their minds to developing the Preferential Procurement Policy and use this process to determine the objective criteria.

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