Administrative Law

Confusion follows apex court decision on tender regulations: what BEE principles will apply in government procurement?

The judgment was confusing enough, especially as it won the barest majority in the Constitutional Court and overturned what had come to seem a central tenet of South African government policy. But then followed a response from the National Treasury department, and it seemed just as confused as everyone else about the implications of the decision. It even suggested that perhaps all government tendering ought to stop immediately, at least pending some kind of clarification from the court about what was to happen next.

So, if you are confused about the significance of Minister of Finance v Afribusiness, and what it means for South Africa and the country’s business community, you’re not the only one!

The Afribusiness tender challenge

When Afribusiness brought its tender regulations’ challenge against the Minister of Finance, few would have imagined that it would cause such sharp divisions within the Constitutional Court; even fewer that it would lead to National Treasury suggesting that all new government tenders should come to a complete stop.

The dispute has to do with tenders and procurement in South Africa, a difficult issue at many levels, not least because of the way the system is so often turned into a tool that enables corruption. This time, however, the question was about regulations by the Minister of Finance that set new Black Economic Empowerment preconditions for tendering, among other issues.

There were two judgments from the Constitutional Court on the dispute: the minority decision (four judges) and the majority (five judges).

Procurement is a crucial part of government delivery

The minority of the court makes clear in its introductory remarks, with which the majority was in agreement, that procurement is a crucial element of government delivery, not only because it allows for the supply of services and goods, but also because the constitution explicitly mandates government to use tenders as a way of achieving transformation.

Explaining the background to the case, the court said that the national treasury received complaints from members of the public about the way that the 2011 procurement regulations worked, in particular that they created ‘a competitive advantage for white persons as they would consistently win on price’. According to these complaints, there was not enough emphasis placed on using tenders to achieve economic redress for previously disadvantaged persons.

Procurement regulations with pre-qualification criteria

This view eventually led to new procurement regulations that set out pre-qualification criteria, and only tenderers who complied with these criteria would be eligible to tender.

Among other provisions, these regulations effectively excluded businesses that were not black owned, from tendering.

It was against these regulations that Afribusiness brought its initial high court application, arguing that the minister had acted beyond the scope of the powers of the Procurement Act in making the regulations.

Constitutional Court interprets “necessary or expedient”

And it was this dispute, namely whether the minister acted outside his powers in making the regulations, that Afribusiness lost in the high court and then won in the Supreme Court of Appeal, leading to an eventual challenge in the Constitutional Court.

Four members of the Constitutional Court found that the minister was acting within his powers when he made the regulations. But the majority disagreed. The key difference between them lay with a single phrase: how to interpret the words, ‘necessary or expedient’.

The judges’ interpretations

The Procurement Act was passed to give effect to the constitution by providing a framework for SA’s procurement policy. In turn, the Procurement Act envisages regulations that will ensure that this framework becomes a reality.

The key words that led to the dispute between the judges come in the section of the Procurement Act that deals with the regulations. Section 5(1) of the Act says that the minister ‘may make regulations regarding any matter that may be necessary or expedient to prescribe in order to achieve the objects of the Act.’

Basically, the minority of the judges interpreted this quite broadly, to mean that the minister could make regulations ‘in order to achieve the objects’ of the Procurement Act. The majority, on the other hand, interpreted the crucial words more narrowly, and concluded that the minister’s power to make the regulations was not as wide as the minority believed.

Only if a minister made regulations that were both ‘necessary’ and ‘expedient’ would he or she be acting within the framework of the Act. And in the view of the five majority judges, the regulations at the centre of the dispute were not ‘necessary’. That’s because the Procurement Act provides that an organ of state had to determine and implement its own preferential procurement policy.

The question of legality

As the majority commented, ‘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?’

‘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 … the Procurement Act.’

If the minister does not have the power to make regulations of this nature, ‘the matter ends there’ and the regulations were invalid for being outside the minister’s powers. ‘And this is no small matter. 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, a foundational value of the constitution.’

Curing the problem legally

If the minister took the view that organs of state were not doing what the Act said they had to do, then ‘she or he must find other legal cognisable means to get them to do what they must do.’ For example, this could be done by ‘engaging them politically’ or by introducing a Bill in parliament to cure the problem.

But a minister was not allowed, ‘just because she or he feels that her or his idea of a preferential procurement policy is not being introduced by organs of state’, to take powers that the minister did not have under the law.

In the case before them, ‘a failure by organs of state to act in accordance with the power vesting in them cannot have the effect of vesting in the minister a power that otherwise vests in (the organs of state).’

Further complications

By a majority of just one, the apex court therefore agreed with the appeal court that the regulations were invalid. But the story doesn’t end there. In fact, the court’s decision was the beginning of further complications.

The decision was delivered on 16 February, 2022. Nine days later, the director general of National Treasury, Dondo Mogajane, wrote to ‘all organs of state’, informing them of the court’s judgment, and noted that while the court declared the regulations invalid, it was ‘silent on the question of remedy’ and neither the majority nor the minority deal with the issue of ‘suspension’ of the declaration of invalidity.

The original judgment of the appeal court was neither set aside nor replaced. In that judgment, the appeal court had suspended its declaration of invalidity of the regulations for 12 months. But that order, along with the judgment itself, was in turn suspended while the matter was dealt with at the Constitutional Court.

Section 18(1) of the Superior Courts Act provides that the operation and execution of a decision which is the subject of an application for leave to appeal or of an appeal is suspended pending the decision of the application or appeal. So, what did the outcome at the highest court mean about the SCA’s order suspending the declaration of invalidity for 12 months? Could it be that by the Constitutional Court dismissing the appeal, the SCA’s order, which was suspended pending the outcome of the appeal, the 12 month suspension of the declaration of invalidity began running on 16 February?

Tenders to be held in abeyance

Mogajane said that the Minister of Finance would be asking the Constitutional Court, as a matter of urgency, to confirm that the declaration of invalidity ‘has been and continues to be suspended.’

He added, ‘Confirmation will be sought by way of declaration, variation and/or clarification.’ In other words, he wrote, ‘guidance is required as to whether the procurement regulations remain valid until 15 March 2023, unless repealed sooner.’

Pending an answer from the Constitutional Court, ‘organs of state are advised that … tenders advertised on or after 16 February 2022 be held in abeyance, and no new tenders be advertised.’

New draft regulations were to be published

Presumably Mogajane had a flood of responses, for another notice was issued on 3 March, explaining that the minister had decided to bring an urgent application to the Constitutional Court, to confirm whether the order of invalidity of the regulations had been suspended.

As to the suggestion that no new tenders be advertised, the notice said suggestion was made to deal with the risk that tenders might be awarded on the basis of regulations that were no longer valid.

After ‘queries from many organs of state’, a follow-up advisory note had been issued saying that new draft regulations were to be published during March and were being finalised.

Exemptions could be granted

Until these new regulations became effective, or the Constitutional Court gave clarity on the suspension of the declaration of invalidity of the regulations, an organ of state could ‘request an exemption from the provisions of the Act for a specific procurement or category of procurement requirements.’

However, these requests should be ‘limited to procurement requirements that cannot await the new regulations or the Constitutional Court’s clarity.’

The notice added that National Treasury acknowledged the need to process requests for exemption as quickly as possible, and it had thus put in place a ‘process of submissions of requests for exemption for the minister’s consideration, daily as far as possible.’

Acting chief procurement officer to advise organs of state

Provision had also been made for the acting chief procurement officer to advise an organ of state of the minister’s decision on an exemption request.

The notice further advised that the application for the Constitutional Court’s clarification had been filed on 4 March, and that the draft regulations were published for public comment on 10 March in the national and provincial gazettes, with a closing date of 11 April 2022.

Transnet moves forward with its own draft tender regulations

Although the current situation is confusing, Transnet, for one, has decided to move forward with its own draft tender regulations that brings procurement ‘back in line with the system that existed before 2017.’

Transnet said that the 2017 regulations had in fact benefited ‘very few black-owned companies’, and that it would now once again be applying the system stipulated in the Act.

This is a reference to the previous 80/20 preference point system for a tender up to R50m, in terms of which 80% of the points awarded for a tender is awarded for price, with the remaining 20% being based on the bidder’s BEE level. A 90/10 split is applied when the tender involves more than R50m.

So we wait to see whether the Constitutional Court interprets its own judgment of 16 February, or tells National Treasury to seek legal advice…

Judgment link: http://www.saflii.org/za/cases/ZACC/2022/4.html