Government Procurement Changes: Levelling Playing Field, Redressing Inequality

Minister of Finance Pravin Gordhan recently stated that “Public procurement will amount to about R1,5 trillion over the next three years. Let me say that a little differently. We will pay about R500 billion a year for the delivery of goods and service.”
This declaration by Minister of Finance Pravin Gordhan when delivering the country’s   budget 2017 bears testimony to government’s inclination towards developing local industries, broadening economic participation and creating jobs.  On the flip side, they shine a spotlight on the big elephant in the room regarding the laws and regulations aimed at facilitating economic freedom for the black majority in a transformed economy.
The regulations aim to use public procurement as a lever to promote socio-economic transformation, empowerment of small enterprises, rural and township enterprises, and designated groups, and, as in the 2011 Regulations, to further promote local industrial development.

There are at least four main changes in the Preferential Procurement Regulations, 2017 as compared to the 2011 regulations:

  1. Regulation 4 empowers institutions to use prequalification criteria for preferential procurement; this ensures advancement of categories of persons or enterprises in a specific tender. Competition is reserved for similar enterprises. Only enterprises who meet the prequalification criteria are evaluated and may be awarded a tender.
  2. Regulations 6 and 7, envisages that the thresholds for application of the preference points systems have been increased from a maximum of R1million to a maximum of R50million for the 80/20 preference points system; likewise, the 90/10 preference point system will be applicable to all tenders above R50million.
  3. Regulation 9 provides for subcontracting as condition of tender. Institutions will be required to identify tenders with an estimated value above R30 million that can be used for subcontracting to advance categories of persons or enterprises.
  4. Regulations 6 (9) and 7 (9) gives institutions the power to negotiate a fair price with preferred tenderers. Whilst government recognises the need to empower designated groups and other sectors, this must be done in a cost-effective manner.

That said, compulsory sub-contracting requires more detail, particularly around how it will work. The intention of regulation 9 relating to subcontracting as a condition of tender is to ensure that Exempted Micro Enterprises (EMEs), Qualifying Small Enterprises (QSEs) and designated groups are able to participate in high value contracts. Organs of state must ensure that a proper industry analysis is conducted to identify possible subcontracting opportunities.

Organs of state must understand the entire supply value chain to identify subcontracting opportunities. This will vary from product to product and tender to tender. For example, when procuring a piece of equipment for R100milion it may not be feasible to subcontract the value of that contract. This is because it may be a single piece of machinery that may not be capable of being divided into separate parts that may be obtainable from other sub-contractors.

The revised regulations refer to compulsory sub-contracting, as well as to sub-contracting under the prequalification criteria. The institutions should avail a list of subcontractors drawn from the central supplier database and managed by National Treasury. Suppliers will be required to update their B-BBEE credentials in line with the regulations for future tenders.

The revisions are about ensuring an increased number of designated groups participate in economic activity. And an increase in the value of tenders awarded to SMMEs, and enterprises owned by black people.

The move also seeks to promote the principles of buying local and support the local manufacturing industry.
















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