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The frequent deviation from standard tender procurement processes by government departments or entities, is often an early symptom of corruption, malfeasance, or poor planning by procurement function (Allpay Consolidated Investment Holdings (Pty) Ltd and Others v Chief Executive Officer of the South African Social Security Agency and Others (Corruption Watch and another as Amici Curiae) 2014 (1) BCLR 1 (CC)). Stated otherwise, a procurement process undertaken outside the normal competitive bidding method without rational reasons, signifies a deliberately skewed process to favour politically connected individuals or companies. Although a competitive public procurement process is a general constitutional requirement, the Municipal Supply Chain Management Regulations, GN868 GG27636/30-5-2005 (SCM Regulations) make provision for local governments to dispense with official tender procurement processes and procure goods or services through any convenient process, which may include direct negotiations with their preferred providers.
However, for years, municipalities have misused this law to award lucrative government contracts to the consultants of their choice without following due process. In this article, I seek to reveal and caution that the Local Government: Municipal Finance Management Act 56 of 2003 (MFMA) is not just a ‘paper tiger’ (see L Egypt, S de Freitas, K Wheeler and J Reuter ‘Criminal offences in the MFMA – not a paper tiger: The imposition of a custodial sentence for failing to prevent irregular expenditure’ (www.cliffedekkerhofmeyr.com, accessed 31-3-2024)). Not only does it impose civil liability on corrupt municipal officials but has teeth for criminal liability. This article contributes to the understanding of s 173 of the MFMA, which deals with criminal liability of procuring officials where there is gross negligence or deliberate abuse of municipal procurement procedures. I argue that any deviation from an official procurement process designed to conceal the irregular appointment through purposeful circumvention or ignorance of the MFMA or its regulations must be punished by criminal liability beyond mere civil liability. This would protect and promote compliance with the Act.
The South African procurement legal system flows directly from s 217 of the Constitution. Section 217 of the Constitution requires that ‘when an organ of state … contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective.’ The specific procurement procedure is prescribed in the legislation and regulations. With respect to local governments, s 168 of MFMA directs the National Treasury to develop an appropriate framework for local government’s procurement of goods and services.
In Dawood and Another v Minister of Home Affairs and Others; Shalabi and Another v Minister of Home Affairs and Others; Thomas and Another v Minister of Home Affairs and Others 2000 (3) SA 936 (CC), the Constitutional Court emphasised that leaving government officials to use their discretion when the only criteria they have to use are the broad constitutional principles or the principles provided for in a particular piece of legislation is insufficient. The court further held that it is important to make sure that legislation is written in a way that prevents officials from using their discretion in an unconstitutional manner. This should be accomplished by making sure that they receive adequate guidance regarding how to use their discretion. In light of Dawood’s principle, the SCM Regulations were put in place to provide guidance for the various procurement processes to be followed by municipalities.
Regulation 12(1) of the SCM Regulations provides for procurement of goods and services by way of petty cash purchases; written or verbal quotations; formal written price quotations; and a competitive bidding process. Accordingly, the municipal’s own supply chain management policies must direct a competitive bidding process to be followed for any procurement of a transaction value above a transaction value of R 200 000 (VAT included), and the procurement of long-term contracts.
However, given the length of time required for procurement procedures in general, the municipalities are allowed in terms of reg 36 of the SCM Regulations to develop supply chain management policies, which may allow the accounting officer to dispense with the official procurement processes and to procure any required goods or services through any convenient process, which may include direct negotiations. Although reg 36 of the SCM Regulations gives accounting officers discretion to authorise deviation from official procurement processes, including deviation from competitive tender process in cases of high value or long-term contracts, it is not an open-ended discretion. This administrative power may only be invoked under very limited or exceptional circumstances.
The deviation from official procurement process at municipal level can only be done
‘(i) in an emergency;
(ii) if the goods or services are produced or available from a single provider only;
(iii) for the acquisition of special works of art or historical objects where specifications are difficult to compile;
(iv) acquisition of animals for zoos; or
(v) in any other exceptional case where it is impractical or impossible to follow official procurement procedures’ (see reg 36(1) of the SCM Regulations).
Bolton argues that while provision is made in SCM Regulations for the non-use of tendering in circumstances specified in reg 36(1) there is lack of interpretative guidance on what amounts to such circumstances (P Bolton ‘Grounds for dispensing with public tender procedures in government contracting’ 2006 (9) PER 1). It is this gap in the regulation that has resulted in the abuse of the public procurement system at local governments.
Although there may be little guidance or substantive content of reg 36 of the SCM Regulations this does not indicate that a state organ may forego a competitive procurement process entirely. Organs of state should nevertheless be obligated to procure the necessary goods or services on the best available terms to ensure conformity with s 217(1) of the Constitution.
Having set out the content and the discretionary power of reg 36 of the SCM Regulations above, the evidence in case law shows that there is abuse of this discretionary power by municipal officials. The accounting officers often authorise deviations even where the reasons do not pass muster. This can be defined as failure by the accounting officers to implement the MFMA and its regulation and sometimes tantamount to corruption. However, these unlawful and irregular procurement processes, which result in financial misconducts are generally dealt with in terms of civil proceedings under s 32 of the MFMA and there are rare criminal liabilities in terms of s 173 of the MFMA.
Therefore, it is apposite to strengthen the provision of s 173 of the MFMA, which makes it a criminal offence if the accounting officer fails to take all reasonable steps to prevent unauthorised, irregular or fruitless and wasteful expenditure; or if they fail to take all reasonable steps to prevent corruptive practices in the management of the municipality’s assets or receipt of money or in the implementation of the municipality’s supply chain management policy.
Section 173 of the MFMA further provides that senior manager or other official of a municipality or municipal entity exercising financial management responsibilities and to whom a power or duty was delegated in terms of s 79 or s 106 of the MFMA, is guilty of an offence if that senior manager or official deliberately or in a grossly negligent way contravenes or fails to comply with a condition of the delegation. Such delegations may include procurement or supply chain management function. The criminal liabilities imposed by s 173 of the MFMA are not limited to accounting officers and officials of the municipality but also extends to councillors who deliberately influence or attempt to influence the accounting officer or any other official of the municipality to contravene a provision of the MFMA or to refrain from complying with a requirement of the Act.
Although the MFMA criminal proceedings against municipal officials are not as common as one may expect, the municipalities must be reminded that the MFMA has teeth and can no longer be seen as a paper tiger where accounting officers and senior officials can only face civil liability for abusing the procurement processes. Lessons can be drawn from the case of the former Municipal Manager and Accounting Officer of the Oudtshoorn Municipality, Mr Martin Pietersen (Pietersen v S (WCC) (A309/2017, 6-2-2019) (Davis AJ (Binns-Ward J concurring)). Pietersen was sentenced to two years’ imprisonment after being found guilty by the Western Cape Division of the High Court for ‘deliberately breaching the requirements of s 62(1)(f), read with s 173(1)(a)(i), of the MFMA, which inter alia require a municipality to implement a SCM policy, and of deliberately failing to take all reasonable steps to prevent irregular expenditure, in terms of s 173(1)(a)(iii) of the MFMA’ (L Egypt, S de Freitas, K Wheeler et al (op cit)).
In the Pietersen case, the court found that the appointment of a consultant through a deviation in the process by Pietersen was the instruction of the mayor and the speaker. In this case there is no reason why Pietersen could not have proceeded by way of an expedited tender. Therefore, the inescapable conclusion that the court reached is that no tenders were called for because the consultant had been specifically chosen by the political office-bearers and they did not want anyone else.
The deviation in the Pietersen case was a stratagem contrived to justify the appointment of the politically pre-selected consultant, for an open-ended range of purposes over an extended period without a competitive tender process. It did not meet the requirements of reg 36 and was, therefore, invalid. As a result, the court held that all the expenditure incurred regarding the consultant, was incurred in contravention of the supply chain policy. The court further held that the payments to the consultant constituted irregular expenditure as defined in the MFMA.
The court further held that the justification for the deviation from the official procurement process by Pietersen was patently spurious and the deviation memorandum was mere ‘window dressing’ designed to conceal the irregular appointment of a politically preferred consultant. It appeared that no experienced municipal manager, as Pietersen claimed to have been, could have honestly believed that the deviation was a valid and lawful exercise of the power under reg 36.
The court held that Pietersen could not seriously have thought that it was correct and proper to conclude the service level agreement for open-ended, undefined services over a period more than ten months on the strength of a single deviation, which was originally motivated by the speaker’s request. In all the circumstances the conclusion was inescapable that Pietersen acted in the knowledge that the deviation was unlawful, and therefore, deliberately contravened the requirements of the supply chain process.
The key takeaway from Pietersen is that it is no defence for an accounting officer to allege political influence in trying to justify a breach of the MFMA because they are required to act with fidelity, honesty, integrity and in the best interests of the municipality in managing its financial affairs. As a matter of fact, accounting officers owe a fiduciary duty to the entity, not politicians, and must refuse to obey unlawful instructions from politicians.
An accounting officer cannot just accept political instructions without seeking, within the sphere of influence of the accounting officer, to prevent any prejudice to the financial interests of the municipality. In the Pietersen case, it was clear in his testimony that he was aware that even although the political office-bearers had instructed him to deviate from the normal tender process and appoint their preferred consultant, he bore the responsibility for the appointment and was required to act in accordance with the law in that regard. Yet he bowed to pressure from the political office bearers. He made no attempt to promote competition and cost-effectiveness in procuring the consulting services which the consultant was hired to render.
As a result, procuring officials must be warned that the MFMA is not a paper tiger; any deviation from the formal procurement process intended to conceal the irregular appointment through purposeful circumvention or ignorance of the MFMA and its regulations exposes them to substantial criminal liability, punishable by imprisonment for up to five years or an appropriate fine.
Sithelo Magagula is a legal practitioner LLB (Hons) LLM (UKZN) at Finger Attorneys in Centurion.
This article was first published in De Rebus in 2024 (May) DR 30.
