The Conundrum That Is Section 217 of the Constitution

Real economic transformation through black economic empowerment has put to the test the adequacy or otherwise of section 217 of the Constitution in the context of preferential procurement.

Written By of Cowan-Harper-Madikizela Attorneys

S 217 of the Constitution of the Republic of South Africa, 1996 (“the Constitution”) requires procurement by organs of state and statutory institutions to be fair, equitable, transparent, competitive and cost-effective and implemented in a manner which seeks to protect or advance previously disadvantaged persons. S 217 (2) allows organs of state to implement procurement policies providing for categories of preference to advance or protect persons disadvantaged by unfair discrimination (“HDIs”). S 217 (3) provides for enactment of legislation to prescribe a  framework within which the procurement policy referred to in S 217(2) must be implemented.

The Preferential Procurement Policy Framework Act 5 of 2000 (“PPPFA”) is the legislation contemplated by S 217 (2) as well as the Broad-based Black Economic Empowerment Act 53 of 2003 (“B-BBEE Act”). The PPPFA requires that tenders must first be assessed based on a preference point system dominated by price not BEE. In 2011, the Minister of Finance (“the Minister”) published the Preferential Procurement Regulations. Upon their promulgation, the Regulations were criticized for enabling bidders to win tenders on price without due regard for the transformation imperatives envisaged by S 217 (1) and (2) of the Constitution as bidders could chose to lose the 10/20 points for BEE and still win the tender on 90/80 points for price. A task team appointed to investigate the issue recommended, inter alia, a flexible approach that balances value for money and economic redress. Consequently, the Minister promulgated the 2017 Regulations.

With all this framework in place, it is easy to assume that Section 217 of the Constitution, the PPPFA and the B-BBEE Act are sufficient to ensure economic transformation through preferential procurement; not so. S 217 (2) was put to the test by Airports Company South Africa SOC Ltd (“ACSA”) in ACSA v Imperial Group Ltd and Others 2020 (4) SA 17 (SCA). ACSA issued a request for bids (“RFB”) to hire out car rental kiosks and parking bays. To achieve the transformation targets set out in its transformation policy and increase BEE participation in the car rental market, in the RFB ACSA substituted the statutory 80/20 and 90/10 preference point system in s 2(1) of the PPPFA with a 50/50 preference point system. ACSA argued, inter alia, that in leasing out the kiosks it was generating revenue and not incurring expenditure; it was therefore not procuring and did not have to comply with the 80/20 or 90/20 preference point system prescribed by the PPPFA.

Affected by the increased preference points, Imperial Group Ltd (“Imperial”) successfully brought an application in the High Court to review and set aside the RFB arguing that it was, inter alia, inconsistent with S 217 of the Constitution, thus invalid. The High Court agreed, but on appeal by ACSA, the Supreme Court of Appeal (“SCA”) found that ACSA was in fact procuring and therefore was bound by the 80/20- 90/10 preference point system in the PPPFA.

S 217 (2) again came under scrutiny by the Constitutional Court in Minister of Finance v Afribusiness NCP CCT279/20 (“Afribusiness”) in the context of the 2017 Regulations. The 2017 Regulations give organs of state a discretion in their RFBs to set prequalifying criteria aimed to advance designated groups including HDIs. A bid that does not meet the prequalifying criteria is disqualified upfront as an unacceptable tender, without considering price/functionality and other applicable conditions.

The prequalifying criteria can either be that a bidder has a stipulated minimum B-BBEE rating, is an exempted micro or qualifying small enterprise or will sub-contract at least 30% of the tender to a micro or qualifying enterprise owned at least 51% by black (people/youth/women/people with disabilities/military veterans) or black people living in rural/underdeveloped areas. In case of a deadlock where two tenderers score equal points, the tender must be awarded to the bidder with the highest points for BEE.

Afribusiness launched an application in the High Court arguing, inter alia, that the discretion afforded to organs of state to set prequalifying criteria that seek to advance, inter alia, HDIs contravenes S 217 (1) of the constitution read with s 2 of the PPPFA. The High Court found that the 2017 Regulations are rational, reasonable, and fair and are designed to facilitate preferential procurement in accordance with S 217 (2) of the Constitution and the PPPFA.

Unphased, Afribusiness appealed to the SCA. The SCA found that the prequalifying criteria in the 2017 Regulations deviate from section 217(1) of the Constitution, that they do not create a framework for application of the prequalifying criteria which could lead to abuse and that the  Minister could not, by way of regulations, create a framework that contradicts that which is mandated in the PPPFA. The SCA upheld Afribusiness’ appeal and issued an order that the 2017 Regulations are inconsistent with S 217 (1) of the Constitution and the PPPFA and declared them invalid (not just the impugned provisions due to their interconnectedness with other sections). The SCA suspended the order of invalidity for a period of 12 months to enable the Minister to take corrective action.

The Minister appealed to the Constitutional Court. Unfortunately, the Constitutional Court focussed only on the narrow issue of the Minister’s power to issue pre-qualification criteria in the 2017 Regulations, without pronouncing on whether the pre-qualification criteria offended S 217 (1) of the Constitution. A five-judge majority held that the impugned regulations are not necessary or expedient to achieve the objects of the PPPFA and found that the Minister acted ultra vires his powers. The court dismissed the appeal with costs.

Following the Afribusiness judgment, on 25 February 2022 National Treasury issued an advisory note to all organs of state that the Constitutional Court judgment is silent on the order of suspension issued by the SCA, which expired on 2 November 2021 and that consequently, in terms of s 18 of the Superior Courts Act 10 of 2013, the 2017 Regulations were no longer suspended and continue to be of force and effect. In terms of the advisory note, the Minister would approach the Constitutional Court and seek confirmation that the invalidity of the 2017 Regulations will  continue to be suspended until 15 March 2023. In the interim, organs of state have been advised that tenders advertised before 16 February 2022 should be finalised in accordance with the 2017 Regulations and those advertised on or after 16 February 2022 should be held in abeyance. No new tenders should be advertised.

Meanwhile on 10 March 2022, the Minister published the draft Preferential Procurement Regulations, 2022 (“Draft 2022 Regulations”) for public comment in accordance with section 5(2) of the PPPFA. The Draft 2022 Regulations seek to introduce, inter alia, threshold amounts in which the 80/20 and 90/10 preference point systems must be applied, together with the formula to be applied. The closing date for written comments on the draft 2022 Regulations is 11 April 2022. The Draft 2022 Regulations do not provide for prequalifying criteria or a framework therefor.

There is also the pending Public Procurement Bill (“the Bill”) that was published by National Treasury in 2020 for public comments. The Bill, inter alia, seeks to repeal the PPPFA, including the current 80/20-90/10 preference point system. It allows the Minister to prescribe a framework for preferential treatment and procurement that considers the B-BBEE Act and includes a preference point system and thresholds to set aside allocation of contracts to promote a category of persons, businesses or a sector. The Minister can also through Regulations provide for prequalification of bidders and circumstances and procedures for such prequalification. The Bill, also not a model for clarity in terms of its drafting, has been found wanting on various fronts, including failing to address economic transformation. In its present form, it is unlikely to be passed into law.

With all this uncertainty one thing is certain, that although S 217 (1) of the Constitution expressly provides for the protection or advancement of HDIs, it remains to be seen whether the setting of prequalifying criteria to advance this group of persons will ever pass the litmus test of  fairness, equity, transparency, competitiveness and cost-effectiveness prescribed by the very same section.

Nobanzi Madikizela-Nyati

Nobanzi Madikizela-Nyati
Chairperson & Head in Public Law, Risk, Governance and Compliance

Mbulelo Ndlovu

Mbulelo Ndlovu
Senior Associate in Public Law, Risk, Governance and Compliance

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