The tender process in South Africa is governed by certain requirements in line with section 217 of the Constitution of South Africa. Section 217 essentially stipulates that when an organ of state and other institutions identified in legislation contract for goods or services, they must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective. In terms of such section, organs of state are not prevented from implementing a procurement policy providing for categories of preference in the allocation of contracts, and the protection or advancement of persons disadvantaged by unfair discrimination. Finally, the section stipulates that national legislation must prescribe a framework within which the procurement policy must be implemented.   

In order to give effect to the provisions of section 217 of the Constitution, the Preferential Procurement Policy Framework Act 5 of 2000 (“the Framework Act”) was gazetted. According to the Framework Act, an organ of state must determine its preferential procurement policy and implement it within a certain framework. The Framework Act provides inter alia that the preferential procurement policy developed by an organ of state must be based on a preference point system as follows: 

  • 80/20 preference point system for acquisition of goods or services for Rand value equal to or above R30 000 and up to R50 million, where 80 points are located for price and 20 points are allocated for contracting with historically disadvantaged persons or designated groups.
  •  90/10 preference point system for acquisition of goods or services with Rand value above R50 million, where 90 points are located for price and 10 points are allocated for contracting with historically disadvantaged persons or designated groups.
  • The contract must be awarded to the tenderer who scores the highest points, unless objective criteria, in addition to contracting with historically disadvantaged persons or designated groups, justify the award to another tenderer.

Section 5 of the Framework Act empowers the Minister to make regulations which may be “necessary or expedient to prescribe” in order to achieve the objects of the Framework Act. Relying on section 5, the then Minister of Finance promulgated the preferential procurement regulations of 2017 (“the Regulations”), which provide that an organ of state may apply pre-qualifying criteria to advance certain designated groups and, if it does so, that organ of state must advertise the tender with a specific tendering condition that only one or more of the following tenderers may respond:

  • A tenderer with a minimum B-BBEE status level
  • An Exempt Micro Enterprise (EME) or Qualifying Small Enterprise (QSE)
  • A tenderer subcontracting a minimum of 30% to:
    • An EME or QSE which is at least 51% black owned
    • An EME or QSE which is at least 51% black youth owned
    • An EME or QSE which is at least 51% black women owned
    • An EME or QSE which is at least 51% black owned by people with disabilities 
    • An EME or QSE which is at least 51% black owned by people living in rural areas
    • An EME or QSE which is at least 51% black owned by military veterans
    • A cooperative which is at least 51% black owned
    • An EME or QSE

Furthermore, the Regulations provide that a tender that fails to meet any pre-qualifying criteria stipulated in the tender documents is an unacceptable tender. In the event of a deadlock, the tender must be awarded to the tenderer that scored the highest points for B-BBEE, unless functionality is part of the evaluation process and the tenderers score equally for B-BBEE, then in such instances, the tenderer scoring the highest on functionality must be awarded the contract.  

Afribusiness, in the case of Afribusiness NPC v Minister of Finance Case No: 1050/2019, challenged the validity of the Regulations on appeal in the Supreme Court of Appeal. Afribusiness argued that the 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. The Court ruled that the Minister had exceeded his powers by promulgating the Regulations and that the Regulations were inconsistent with section 217 of the Constitution. The Court further indicated that the Regulations had the effect of “disqualifying certain tenderers who do not otherwise fall to be disqualified by the Framework Act”. The Court accordingly declared the 2017 Regulations invalid but suspended the invalidity for a period of 12 months from the date of the judgment, being 2 November 2020, to enable the Minister of Finance to remedy the identified defects.

Notwithstanding the declaration of invalidity, the B-BBEE Commission released a statement on the 4th of November 2020 contending that the declaration of invalidity is not a “blow” to the B-BBEE requirements for tenders nor does it invalidate the B-BBEE Act. The statement emphasised the following:

  • Section 9 (6) of the B-BBEE Act provides that “If requested to do so, the Minister may by notice in the Gazette permit organs of state or public entities to specify qualification criteria for procurement and other economic activities which exceed those set by the Minister in terms of subsection (1).” Any organ of state or public entity may therefore set the 51% qualification criteria for tenders with the permission of the Minister of Trade, Industry and Competition, and the ruling has no implications for this process under the B-BBEE Act.
  • Section 10 (1) of the B-BBEE Act provides that all organs of state and public entities must apply any relevant Codes of Good Practice issued by the Minister of Trade, Industry and Competition in terms of section 9 of the B-BBEE Act in developing and implementing a preferential procurement policy. Section 10 (1) of the B-BBEE Act is therefore mandatory, and not optional for organs of state and public entities.
  • The ruling by the Supreme Court of Appeal therefore does not prevent any state entity or department from pursuing and accelerating economic transformation by setting qualification criteria of 51% black ownership under the B-BBEE Act. It simply means that the Regulations cannot be used as a basis to set such qualification criteria. The Framework Act and B-BBEE Act processes should not be confused, noting that section 3 (2) of the B-BBEE Act also introduced the trumping effect to address any possible conflict of legislation.

In considering the Commission’s statement however, it is crucial to note that despite section 9(1) of the B-BBEE Act making provision for the Minister to, by notice in the Gazette, issue codes of good practice on black economic empowerment including qualification criteria for preferential purposes procurement and other economic activities, the Minister has not gazetted any such codes. In the circumstances there are no codes of good practice which may be relied upon for the qualification criteria for preferential purposes with respect to procurement. In any event, such codes, if gazetted, would still have to meet constitutional muster. The declaration of invalidity accordingly remains applicable and binding until the Framework Act (and its regulations) are amended and/or the applicable codes of good practice dealing with qualification criteria for preferential purposes for procurement are gazetted, at all times in consistence with the Constitution. It accordingly follows that until such time that the relevant minister publishes codes dealing with qualification criteria for preferential purposes for procurement, the contentions of the B-BBEE Commission do little to affect the declaration of invalidity.

The implications of the aforegoing are that tenderers who do not meet B-BBEE requirements may not be automatically disqualified from tendering. B-BBEE and the advancement of historically disadvantaged persons or designated groups will still very much count towards the 10 and 20 points in the 80/20 and 90/10 point systems respectively. In light of the above, compliance with B-BBEE provisions and legislation appear to still be applicable for entities who wish to tender for government work. 

Guidance will however need to be provided by the Minister of Finance and/or the Legislature on how the provisions of the Framework Act and B-BBEE Act will correspond in respect of pre-qualification criteria, as there appears to be a conflict in this regard.       

Esther Longwe                        Zahn Abreu
Legal Advisor                           B-BBEE Manager

Reviewed by Liz Pinnock, Group Head: Legal

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