Last week the Constitutional Court struck down the Preferential Procurement Regulations (the Regulations) gazetted in 2017 by the then finance minister, Pravin Gordhan, under the Preferential Procurement Policy Framework Act (PPPFA) of 2000. Why did it do so – and what does this herald?

Background to the case

The minister’s Regulations allowed organs of state to set ‘pre-qualifying criteria’, under which a company wanting to tender for a contract had to have ‘a stipulated minimum BEE status level’ if it was to be considered at all. In practice, this minimum was often set at 51% (or even at 100%) BEE ownership, even though the ownership target under the BEE generic codes is 25%.

AfriBusiness or Sakeliga, a non-profit organisation representing some 10 500 firms, objected that these pre-qualification criteria were unconstitutional. They also made for inflated pricing and poor delivery as many businesses with competitively priced and high-quality products were excluded from tendering.  

Sakeliga’s objections to the Regulations were dismissed by the Pretoria high court. In 2020, however, they were upheld by the Supreme Court of Appeal (SCA), which found the Regulations inconsistent with the framework for preferential procurement in the PPPFA and the Constitution.

As the SCA pointed out, Section 217(1) requires that ‘all public procurement be effected in accordance with a system that is fair, equitable, transparent, competitive, and cost-effective’.  As an exception to this general rule, Section 217(2) adds that national legislation must ‘prescribe a framework’ within which preferential procurement policies may be implemented to ‘protect or advance’ the disadvantaged.

The PPPFA is the national legislation to which Section 217(2) refers. It sets out a framework for preferential procurement under which tenders must generally go to the bidder with the highest points, as calculated under a points system. This system gives 80 points for price and 20 for BEE status for tenders below a specified threshold (currently set at R50m). It gives 90 points for price and 10 points for BEE status for tenders above that threshold.

‘This framework,’ ruled the SCA, ‘does not allow for the preliminary disqualification of tenderers’ without their tenders being considered at all. Hence, the minister could not use his regulations to ‘create a framework which contradicted the mandated framework’ set out in the PPPFA. The minister had therefore exceeded the powers given to him by the PPPFA and acted in a manner ‘inconsistent with the Constitution’. 

The ANC’s (now suspended) secretary general, Ace Magashule, responded with ‘dismay’ and said the ANC would seek to have the ruling set aside by the Constitutional Court. The SCA judgment, he added, had made ‘the process of implementing the 51% black ownership provision far more cumbersome’. Yet the 51% provision was vital to give black South Africans ‘control of our economy’ and ‘complete our revolution’.

The Constitutional Court ruling

Now, however, the Constitutional Court has upheld the SCA ruling rather than setting it aside. According to the majority judgment of Judge Mbuyiseli Madlanga, the crucial question was whether ‘the minister has the power to make regulations of this kind. If he…does not, the matter ends there; the regulations are invalid for being ultra vires the enabling section. And this is no small matter. Conduct by a [minister] 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’.

The majority ruling brushed over the key point made by the SCA: that the PPPFA requires all tenders to be considered and ranked according to its points system, whereas the pre-qualification criteria in the Regulations prevent many tenders from entering into the running at all.

Instead, it relied on the rather odd argument that the PPPFA already empowers organs of state to determine their own preferential procurement policies within the framework it provides. Hence, it is ‘superfluous’ – rather than ‘necessary’ or ‘expedient’ – for the minister to determine such a policy too via his regulations.

The judgment was, however, on solid ground in emphasising that the minister ‘entrusted with the regulation-making power cannot stray from the parameters set by the empowering legislation’. He might want organs of state to apply ‘a particular type of preferential procurement policy’, but this is ‘simply not enough’ – for the minister ‘cannot arrogate to himself a power he does not have under the Procurement Act’.

The immediate effect of the judgment is that 51% BEE ownership requirements and other pre-qualification criteria earlier imposed under the minister’s Regulations can no longer be applied in public procurement. Does it also mean that the Constitutional Court is becoming more alive to the negative practical effects of preferential procurement policies?  

The practical outcomes of preferential procurement policies

The majority judgment began by stressing the importance of preferential procurement as an instrument of redress. If the Constitution had not made provision for this, said Judge Madlanga, the ‘history of economic disadvantage experienced’ by the black majority ‘would have meant the perpetuation of the disadvantage and possibly the widening of the gap’. Moreover, as the Constitutional Court had previously stated in the Allpay case, ‘economic redress for previously disadvantaged people lies at the heart of our constitutional and legislative framework’.

Implicitly, the court accepted that these laudable goals should be taken at face value, as if the articulation of an aim is sufficient to secure its fulfilment. But is preferential procurement succeeding in practice in providing redress and reducing disadvantage? It has clearly helped a small minority of politically connected people, but what about the great majority of black South Africans?

One of the key problems was summed up by journalist Jovial Rantao back in 2007, well before Jacob Zuma came to power and Zupta-linked ‘state capture’ began. The government’s declared BEE aim, wrote Mr Rantao, was to ‘spend billions of rands’ on delivering much needed goods and services while simultaneously empowering black business. But what many suppliers did was to ‘pocket the millions’ they received, buy better houses and ‘the biggest and flashiest 4×4 by far’ – and then use what little was left over to deliver on their contracts with the state.

Another core aspect of the malaise was highlighted in 2012 by an anonymous BEE businessman who explained why tender prices were often so inflated: ‘You pay to be introduced to the political principals,’ he said. ‘You pay to get a tender, you pay to be paid [for completed work], and you must also “grease the machinery”. From time to time, you are called upon to make donations to the…ANC. There are also donations to the youth league, the women’s league, and the SACP.’ Those who failed to make the necessary payments either in cash or ‘in kind’ – by giving sub-contracts to the relatives of public servants and politicians – would find themselves excluded from state contracts worth many millions of rands.

Though few other people have made similar admissions, the comment seems to provide an insight into a wider pattern of abuse. It also helps explain why the state’s contract prices are often so absurdly high: R40m for a school that should have cost R15m, as Pravin Gordhan said in 2009, R27 for a bottle of water that should have cost R7, as Gwede Mantashe added in 2012, and a staggering R238 000 for a wooden mop, as Eskom reported in 2021.

These are not isolated instances, moreover. Rather, as the Treasury’s acting chief procurement officer Willie Mathebula told the Zondo commission in 2018, the procurement rules intended to ensure cost-effectiveness are deliberately not followed in roughly half of all state contracts. And once some excuse has been found to bypass normal procurement requirements, ‘a contract which starts at R4m is soon sitting at R200m’, as Mr Mathebula added.

Inflated pricing wastes scarce tax revenues, adds to public debt and costly interest payments, and limits the money left over for the delivery of vital goods and services. Often, too, what is delivered is partial and deficient, adding to the wastage. And the people who bear the brunt of this defective delivery are the majority of black South Africans, who rely on the government for such core needs as water, sanitation, housing, education, and healthcare.

Preferential procurement and other BEE rules are also so unduly onerous – and so constantly in flux – as to deter fixed investment, reduce economic growth, and limit the employment vital to upward mobility. And the people who suffer the most from this economic malaise are again the majority of black South Africans.

So great is the widening gap between the few who gain and the many who suffer that even the SACP – which, like Mr Magashule, wants BEE to help ‘complete’ its socialist revolution – has identified the system as the primary reason for mounting inequality since 1994.

In 2017 the party warned that the ‘intra-African inequality’ which BEE has fostered is ‘the main contributor to South Africa’s extraordinarily high Gini coefficient’ of income inequality. Added the SACP: ‘Enriching a select BEE few via share deals…or (worse still) looting public property…in the name of broad-based black empowerment is resulting in….increasing poverty for the majority, increasing racial inequality, and persisting mass unemployment.’

Why then do the courts continue to assume that preferential procurement is effective in providing redress and reducing disadvantage? Some judges may take the view that the practical outcomes of the policy are not the courts’ concern. But this is not so.

The Van Heerden tests

In 2004 the Constitutional Court in the Van Heerden case laid down three tests for the validity of all affirmative action measures: (1) whether they target the disadvantaged; (2) whether they are designed to advance them; and (3) whether they promote the achievement of equality.

Preferential procurement fails all three tests because it targets the skilled and politically connected rather than the disadvantaged; harms rather than advances the great majority of black people; and worsens inequality between a relatively small black elite and the 10.7 million black people now jobless and destitute.

It is high time that the courts began recognising this reality and striking down BEE procurement rules – not simply on relatively narrow grounds such as the ultra vires rule, as in the Sakeliga case – but primarily because they fail the Van Heerden tests and are hurting, rather than helping, the great majority of black South Africans.

First published by The Daily Friend.

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Anthea Jeffery

Dr Anthea Jeffery holds law degrees from Wits, Cambridge and London universities, and is the Head of Policy Research at the IRR. She has authored 11 books, including People’s War: New Light on the Struggle...

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