Afribusiness NPC v The Minister of Finance (Case no 1050/2019) [2020] ZASCA 140 (2 November 2020)

On 2 November 2020 the Supreme Court of Appeal found the Preferential Procurement Regulations, 2017 (the “2017 Regulations”), issued in terms of section 5 of the Preferential Procurement Policy Framework Act, 2000, to be invalid.

Under the Constitution, the general rule is that all public procurement must be effected in accordance with a system that is: fair, equitable, transparent, competitive, and cost-effective.

The only exception allowed by the Constitution is that organs of state may implement procurement policies that provide for categories of preference in the allocation of contracts and the protection and advancement of people disadvantaged by unfair discrimination.

The Constitution limits the implementation of procurement policies by organs of state by requiring that national legislation must prescribe a framework within which those procurement policies must be implemented. The Preferential Procurement Policy Framework Act, 2000 (the “Framework Act”) constitutes the said framework.

The 2017 Regulations were promulgated by the Minister of Finance (the “Minister”) on 20 January 2017.

Regulation 3(b) of the 2017 Regulations allows an organ of state to determine whether pre-qualification criteria are applicable to a tender. The discretionary pre-qualification tender criteria are aimed at advancing certain designated groups such as tenderers with a stipulated minimum Broad-Based Black Economic Empowerment status level, Exempt Micro Enterprises and Qualifying Small Enterprises as determined under the Broad-Based Black Economic Empowerment Act, 2003 and tenders that will subcontract a minimum of 30% of the tender to inter alia EMEs or QSEs that are at least 51% Black-owned.

The challenge to the discretionary pre-qualification tender criteria was on the basis that:

• the Framework Act does not allow for qualifying criteria, which may disqualify a potential tenderer on the basis of race, gender and disability, without or prior to applying the preference points system under the Framework Act; and
• pre-qualification criteria are contrary to the objective of competitive bidding, inconsistent with the Constitution and in the absence of a legislative framework for the implementation of such criteria lends itself to abuse and the manipulation of tenders.

The Minister, however, was of the view that:

• the 2017 Regulations gave him wide discretionary powers to legislate on what he considered to be necessary or expedient to prescribe in order to achieve the objects of the Framework Act; and
• that the framework for the procurement process was a two-stage process, the first of which, the pre-qualification stage, required an organ of state to evaluate any tender against the requirements for an ‘acceptable tender’, where the requirements for an ‘acceptable tender’ in the circumstances of a given tender process are left to the discretion of the organ of state and not prescribed in any way. The Minister in essence contended that the discretionary pre-qualification tender criteria were in line with the Framework Act.

On appeal from a judgment by the High Court, the Supreme Court of Appeal (the “SCA”) ruled that the 2017 Regulations are invalid and suspended the invalidity for a period of 12 months in order to allow the Minister to remedy the defects.

The SCA found that:

• the discretionary pre-qualification criteria stipulated in regulation 4 of the 2017 Regulations is not authorised by either the Constitution or the Framework Act:
• the discretion which is conferred on organs of state to apply pre-qualification criteria in tenders, without a legislative framework for the application of the criteria, may lend itself to abuse and is contrary to the Framework Act;
• the pre-qualification criteria do not meet the advancement of the requirements of the Constitution;
• the pre-qualification criteria also do not meet the requirements of the Framework Act, providing for points to be allocated to bidders based on the goals set out in the Framework Act;
• the Minister may not in terms of the Framework Act make regulations which permit organs of state to incorporate in their tender documents conditions which are inconsistent with the Constitution and the Framework Act;
• the Minister had to comply with the Constitution and the Framework Act, which provides firstly for the determination of the highest points scorer and thereafter for consideration of objective criteria which may justify the award of a tender to a lower scorer;
• the Framework Act does not allow for preliminary disqualification of tenderers, without any consideration of the tender;
• the Minister may not through regulations create a framework which contradicts the Framework Act, the discretionary pre-qualification criteria may well disqualify certain tenderers who do not otherwise fall to be disqualified by the Framework Act;
• in short, the Minister has exercised a power that is reserved for the legislature.

The 2017 Regulations remain valid until the Minister remedies the defects, unless the 12 months’ suspension of the order expires prior to defects being remedied.  It remains to be seen whether the Minister will lodge an appeal against the judgment to the Constitutional Court.

Written by Paul Fouche, Partner; Daphney Willem, Senior Associate; Fasken