South Africa/Russia nuclear power deal: A mockery of the constitutional procurement principles

May 1st, 2017
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By Dr Prenisha Sugudhav-Sewpersadh

On 21 September 2014 South Africa (SA) entered into an international government agreement with Russia pertaining to the purchase of 9.6GW of electricity to be generated through nuclear energy. The estimated cost of this procurement is said to be in excess of R 1 trillion. (Founding AffIdavit of Earthlife Africa in the matter of Earthlife Africa – Johannesburg and Another v The Minister of Energy (WCC) (case no 19529/2015)).

The conclusion of the Russian agreement was met with huge public outcry as it signalled significant deviations from legitimate procurement processes. Indeed, I submit that the Russian agreement, not only represents violations of a fair and open public procurement process, but actually goes so far as to make a mockery of constitutional procurement principles.

What is public procurement and its legislative framework?

It is prudent to begin with a brief explanation of public procurement in SA and the laws which govern it. Procurement is generally described as the function of purchasing goods and services from an outside body (Phoebe Bolton ‘Grounds for Dispensing with Public Tender Procedures in Government Contracting’ PER 2006 (9) 2). Public procurement is, therefore, the purchasing of goods and services by public entities, such as government, from outside bodies. Government generally purchases goods and services in order to meet its service delivery mandate. In SA, the public procurement sector or government procurement is estimated to amount to approximately 14% of the gross domestic product (Bolton (op cit)). Naturally the spending of public funds must be undertaken within a defined legislative framework with appropriate checks and balances. In SA public procurement is extensively regulated. However, the Constitution sets out clear procurement principles, which all procurement models and decisions must adhere to in order for such model or decision to be valid.

The constitutional procurement principles

Section 217 of the Constitution provides that when an organ of state contracts for goods and services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective. There is a school of thought that fairness within the context of s 217 refers only to procedural fairness. (Phoebe Bolton The Law of Government Procurement in South Africa (Durban: LexisNexis 2007)). However, it may be cogently argued that the principle of fairness as contained in s  217 may be interpreted to mean something more than only procedural fairness. Transactions entered into by virtue of public procurement result in contracts. However, such contracts are not entirely akin to contracts within the private sector, wherein contracting parties are bound and obligated only to one another, to the exclusion of non-contracting parties. Government, as the custodian of public funds, can be said to always have a fiduciary duty to the general public in all of its decisions, actions and/or conduct, including when it contracts for goods and services. The necessity for substantive fairness in addition to procedural fairness is therefore clear.

The principle of equity addresses issues of redress in order to balance the effects of past discriminatory practices. Transparency is viewed as probably the most important procurement principle, which ensures that processes are not carried out in secret. Transparency, however, entails more than the mere right to access to information. It has been said that the underlying aim or rationale for a transparent procurement system is to ensure that interested or affected parties, like the media, the legislature, potential contractors and the public as tax payers, are free to scrutinise the procedures followed (Bolton (op cit)). Therefore, I submit that a transparent procurement system, in addition to ensuring that procedures are open to the public, is to ensure that actual reasons and underlying principles in terms of which decisions are made are fair, lawful, rational and free of any venal intent.

The principles of competition and cost-effectiveness are concerned largely with the attainment of value for money. This ensures the responsible use of public funds and encourages commercial competition among potential bidders. These principles, correctly applied, should result in the best possible good or service procured at the most cost-effective price.

Legislation enacted to give effect to constitutional principles

Certain key public procurement legislation have been enacted. Some of these will be mentioned briefly. At national and provincial level, public procurement is regulated by the Public Finance Management Act 1 of 1999 (PFMA) specifically reg 16A thereof. At local government level, public procurement is regulated by the Municipal Finance Management Act 56 of 2003 (MFMA), specifically its municipal supply chain management regulations. Further to this there is a plethora of National Treasury prescripts, which regulate public procurement. The Preferential Procurement Policy Framework Act 5 of 2000 applies to all levels of government and it provides a framework for the recognition of socio-economic components and the setting and evaluation of award criteria.

The procurement regulations of the PFMA, as well as those of the MFMA make provision for various procurement models depending on the expenditure involved. For contracts in excess of R 200 000 the competitive bidding model is prescribed. This model is commonly known as the tendering process.

While the tendering process may take various forms such as a two stage bidding process, or a closed bidding process, the procurement regulations stipulate certain features, which must be inherent in every tendering process. Essentially the tendering system is characterised by a bid committee system, wherein project specifications are formulated by a bid specification committee, tender adverts are publicly published and evaluation of bids are undertaken by two committees functioning independently of one another, viz a bid evaluation committee and a bid adjudication committee. The roles of bid committees are to ensure that fair and transparent tendering processes have been followed, that no bidder was unduly advantaged and to make or recommend the making of an award accordingly.

South African law does make provision for the deviation from the normal procurement processes in certain defined circumstances, such as reg 36 of the MFMA regulations. Notwithstanding such deviations the principles enunciated in s 217 of the Constitution must still be shown to have been respected and adhered to.

The SA/Russia nuclear power deal

In terms of s 34 of the Electricity Regulation Act 4 of 2006 (ERA) the Minister of Energy may, in consultation with the National Energy Regulator of SA, make certain determinations prior to the procurement of new generation capacity. Such determinations are set out in s 34(1)(a) to (d) of the ERA, but include a determination that new generation capacity is needed and a determination of the types of energy sources from which electricity must be generated. Once these ministerial determinations are done and gazetted, s 34(1)(e) of the ERA requires that such new generation capacity be established through a tendering system which is fair, equitable, transparent, competitive and cost-effective. There is, therefore, no permissible side-stepping of the constitutional principles.

National Treasury has divided the supply chain management process governing tenders into the following broad phases:

  • demand management;
  • acquisition management;
  • logistics management; and
  • disposal management.

The purpose of proper demand management is to ensure effective procurement planning and to ensure that the demand for the goods or service really does exist and in what quantities. Clearly this is the purpose of the s 34 ministerial determinations in terms of ERA. It is clear that this section mandates the minister to make these determinations prior to embarking on any procurement process. Further to this, a clearly defined procurement process, which adheres to all constitutional principles, must be established prior to any procurement action being taken.

Notwithstanding the above legislative requirements it appears that the Minister of Energy, authorised by the President in his capacity as Head of the Executive, has seen it fit to enter into a legally binding contract with Russia for the procurement of nuclear power plants (founding affidavit (op cit)). The interesting features of this agreement lie in its comprehensiveness and detailed provisions. It is in fact indicative of the type of contract, which would be entered into with a successful bidder after an open and fair tender procedure has taken its course. In this instance, however, no valid tender process has yet been established, let alone implemented.

According to High Court papers filed by Earthlife Africa and the Southern African Faith Communities’ Environment Institute against the Minister of Energy in a case against the entering into of this agreement, the following salient details may be extracted from the Russian agreement: The preamble recognises the relationship between the parties as that of a ‘strategic partnership’. This is notwithstanding that this is the term used by government to refer to the party that will ultimately construct the new nuclear power plants through a legitimate procurement process. The agreement clearly sets out that the partnership will be, inter alia, in the area of design, construction, operation and decommissioning of the NPP (new nuclear power plant) units based on the VVER reactor technology in the Republic of South Africa, with a total installed capacity of about 9.6 GW. I submit that such technical detail may only be established after the s 34 ministerial determinations have been published, and further after a set of bid specifications have been drafted by a properly constituted committee. In practice, government departments generally make use of consultants for the drafting of highly technical bid specifications, with the rule that such consultants may obviously then not bid for the same tender.

In the present case, it appears that the entire tender process has been condensed into one document, which is the Russia agreement. It appears that demand management and bid specifications have been drafted in consultation with Russia, that it was agreed Russia was the only country from which the particular reactors may be purchased and that award was therein made to Russia. All of this having been done without a single bid committee having been established or any other legitimate procurement process been followed. A more blatant disregard for constitutional provisions has never before been seen in public procurement. It can never be argued by government that it sought the guidance from Russia as a strategic partner. The use of Russia in this sense, would then preclude it from all bidding processes with regards to the purchase of nuclear power, as the principle of fairness would demand their preclusion. The entering into of the agreement with Russia is prejudicial and unfair to other prospective bidders as the procuring entity has now fettered its discretion by entering into a prior agreement with Russia. Whichever way one looks at this scenario, fairness, both procedurally and substantively, is compromised.

In my opinion, a reading of the Earthlife High Court papers referred to above, reveals the clandestine manner in which the Russia agreement was entered into. To date the minister has failed to produce the s 34 determinations mentioned above. No procurement model, as envisaged in terms of s 34(1)(e) has been produced either. It is, therefore, impossible for the public to scrutinise the process followed. Transparency has been overshadowed by seemingly dark and sinister actions, and incoherent press reports. It appears that the signing of the Russia deal has turned the constitutional procurement process on its head. A contract has been entered into, and what remains to be determined is the process of procurement, which would have justified the entering into of such a contract.

It appears that the national executive, as the only authority designated by the Constitution to sign international agreements, has used this power to bind the country in the largest procurement deal without a single legitimate procurement process having been followed.

Conclusion

South Africa has a highly regulated public procurement system governed by constitutional principles. Notwithstanding this, the government has entered into a binding contract with an outside party, which is envisaged to cost the country in excess of R 1 trillion. No legitimate procurement process has been identified. The validity of the agreement entered into with Russia makes a mockery of the constitutional procurement principles of SA.

Dr Prenisha Sugudhav-Sewpersadh LLB LLM PhD (UKZN) is as attorney practising at Dr Sugudhav-Sewpersadh Attorneys in Port Shepstone.

This article was first published in De Rebus in 2017 (May) DR 58.

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