Sakeliga reiterates: state entities may immediately elect to cease BEE and local content procurement requirements

15 November 2022

Sakeliga reiterates the view in our statement and special report issued last week that state entities may immediately cease setting BEE and local content conditions in procurement. The Public Procurement Bill cannot change this, and to the extent that it seeks to do so, we will challenge it on Constitutional grounds.   

Neither erroneous “clarification” by some national government departments* and legal commentators, nor statements by President Cyril Ramaphosa that he wishes to intensify BEE, changes these facts.

We emphasise that a proper understanding of procurement law requires a distinction between normal, value-for-money procurement under section 217(1) and preferential procurement under section 217(2) and (3). State entities are obliged to do the former, which the Constitution stipulates should be cost-effective, competitive, transparent, and so on, and must set their own policies to do so. They are not compelled to do preferential procurement, but if they do decide to exercise their discretion to do so, then it must meet the requirements of section 217(1) and be in accordance with a framework provided by Parliament.  

A lack of appreciation for this distinction lies at the heart of ambiguities in statements last week by National Treasury, as well as errors in statements by the B-BBEE Commission, and legal commentators who incorrectly maintain that BEE and local content remain legal imperatives in state procurement. It would do these entities well to study our report, in which it is evident that our arguments do not rely on the content of the new procurement regulations, but on properly interpreted provisions in the Constitution and empowering legislation.

The legal position does not hinge on the new procurement regulations

During our legal and litigation research on this matter, Sakeliga became aware of a lack of appreciation for the discretionary nature of preferential state procurement. Over the years, most state entities have apparently been led to believe that they always had to apply preferential procurement, regardless of their constitutional mandate for value-for-money procurement.

Sakeliga’s report on the matter now reminds state entities of their value-for-money obligations under section 217(1) of the Constitution, and the discretionary nature of preferential procurement under section 217(2) and (3). The Constitutional position is further fortified by international law obligations.

Our report does not rely on the content of the old and illegal procurement regulations, the new regulations, or any such regulations in the future.

The legal position regarding the new preferential procurement regulations

We welcome the acknowledgement by National Treasury and others that BEE and local content requirements have been completely stripped from the new preferential procurement regulations, pursuant to the Constitutional Court judgement in Sakeliga’s litigation.

It must be underscored that the independence in procurement of state entities do not hinge on the new regulations or regulations that may follow. Instead, the new regulations merely confirm the Constitutional position that state entities can choose if and when to apply special preferential considerations to tenders.

When the new regulations enter into force on 16 January 2023, replacing the current illegal and unconstitutional procurement regulations, there will be no regulatory requirement on state entities that do make use of preferential procurement to apply BEE and local content criteria. In the meantime, we repeat that there is no Constitutional requirement on state entities to implement preferential procurement itself. On the contrary, the Constitution provides for the independence of state entities in this regard.

Correcting recent claims that deny state entities’ procurement discretion

1. BEE and local content in procurement are ANC political objectives, not legal requirements

National Treasury points out that much of procurement in South Africa is “steeped in legalese and technical language.” While true, what most complicates procurement is politics: BEE and local content are political objectives, not legal or technical requirements.

President Cyril Ramaphosa’s most recent weekly newsletter, dedicated to the matters Sakeliga raised in the wake of the new procurement regulations, is a case in point. “Put plainly,” he wrote, “we remain as committed as ever to broad-based black economic empowerment [and] meeting our localisation objectives…” While requests by members of his cabinet to National Treasury for exemption from preferential procurement cast doubt on the unanimity of that commitment, the President’s statement is nevertheless simply of a political, and not a legal or technical nature.

Wherever premiums are paid to a few non-value adding intermediaries, such as based on BEE and localisation criteria, those premiums cannot but come at the expense of the general public forced to forego better value at a lower price. Given the extensive harms of BEE and local content in public procurement, it is therefore ironic how President Ramaphosa’s defends his political commitments in the newsletter: “What is unsound, unsustainable and, above all, immoral, is an economy that benefits the few at the expense of the many.” Sakeliga agrees that such an economy is not desirable, which is precisely why we advise against BEE and local content requirements in state procurement.

Meanwhile, it remains a welcome fact that political objectives set by the national executive – as expressed by President Ramaphosa, the DTIC and others – translate neither into political objectives nor legal requirements for other organs of state. Their constitutional mandates when it comes to procurement are, absent illegal infringement, largely independent.

2. The B-BBEE Act does not compel BEE or local content in procurement

National Treasury alleges that “organs of state must comply with the B-BBEE Act when developing their procurement policies.” This conflicts with the Minister of Finance’s comments when the new regulations were issued and incorrectly creates the impression that the B-BBEE Act prescribes BEE in state procurement. National Treasury’s reference to it is largely irrelevant.  

The B-BBEE Commission makes an even more substantial error than National Treasury.

According to the B-BBEE Commission,

“the B-BBEE Act permits organs of state or public entities to set B-BBEE qualification criteria for procurement and other economic activities that exceed the criteria set in the Codes through section 9 (6) of the B-BBEE Act. For example, an organ of state or public entity may therefore set the 51% qualification criteria for tenders with the permission of the Minister […] and the PPPFA Regulation of 2022 do not change this provision of the B-BBEE Act. […] The only time that these prescripts of the B-BBEE Act may not be applied by an organ of state or public entity is when such an organ of state or public entity has been granted an exemption by the Minister of the dtic in terms of section 10 (2) of the B-BBEE Act, meaning that it is only under the B-BBEE Act that exemptions can be granted …”**

In reality, only if and when an organ of state decides to use the objectives in the B-BBEE Act as a proxy for its own preferential procurement policy goals, could that organ of state be led by the requirements of the B-BBEE Act. This does not mean that an organ of state is obliged to invoke the requirements of the B-BBEE Act when determining and implementing a preferential procurement policy.

On the contrary, an organ of state is at liberty to apply any specific goals in line with section 217(2) of the Constitution if it decides to implement preferential goals at all. If it does decide to do so, then it must be done within the confined framework of the PPPFA (as an Act of Parliament) and subject to the five principles in section 217(1) of the Constitution.

Section 10(1)(b) of the B-BBEE Act, considered within the Act as a whole, merely provides that structure can be given to how specific criteria focusing on ‘historically disadvantaged’ persons should be qualified and measured in a procurement policy. It is clear from the long title of the Act, that it only intended to “establish a legislative framework for the promotion of black economic empowerment.” It is not the intention of the Act to override the discretion or authority of any institution as to when and under what circumstances it would be appropriate to apply specific goals to a tender, and which specific goals should be applied or not.

3. The Public Procurement Bill is currently unconstitutional

Much is being made of the “long-awaited” Public Procurement Bill. It is envisaged that the Bill will inter alia “advance economic transformation [in procurement] by prioritising targeted groups…”  However, it cannot be forgotten that the Bill is just as much constrained by section 217 of the Constitution as the PPPFA.

Despite statements to the contrary, the Bill will not be able to prescribe to state entities that they should apply preferential procurement, nor will it be able to prescribe or allow the minister to prescribe via regulations what state entities’ procurement policies should be. Making BEE and local content legally compulsory for state entities would require an amendment to the Constitution. To the extent that government attempts to bypass these legal constraints, Sakeliga will be there to challenge them.

The Public Procurement Bill, if eventually signed into law in its current form, would likely be unconstitutional on many scores. For one, Chapter 4 of the Bill permits the Minister to determine a framework for “preferential treatment”, while section 217(3) of the Constitution expressly provides that such a framework must be provided for in national legislation. Parliament, not the Minister, is the national legislator.

Even if made by parliament, any supposed framework enforcing specific goals upon organs of state when determining a preferential procurement policy, would be unconstitutional.

4. The RDP does not establish an obligation to do BEE, nor legal grounds for requiring local content

Some commentators now attach much weight to the renewed inclusion of the Reconstruction and Development Programme (RDP), under “specific goals” in the 2022 regulations, for the first time since the 2001 regulations. This is a mistake.

Giving state entities more options still does not place an obligation on them to do preferential procurement, nor to do so for BEE or local content purposes.

Moreover, we caution that the Constitution does not authorise local content criteria in preferential procurement: section 217(2) of the Constitution only authorises preferential procurement policies related to protecting or advancing those previously disadvantaged by discrimination. Local enterprises do not per se fall under this authorisation.

* National Treasury, 8/11/2022. 

* The B-BBEE Commission, 9/11/2022.

Issued by Piet le Roux, CEO, Sakeliga, 15 November 2022