March 17, 2017

Preferential Procurement Policy Framework Regulations and Draft Amended Construction Sector Code

In January 2017, the Minister of Finance promulgated the Preferential Procurement Regulations in terms of the Preferential Procurement Policy Framework Act, 2000. The Regulations, which will come into effect on 1 April 2017, apply to organs of state and seek to promote socio-economic transformation. 

The Regulations specifically seek to do the following:

  • Align the Preferential Procurement Policy Framework Act to Broad-Based Black Economic Empowerment (B-BBEE) legislation, and provide the evaluation formula to be utilised by organs of state.
  • Encourage Government to procure from small to medium enterprises (SMEs).
  • Empower organs of state to apply pre-qualification criteria to tenders, limiting tenderers who are entitled to respond to only those who:
    • have a stipulated minimum B-BBEE status level;
    • are exempted micro enterprises (EMEs) or qualifying small business enterprises (QSEs);
    • subcontract a minimum of 30% of the contract EMEs or QSEs who are at least 51% owned by black people in various categories (being youth, women, people with disabilities, people in rural areas, or military veterans).

Where tender documents do not meet any specified pre-qualifying criteria, they are determined to be unacceptable.

  • Requires organs of state, for contracts above R30 million, and if feasible, to apply subcontracting to advance designated groups. If the organ of state is required to apply such subcontracting requirements, the successful tenderer will be required to subcontract a minimum of 30% of the value of the contract to:
    • An EME or QSE;
    • An EME or QSE which is 51% owned by black people in specified categories (being youth, women, people with disabilities, people in rural areas, or military veterans);
    • A cooperative which is at least 51% owned by black people; or
    • A combination of the above.

The Regulations make provision for a database of approved suppliers who meet the above criteria, and from which an approved tenderer may select its suppliers.

The Regulations seek to prevent abuse of the procurement requirements by preventing any subcontracting after the award of the contract without the approval of the organ of state. The Regulations also prohibit the person awarded a contract from subcontracting more than 25% of the value of the contract to any other enterprise which does not have an equal of higher B-BBEE status level of contributor than the person concerned, unless the contract is subcontracted to an EME with the capability and ability to execute the subcontract.

As SMEs are some of the entities most dramatically affected by late payments, there is now an even more pressing need to address late payment malaise through the introduction of appropriate legislation / regulation (see the Prompt Payment and Adjudication article in this Newsletter).

Another development in the procurement space, which will go hand-in-hand with the Preferential Procurement Regulations, is the publication by the Minister of Trade and Industry of the Draft Amended Construction Sector Code.

The Draft Code was published for public comment in October 2016, in terms of the Broad-Based Black Economic Empowerment Act, 2003. Its main aim is to act as a catalyst for the implementation of B-BBEE in the construction sector in South Africa, and sets a target for black ownership at 35%. It aims to curb passive shareholding in order to meet B-BBBEE levels by requiring at least 50% of black shareholding to be held by professionals.

We will release a further update once progress is made on implementing the Draft Code.