It is high time that the organs of state implement their own preferential procurement policies

June 1st, 2022
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Minister of Finance v Afribusiness NPC (CC) (unreported case no CCT 279/20, 16-2-2022) (Khampepe ADCJ, Jafta J, Madlanga J, Majiedt J, Mhlantla J, Pillay AJ, Theron J, Tlaletsi AJ and Tshiqi J)

On 16 February 2022, the Constitutional Court (CC) handed down the judgment of Afribusiness, which largely deals with s 217 of the Constitution, the Preferential Procurement Policy Framework Act 5 of 2000 (the Procurement Act), and the Preferential Procurement Regulations, 2017 (the 2017 Procurement Regulations). The CC found that the 2017 Procurement Regulations are unlawful, and the Minister of Finance (the Minister) acted ultra vires when he promulgated the regulations. The Afribusiness case is undoubtedly bringing new development into the government procurement system.

Section 217 of the South African Constitution explicitly mandates government procurement system that is fair, equitable, transparent, competitive, and cost-effective. This procurement process is a critical part of a functional government service delivery mechanism. To give effect to s 217 of the Constitution, Parliament enacted the Procurement Act. Section 5(1) of the Procurement Act gives the Minister a ‘discretionary power to make regulations regarding any matter that is necessary or expedient to achieve the objects of the Act’ (Afribusiness at para 46). Accordingly, in 2017 the then Minister promulgated the 2017 Procurement Regulations. It is important to note that regulations are subordinate legislation, therefore, they must be created within the limits of the empowering statute. If they are not, the exercise of the Minister’s power to promulgate them is unlawful and may be reviewed and set aside in terms of the Promotion of Administrative Justice Act 3 of 2000 (PAJA).

Section 2 of the Procurement Act mandates the organs of state to implement their preferential procumbent policies, however, the organs of state have always relied on the preferential procurement system prescribed by the Minister in the 2017 Procurement Regulations instead of establishing their own preferential procurement policies. The question that was confronted by the CC in the Afribusiness case was: ‘If each organ of state is empowered to determine its own preferential procurement policy, how can it still lie with the Minister also to make regulations that cover that same field?’ (Afribusiness at para 111).

Case law analysis

The Afribusiness case concerns the validity of the 2017 Procurement Regulations. This comes after the Supreme Court of Appeal (SCA) found that the Procurement Regulations were inconsistent with the Procurement Act and were thus invalid.

This matter has its genesis in complaints received by the National Treasury from members of the public that the 2011 Preferential Procurement Regulations ‘created a competitive advantage for white persons as they would consistently win on price, and no corresponding emphasis was placed on the achievement of economic redress for previously disadvantaged persons’ (Afribusiness at para 5). After establishing a Task Team to look at the issues raised by the members of the public the Minister promulgated the 2017 Procurement Regulations. The promulgation of the 2017 Procurement Regulation was in terms of s 5 of the Procurement Act, which gives the Minister the power to ‘make regulations regarding any matter that may be necessary or expedient to prescribe in order to achieve the objects of this Act’.

‘In terms of the 2017 Procurement Regulations, organs of state may elect to apply a specified list of pre-qualification criteria to advance certain groups, and only tenderers who comply with such criteria would be eligible to tender. The impugned regulations are regulations 3(b), 4 and 9 of the 2017 Procurement Regulations. Regulation 3(b) provides that “[a]n organ of state must . . . determine whether pre-qualification criteria are applicable to the tender as envisaged in regulation 4.” Regulations 4 and 9 fashion pre-qualification criteria that tenderers must meet to be eligible to tender and subcontract respectively. These can be understood as threshold requirements for entry to tender’ (Afribusiness at para 10).

Afribusiness then launched an application in the High Court and sought an order reviewing and setting aside the 2017 Procurement Regulations ‘on the basis that the Minister had acted beyond the scope of his powers and that the regulations were invalid. … [The High Court] held that the Minister was authorised to promulgate the regulations. It thus rejected the argument that the Minister had acted beyond the scope of his powers’ and the application was dismissed (www.concourt.org.za, accessed 12-5-2022).

Aggrieved by the decision of the High Court, Afribusiness appealed to the SCA. The SCA reasoned differently from the High Court and held that the Minister acted ultra vires. The SCA held that in terms of s 2 of the Procurement Act, ‘the correct approach to evaluating tenders is to first ascertain the highest points scorer and thereafter, if there are objective criteria that justify the award of the tender to a tenderer with a lower score, organs of state may do so. The [SCA] held that the preliminary disqualification was impermissible. … Consequently, it held that the Minister’s promulgation of regulations 3(b), 4 and 9 was unlawful’ (www.concourt.org.za, accessed 12-5-2022).

The SCA added that ‘this unlawfulness was not cured by the fact that the application of pre-qualification was discretionary and that, in any event, the 2017 Procurement Regulations do not provide organs of state with a framework to guide the exercise of that discretion, which may lend itself to abuse. This … is inimical to the provisions of section 2 of the Procurement Act and section 217(1) of the Constitution’ (Afribusiness at para 15). Accordingly, the 2017 Procurement Regulations were declared invalid as they were inconsistent with the Procurement Act and s 217 of the Constitution. However, the SCA suspended the declaration of invalidity for 12 months.

Aggrieved by the decision of the SCA the Minister appealed to the CC. The issues, which were placed before the CC, among others, are as follows:
‘(d) Whether the Minister acted beyond the scope of his powers when he promulgated the impugned regulations. …
(i) Whether the 2017 Procurement Regulations are inconsistent with the Procurement Act.
(ii) What is the scope of the Minister’s regulatory powers in terms of the Procurement Act?
(iii) Lastly, whether the 2017 Procurement Regulations are inconsistent with section 217(1) of the Constitution such that they are invalid’ (Afribusiness at para 18).

Law and application

The CC gave two judgments in this matter (the minority and majority judgments). The minority judgment found that the Minister acted within the scope of his powers when he promulgated the regulations and that a ‘proper reading of the [2017] Procurement Regulations would demonstrate that an organ of state has a discretion to implement the pre-qualification criteria’ (www.concourt.org.za, accessed 12-5-2022). Thus, the minority found that the regulations were lawful and valid. While one may argue that the minority judgment is interesting and somewhat transformative in nature, it has no value in our jurisprudence but remains academic. Therefore, the focus should only be placed on the majority judgment.

The majority held that s 217(3) of the Constitution envisages the Procurement Act from whose long title the Act is meant ‘to give effect to section 217(3) of the Constitution by providing a framework for the implementation of the procurement policy contemplated in section 217(2) of the Constitution’. Section 2(1) of the Procurement Act provides that ‘an organ of state must determine its preferential procurement policy’, which it must implement within the framework set out in this section. Section 5(1) of the Act – which is the section that is at the centre of what the CC was asked to decide on – provides that ‘the Minister may make regulations regarding any matter that may be necessary or expedient to prescribe in order to achieve the objects of this Act’.

The majority held that the ‘purpose served by regulations is to make an Act of Parliament work. The Act itself sets the norm or provides the framework on the subject matter legislated on. Regulations provide the sort of detail that is best left by Parliament to a functionary, … to look beyond the framework and – in minute detail – to ascertain what is necessary to achieve the object of the Act or to make the Act work’. The difference between the minority and majority judgment lies in the interpretation of ‘necessary or expedient’ in s 5 of the Procurement Act. The majority interpreted the words ‘necessary or expedient’ to be the limiting factor to the powers of the Minister to make regulations. The majority arrived at ‘this conclusion by reading the words “necessary or expedient” with section 2(1) of the Procurement Act, which provides that an organ of state must determine its preferential procurement policy’ criteria’ (www.concourt.org.za, accessed 12-5-2022).

Accordingly, ‘since each organ of state is empowered to determine its own preferential procurement policy’, the majority held that ‘it cannot also lie with the Minister to make regulations that cover the same field’ (www.concourt.org.za, accessed 12-5-2022). In the result, the majority held that ‘it can neither be necessary nor expedient for the Minister to make regulations that seek to achieve that which can already be achieved in terms of s 2(1)’ (www.concourt.org.za, accessed 12-5-2022). The question raised by the majority was: ‘If each organ of state is empowered to determine its own preferential procurement policy, how can it still lie with the Minister also to make regulations that cover that same field?’ (Afribusiness at para 111). In the view of the majority judgment, the impugned regulations were not necessary and were somewhat meant to serve as a preferential procurement policy. The majority held that the ‘conduct by an organ of state that has no foundation in some law breaches the principle of legality, which is a subset of the rule of law’ (Afribusiness at para 118). Accordingly, the CC dismissed the appeal and upheld the decision of the SCA that the Minister acted ultra vires when he promulgated the 2017 Procurement Regulation and that the regulations are unlawful and invalid.

Conclusion

What one learns from the Afribusiness case is that the organs of state, including municipalities have failed to implement their own preferential procurement policies. Such failure by the organs of state to act in accordance with the power vesting in them to implement preferential procurement policies ‘cannot have the effect of vesting in the Minister a power that otherwise vests in them’ (Afribusiness at para 120).

While the declaration of invalidity for the 2017 Procurement Regulation is suspended for 12 months (beginning from 17 February 2022) the organs of state must still procure services for them to function. The question is, should the organs of state continue to apply the pre-qualification criteria prescribed by the impugned 2017 Procurement Regulations in their tender processes? We already know by now that ‘the 2017 Procurement Regulations, which permit consideration of various criteria before the points system is applied, therefore, putting “the cart before the horse”’ are unlawful. It is clear in the Afribusiness case that s 2(1)(f) of the Procurement Act, which allows for a tender to be awarded to an entity based on ‘objective criteria’, even if that ‘entity did not score the highest in terms of the points system, does not permit the pre-qualification criteria set out in the 2017 Procurement Regulations’.

What one learns from the Afribusiness case is that the organs of state must implement their preferential procurement policies. In the absence of the policy, they have discretion to apply or not apply the pre-qualification criteria prescribed by the 2017 Procurement Regulations. In the interim, the declaration of invalidity for the 2017 Procurement Regulations are suspended for 12 months. Therefore, it is strongly advised that the organs of state should exercise their discretion not to apply the pre-qualification criteria as we already know that it is unlawful and inconsistent with the empowering statute.

Sithelo Magagula LLB LLM (UKZN) is a legal practitioner at Finger Inc Attorneys in Pretoria.
This article was first published in De Rebus in 2022 (June) DR 26.

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