By Pieter Steyn

New regulations in terms of the Preferential Procurement Policy Framework Act (PPPFA) have been published and will take effect from April 1. The regulations replace the 2011 regulations and introduce several important changes that have significant implications for firms contracting with government and parastatals.

The PPPFA regulations apply to procurement by ‘organs of State’, which include national and provincial government departments, municipalities, Parliament, provincial legislatures and various parastatals, including power utility Eskom.

Under the new regulations, price remains the dominant basis on which procurement decisions must be made. This is ensured by the so-called 80:20 and 90:10 principles, in terms of which 80% or 90% of the total points awarded to a tenderer depends on price and 20% or 10% on nonprice considerations like the tenderer’s rating for broad-based black economic empowerment (BBBEE). However, under the new regulations, the 80:20 principle will apply to tenders valued at under R50-million. Previously, the threshold was R1-million. So, this is a significant change, as nonprice considerations, including BBBEE, will be more important for such tenders. The 90:10 principle will apply to tenders above R50-million.

Another significant change in the new regulations is the explicit authorisation for prequalification criteria for tenders. Tenders may now include a specific tendering condition that only one or more of the following tenderers may respond:

• A tenderer with a stipulated minimum BBBEE status.

• An exempted microenterprise (EME) or qualifying small enterprise (QSE). These terms are defined in the codes of good practice on black economic empowerment issued in terms of the BBBEE Act. EMEs are firms with a yearly total revenue of R10-million or less and QSEs are firms with a yearly total revenue of between R10-million and R50-million.

• A tenderer subcontracting a minimum of 30% to various EMEs or QSEs, including EMEs or QSEs that are at least 51%-owned by black people (including youth, black women, black people with disabilities, black people living in a rural or undeveloped area or township and/or military veterans).

The importance of this change is that a tender that fails to meet the prequalification criteria may be excluded from consideration. The new regulations, thus, explicitly allow for a ‘set-aside’ of tenders for firms with a certain BBBEE status and/or small and medium-sized enterprises.

It is important to note that the prequalification criteria permitted for BBBEE is based on the BBBEE status of a firm. This is determined in terms of the codes by considering not only black ownership but also a firm’s scores for management control, skills development, enterprise and supplier development and socioeconomic development. The practice of parastatals like Eskom of imposing prequalification criteria based solely on black ownership (for example, a minimum 51% black shareholding), as opposed to BBBEE status, is not authorised by the new regulations. Black ownership targets in the codes are 25% (plus one vote), and only 25 points (out of a total of 118 points) are available for a firm’s black ownership score. The approach in the new regulations is consistent with the principles underlying the BBBEE Act, which seeks to promote broad-based empowerment that is not restricted to black ownership only.

The PPPFA Act provides that a contract be awarded to the tenderer who scores the highest points, unless ‘objective criteria’ justify the contract being awarded to another tenderer. The term ‘objective criteria’ is, unfortunately, not defined in the Act and this has led to several ‘issues’ concerning interpretation. The Act stipulates that the ‘objective criteria’ must be “in addition to” criteria relating to contracting with historically disadvantaged persons or implementing the programme of the 1994 Reconstruction and Development Programme.

As BBBEE (which covers black ownership) is taken into account when the 80:20 or 90:10 principle is applied, it is arguable that the ‘objective criteria’ cannot include criteria relating to the level of black ownership of a tenderer. The new regulations, however, make it clear that, if ‘objective criteria’ will be applied in a tender, this must be stipulated in the tender document. This will allow firms to assess the risk upfront that the tenderer with the highest score (when the 80:20 or 90:10 principle is applied) may not be awarded the tender.

The new regulations are in line with government’s policy to use State/ parastatal procurement as a more effective means of supporting BBBEE and small and medium-sized businesses. Earlier proposals included that the 80:20 and 90:10 principles be replaced with a 70:30 principle and increasing the threshold for the principle to R100-million. The new regulations follow a healthy debate on (and seek to find a compromise between) the need for State/parastatal procurement to obtain “value for money” and also to promote BBBEE and other industrial policy goals. Firms contracting with government and parastatals need to carefully consider the new regulations and prepare themselves for when the regulations take effect on April 1.

Steyn is a director of law firm Werksmans Attorneys.