The Supreme Court of Appeal has handed down a landmark ruling stating that state-owned companies cannot disqualify prospective contractors who are not majority black-owned without first considering the price and proposition of the tender.

On 2 November 2020 the court declared the Preferential Procurement Regulations, 2017 (the “Regulations”) invalid, finding the Regulations to be inconsistent with the Preferential Procurement Policy Framework Act 5 of 2017 (the “Act”). These Regulations previously allowed organs of state to disqualify tenders in advance purely based on the fact that a company was not 51% black-owned, for example. The court has consequently rejected this pre-disqualification as invalid and unconstitutional.

The question that now arises is, how will it affect my organisation's operations? 

To answer this, it is essential to first understand how public procurement operates within South Africa. The law regulating public procurement in South Africa is founded in section 217 of the Constitution of the Republic of South Africa, 1996 (the “Constitution”). The Constitution provides five principles which an organ of state must adhere to when it procures for goods or services, namely that the procurement process followed must be fair, equitable, transparent, competitive and cost-effective.

Section 217 of the Constitution also places an obligation on the national legislature to prescribe a framework within which organs of state must operate when procuring for goods or services. In discharging this obligation the national legislature enacted the Act as set out above. Section 5 of the Act grants the Minister of Finance the authority to make regulations regarding any matter that may be necessary to achieve the objects of the Act.

On 20 January 2017 the Minister used these powers to publish the Regulations. The Regulations detail various aspects of the procurement process which organs of state and all parties that want to conduct business with organs of state, must abide by. Among the aspects regulated by the Regulations and which is instrumental in the Regulations having now been declared as invalid, is the prequalification criteria used by organs of state when evaluating bids.

Regulation 4 of the Regulations provides the following in respect of a prequalification criteria:

“if an organ of state decides to apply pre-qualifying criteria to advance certain designated groups, 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 having a stipulated minimum B-BBEE status level of contributor;
• an Exempted Micro Enterprise (“EME”) or a Qualifying Small Enterprise (“QSE”)
• a tenderer subcontracting a minimum of 30% to – 
  • an EME or QSE which is at least 51% owned by black people;
  • an EME or QSE which is at least 51% owned by black people who are youth;
  • an EME or QSE which is at least 51% owned by black people who are women;
  • an EME or QSE which is at least 51% owned by black people with disabilities;
  • an EME or QSE which is 51% owned by black people living in rural or underdeveloped areas or townships;
  • a cooperative which is at least 51% owned by black people;
  • an EME or QSE which is at least 51% owned by black people who are military veterans;
  • an EME or QSE”

The provision further states that any tender that fails to meet any pre-qualifying criteria stipulated in the tender is an unacceptable tender. This is an exclusionary provision which provides a particular organ of state the discretion to exclude any entity which do not meet the pre-qualifying criteria set out in its tender.

Now the Supreme Court of Appeal has declared that the discretionary power set out above, is a deviation from the Constitutional principles as set out in section 217 of the Constitution (which I've also discussed herein). The Court held that the prequalification criteria imposed by regulation 4 did not meet the requirements of advancing the principles listed in section 217 of the Constitution. In addition the Court highlighted that section 2 of the Act requires that points must be allocated to bidders based on any specific goals, which goals may include contracting with persons, or categories of persons historically disadvantaged by unfair discrimination on the basis of race, gender or disability, or implementing the programmes of the Reconstruction and Development Programme (“RDP’s”).

The Court found that just because the Act provides for point allocation based on specific goals, this did not translate to providing for an exclusionary mechanism based solely on the failure to meet such specific goals. The Court consequently made an order declaring the Regulations as inconsistent with the Act and therefore invalid, and found that, in promulgating the Regulations, the Minister introduced an antecedent step to evaluating bids, a step which is not authorised by either the Constitution or the Act.

Notwithstanding the declaration of invalidity of the pre-qualification criteria, this is not to be confused with the B-BBEE evaluation framework, which framework is still applicable to organs of state when evaluating bids. The Court however saw it fit to suspend the order of invalidity for a period of 12 months from the date of the Court order. This suspension is to allow the Minister enough time to remedy the defects highlighted by the Court in this case.

Therefore, for the 12 month period following the order by the Court, the Regulations are still applicable, however as soon as the 12 month grace period offered by the Court expires the Minister must have provided us with an alternative to the Regulations, which alternative will become the new legislative position to be considered when your organisation participates in a tender and when organs of state advertise tenders for procurement of goods and services.