Public Procurement

In South Africa, public sector procurement is estimated to amount to approximately 14% of gross domestic product. Government procurement is therefore of huge significance and governments all over the world, including South Africa, increasingly make use of private entities to provide goods and services on behalf of government and its parastatals (SOCs).

Government procurement is expanding and due to its magnitude there is a wide range of groups with an interest in public procurement. It is therefore of huge significance, as ultimately it is the tax payers’ money that is being spent and public procurement has a big role to play regarding a country’s development.

Public procurement is of huge political and economic significance and differs vastly from private procurement. It relates to:

  • Achievement of different policies (the policy and philosophy behind government contracting being that the state must provide for its citizens).
  • The importance, from a public interest point of view, of their subject matter.
  • The need for flexibility and control.
  • And simply, the large amount of public money involved.

Proper regulation of public procurement is of the utmost importance in order to guard against corruption, inefficiency and wastefulness.

The importance of public procurement in South Africa is illustrated by the fact that it has been afforded constitutional status. The Constitution (section 217) provides that when the government contracts for goods or services it must do so in accordance with a system that is fair, equitable, transparent, competitive and cost-effective.

Procurement legislation

To give effect to the constitutional status of government procurement legislation has been enacted that supplements and/or replaces previous acts applicable to procurement.

At national and provincial government level there are the PFMA and the Regulations thereto. At local government level there are the Municipal Systems Act (Chapter 8) and the MFMA and the Regulations thereto.

Also of importance are inter alia:

  • Broad Based Black Economic Empowerment Act 53 of 2003
  • Preferential Procurement Policy Framework Act 5 of 2000
  • PAIA 2 of 2000
  • PAJA 3 of 2000
  • State Tender Board Act 86 of 1968

 

Constitutional principle: Competitive

To a large extent “competitiveness” is interrelated with the principle of “cost effectiveness”. An organ of state should try to obtain the best possible value for money as far as possible. A competitive procurement system will assist in obtaining the best value for money.

Competition can be defined as: “The rivalry that naturally exists in the market between those engaged in a similar economic activity, whether the activity be the production, distribution, sale or purchase of goods or services.”

Competition is an incentive for producers to invest in research and development to the survival and growth of those companies who make the necessary changes in good time while those that fail to do so fall behind. The continual pressure on all producers and sellers in that market will keep costs and prices down; it avoids favouritism and monopoly, and promotes efficiency and economy.

Competition provides incentives to increase efficiency and forces inefficient or marginal service providers out of the market. Competition provides powerful incentives to develop new ways of providing service. Competition helps to minimise costs. In contrast thereto, statutory monopoly provision encourages expansion of costs expenditure.

In the government context, therefore, this means that a government contract can only be awarded after a number of entities have been afforded an opportunity to compete for a particular contract. This can be done, for example, by means of (section 217 does not make reference to “tendering” as such):

  • Calling for tenders (RFPs)
  • Quotations
  • Competitive negotiation

There can, however, only be genuine competition if all parties are given a genuine change to participate and a sufficient number of competitors must participate

Constitutional principle: Cost-effective

Functioning or producing effectively and with the least amount of effort.

In public procurement, cost effectiveness finds application throughout the procurement process, such as:

  • Planning stage
  • Process of procurement
  • Contract maintenance/administration

In principle, an organ of state should procure goods or services from an outside entity, as opposed to providing it in-house only if doing so will lead to costs savings, BUT lowest price offered is not the only factor to be taken into account, as “value for money” is not necessarily the same as lowest price, though it may be.

Factors such as promptness of delivery, reliability in services, level of future operating costs or compatibility with existing equipment may indicate acceptance of some other than the lowest tender. Current guidance emphasises the need to take into account whole life costs and not simply the initial procurement costs.

Constitutional principle: Fairness

“Free from discrimination, just and appropriate in the circumstances, impartial in conformity with rules or standards, treating people equally, unbiased, uncorrupted and unprejudiced” public procurement is of an administrative law nature and “fair” referred to in section 217(1) can be said to refer to procedural fairness.

Procedural fairness finds application in two distinct relationships in the public procurement process:

  • Relationship between an organ of state and private contracting parties.
  • Relationship between an organ of state and private contracting parties in relation to each other traditionally procedural fairness consist of two elements: audi alteram partem (right to be heard) and nemo iudex in sua causa (rule against bias).

Therefore procedural fairness means at least the right to a fair hearing and the right to actions that are not tainted by bias.

 

Relationship between an organ of state and private contracting parties:

  • An organ of state should afford potential contractors sufficient access to the procurement process.
  • Government contracts should be widely advertised.
  • All contractors should be familiar with the rules of the competition.
  • All contractors should be afforded enough time to participate.

The organ of state should treat all possible contracting parties fairly in relation to each other. No preferences should be given to different contractors. All parties should have equal time for preparation and submission for tenders or quotes. The same information should be made available to all parties. An organ of state should treat all parties equally; it should not be biased or suspected of bias.

Fairness in SA

Harksen v Lane NO & Others 1997 (11) BCLR 1489 (CC): To address past inequalities, the right to equality, entrenched in section 9 of the Constitution, has been held to reflect a “substantive” conception of equality as opposed to a “formal” conception of equality.

In other words, in certain defined circumstances an organ of state is allowed to treat private contracting parties differently.

Example:

The wide publicity of government contracts may therefore not be enough; there may still be contractors who have difficulty understanding the precise needs of the organ of state. Briefing sessions may, for example, be held. Procurement may also be a policy tool for reform and development and eradication of past unfair discriminatory policies and practices.

Constitutional principle: Fairness and equity

Equity calls for an individualised application of legal norms that normally tend to operate generally and it helps ensure that these norms cater for the singular demands of dissimilar concrete situations.

Instead of treating all groups exactly the same, groups who face different levels of resources and development should receive different treatment. In this sense, equity is also linked to affirmative action. This links up with sections 217(2) and 217(3) of the Constitution, which also makes provision for the preferential allocation of contracts and the use of procurement as a means to address the inequalities and unfair discriminatory practices of the past

 

Constitutional principle: Transparency

The notion of transparency or openness is of the utmost importance in South African Law. One of the objectives of the South African Constitution is to lay the foundations for a democratic and open society. Transparency or openness is one of the core values of South Africa as a democratic state.

In government procurement, procurement must be done by means of a system that is open and should not be done behind closed doors. Information should be generally available (rules and practices). Criteria that will be used to select contractor must be available – for this reason tendering should be the preferred method of selecting contractors as the procedures used are more open. Transparent procurement methods assist better decision making and combat corruption.

Types of procedures

Informal procurement

Request for quotation

Request for proposals

Competitive negotiations

Formal procurement

Public call for tenders

Selective tendering

                        

National Treasury

The Regulations in terms of the PMFA have been promulgated and provide for the development and implementation of a supply chain management (SCM) system that “must”, inter alia, be cost effective.

The National Treasury has also issued instructions referred to as practice notes that relate to:

  • General conditions of contract
  • Standard bidding documents
  • Appointment of consultants
  • Code of conduct for SCM managers

Threshold values for the procurement of goods and services by means of petty cash, verbal/written price quotations and competitive bids

National Treasury: Threshold values

Range of procurement

Threshold value (inclusive of VAT)

Petty cashRange of procurement

 Up to value of R2000

(No bids or quotations)

Verbal or written quotations

Above the value of R2000 but not exceeding R10 000

(At least three)

Written price quotationsAbove the value of R10 000 but not exceeding R200 000

(Written price quotations from as many as possible)

Competitive biddingAbove R200 000

(Competitive bids should be invited)

 

Request for quotations

This method is usually used for the procurement of goods and services of a low value and for which there is an established market. The goods or services are readily available and are not specifically produced or provided to the exact specifications of the organ of state. The procedures are competitive but very informal. Quotations may be requested

over the phone and the organ of state can do informal “shopping around”.

This process provides for much less scrutiny by interest parties.

Request for proposals/request to tender

  • The method of procurement is generally used in instances where it is not possible for an organ of state to prepare detailed specifications for goods or, in the case of services to identify their characteristics.
  • Detailed technical and costs proposals are therefore solicited from interested parties as to various possible means of meeting the organ of state’s needs.
  • Contractors are required to submit proposal which sufficiently explain how they plan to perform and for what price.
  • Price plays a role, but the quality of goods or services to be provided is regarded as more important than the costs involved.
  • This method is used more frequently for the procurement of services where the value or the quality of the services is of the utmost importance.
  • Proposals received are evaluated and negotiations or discussions are then conducted with what an organ of state may regard as prospective providers.
  • RFPs enable an organ of state to include broad performance parameters and to seek technological solutions from interested firms.
  • RFPs may become very formal at times.

Competitive negotiation

  • This method is used, generally in cases of urgency.
  • For example, a public wall collapsed and a road needs to be cleared. Negotiations must be conducted with a sufficient number of (usually known) contractors.
  • The more urgent the matter the more justified the organ of state will be to negotiate with only a few possible contractors. Also used in cases where only a small number or insufficient number tendered. Organ of state then conducts negotiations with those tenderers and ask them to submit “best and final” offers by a specified date.

Formal procurement

Also referred to as:

  • Tendering
  • Competitive tendering
  • Bidding
  • Competitive bidding
  • Call for tenders
  • Public call for tenders

Public call for tenders

  • The general public is approached.
  • Procedures are formal.
  • Detailed specifications of the goods or services are drawn up and advertised.
  • Closing date, a time and details as to where tender documents can be obtained are provided.
  • Tenders are opened in public and opened together – negotiations with tenderers after submission is prohibited unless the tender documents stated that this will happen.
  • Late tenders sent back unopened.

Restricted invitation/Selective tendering

RFP may be very formal and the RFP will then be used in conjunction with tendering procedure.

  • Contractors are invited to provide detailed technical and costs proposals by a date.
  • Number of proposals is then reduced.
  • The candidates who are most likely to be able to perform the services or provide the goods are then invited to tender. The tender process is then limited to a reasonable number of contractors so than an organ of state’s resources are not strained unnecessarily due to the tender process.
  • Selective tendering may be utilised when the time and costs required to examine and evaluate a large number of tenders are disproportionate to the actual value of the goods or services needed.
  • A public call for “proposal to tender” therefore serves as a qualification process and aims to ensure that potential providers not only offer to provide goods or services, but are also able to deliver such goods or services.

Example: Allpay Consolidated Investment Holdings (Pty) Limited v CEO of The South African Social Security Agency 2013 ZACC 42

Process used:

  • Request for proposal
  • Bidders were called on to provide proposals to pay social grants with and seek solutions on a payment method that was convenient for recipients of social grants which limits theft and fraud

Process for accepting bids was as follows:

  • Bidders were invited to submit bids for a number of provinces.
  • Once the bids had been submitted, there would be a compulsory briefing session, where questions of clarification or queries concerning the requirements of the Request for Proposals were to be addressed.  The briefing procedure envisaged that bidders would submit written questions by a specified date and that clarifying responses would be provided at the briefing session.
  • The bids were to be evaluated by a Bid Evaluation Committee and awarded by a Bid Adjudication Committee.  A Supply Chain Management Circular indicated how the committees were to be constituted, and how their functions were to be performed.
  • The bids were to be evaluated in two stages.  At the first stage, bids would be assessed on the merit of the technical solutions offered to fulfil the requirements of the tender.  Solutions that crossed a substantial threshold – scoring a minimum of 70% – would be reconsidered after a further oral presentation on functionality.
  • Bidders whose solutions maintained a minimum score of 70% after the oral presentation would proceed to the second stage, where they would be evaluated on financial and preference-point merit.
  • Organs of state’s tender processes are administrative actions in terms of the Promotion of Administrative Justice Act 3 of 2000. The fairness and lawfulness of the procurement process must be assessed in terms of the Act (reviewed in terms of section 6 and make orders as set out in section 8).
  • Any tender process that does not follow section 217’s stipulations will be invalid. The tender documents and process must comply with the Constitution. An acceptable tender has to comply with the tender documents

Tender documents must set out:

  • If that tender will be evaluated on functionality; that the evaluation criteria for measuring functionality are objective.
  • The evaluation criteria, weight of each criterion, applicable values and minimum qualifying score for functionality.
  • That no tender will be regarded as an acceptable tender if it fails to achieve the minimum qualifying score for functionality as indicated in the tender invitation.
  • That tenders that have achieved the minimum qualification score for functionality must be evaluated further in terms of the applicable prescribed point systems.

Vague tenders can be successfully challenged in terms of PAJA.

“The purpose of a tender is not to reward bidders who are clever enough to decipher unclear directions.  It is to elicit the best solution through a process that is fair, equitable, transparent, cost-effective and competitive.”

The text published here is a summary of the text that facilitated discussions between the delegates of a workgroup presented by Pule Inc. It should by no means be construed as a comprehensive discussion on the issues raised herein and should also not be regarded as legal advice on the subject.