Black ownership as a requirement for doing business with government

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25 Jan 2017

The South African Preferential Procurement Regulations (PPR) are the legal basis for BBBEE and black ownership preferment by the State when they do business.  The PPR were amended last week and the changes take effect in April 2017.

There are three important elements of the amended regulations relating to preferential treatment of black-owned businesses by the State: the retention of the 90/10 and 80/20 principle; the introduction for the first time of “BBBEE status level” as an acceptable pre-qualification criteria; and the exclusion of 51% black ownership of large businesses as an acceptable pre-qualification criteria.

The 90/10 and 80/20 principle

The PPR and the PPPFA Preferential Procurement Policy Framework Act (PPPFA) were enacted to create a framework for how the State may “prefer” historically disadvantaged companies when buying goods and services.

They were, however, primarily imposed by National Treasury to limit the application of such preferences by the State. Through the PPPFA and PPR, National Treasury seeks to limit the “premium” or extra cost that the State may incur through such preferences.

This premium arises because rather than simply appointing the party with the cheapest price, part of the consideration in choosing a contractor is a non-price consideration.

For this reason, the “80/20” and “90/10” principle is a key feature of the PPPFA and PPR.  This provides that Price is the dominant basis on which government makes procurement decisions and so Price must make up 80 or 90% of the total points awarded when scoring and ranking tenders by government.  The regulations allow organs of state to include “BBBEE status level” as a criteria for only 20 or 10% of the overall points available.   The 90/10 principle is applied to high value tenders and the 80/20 principle to lower value tenders, the actual value thresholds are discussed below.

The 80/20 and 90/10 principle was subjected to criticism by state owned enterprises, which sought to have this threshold raised to at least 70/30, arguing that this principle inhibited them in giving sufficient preference to black-owned businesses in South Africa.  The 2012 Presidential Review Committee on State Owned Enterprises proposed a 70/30 threshold.  Earlier drafts of the PPR set a 50/50 threshold for tenders of below R 10 million.  The fact that the 80/20 and 90/10 thresholds have remained in place in the amended PPR indicates that to some extent National Treasury was successful in urging cost savings and financial prudency by government.

BBBEE status level as prequal requirement

While it has remained in place, the 90/10 and 80/20 principle has been subjected to important changes in the amendments.

The threshold for applying the 90/10 threshold has been raised from R 1 million to R 50 million.  This means that for all tenders below R 50 million, a price premium of 20% rather than 10% is considered acceptable.  For most professional service providers to government such as lawyers, accountants, and engineers, for example, whose contracts are generally worth less than R 50 million, BBBEE status level now becomes a much bigger determiner of who does business with government.

National Treasury has also, for the first time, sanctioned the use of BBBEE status level as a “pre-qualification criteria” for government tenders.  National Treasury has, since 2006, specifically outlawed this practice which it termed a “set aside” (setting aside certain tenders for only a particular class of companies).   Prior to the PPR applying to state owned enterprises such as Eskom and Transnet in 2012, most had as a standard tender requirement that all companies doing business with them have a Level 4 BBBEE status level.  This practice was considered by most to be outlawed by the PPR in 2012, as the PPPFA only allowed the use of BBBEE status level in the application of the 80/20 and 90/10 principle.

The amended PPR specifically allows BBBEE status level as a prequalification criteria. This means that we will likely see a return of a prior practice where most major state owned enterprises have a gate keeper requirement of Level 4 BBBEE contributor status.

In the past, this was used as a blunt instrument, depriving the State of competitive tenders where the pool of compliant service providers was small.  It also led to a rise in fronting.  Fronting practices are already on the rise due to the much stricter provisions in the amended BBBEE Codes and one hopes BBBEE status level thresholds will be set to encourage greater BBBEE targets while properly understanding what the market can offer.

Legal debate might continue around whether the introduction of BBBEE contributor status level as a prequalification criteria in the PPR is lawful as the restriction on this is arguably found in the PPPFA itself and the PPR must be subject to the PPPFA in terms of which they are published.  The introduction of this provision is also at odds with other provision of the PPR which provide that a company may not be excluded from a tender for not having a BBBEE status level certificate.

No prequal based on 51% black ownership?

The PPR regulations appear not to allow the State to use 51% black ownership of large businesses as an acceptable pre-qualification criteria. There have recently been high profile cases of major public entities saying they will only do business with 51% black-owned companies for major contracts. This approach has been said to contradict the PPPFA and BBEE Act in terms of which a broad-based approach is taken towards empowerment.

The B-BBEE Act and B-BBEE Codes, in terms of which a company’s B-BBEE status level is measured, considers a range of factors including ownership, management control, skills development, enterprise and supplier development and socio-economic development relevant to determine B-BBEE status level.  In this context, 51% black ownership on its own may be seen as a blunt measure which the PPR only allows as a relevant consideration for prequalifying small enterprises.

Applying such criteria where the known pool of 51% black-owned companies is small, may reduce the pool of compliant tenderers and reduce competitiveness as prices rise due to the lack of competition.  This has been said to offend against the Constitutional requirement that government procure goods and services on a competitive basis and is arguably irrational and unreasonable where the procurer knows it is excluding competent competitive tenders.  It remains to be seen whether National Treasury intended the PPR to proscribe such pre-qualification criteria or not.

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)

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