State Owned Entities Boards are the last line of Defence for BEE and Preferential Procurement

Public Sector and Regulatory

Much has been said about the recently published regulations to the Preferential Procurement Policy Framework Act 5 of 2000 (the 2022 PPPFA Regulations) by the Minister of Finance which came about after the Supreme Court of Appeal and the Constitutional Court respectively set aside the 2017 PPPFA Regulations, following a challenge by Sakeliga NPC (previously known as Afribusiness NPC).

The 2022 PPPFA Regulations took effect on 16 January 2023 to repeal the 2017 PPPFA Regulations, most notably the provisions on BEE standing as pre-qualification criteria, the requirement for local content and the mandatory subcontracting of high value tenders to qualifying small enterprises and exempt micro enterprises.

The repeal of the 2017 PPPFA Regulations and the advent of the 2022 PPPFA Regulations means that state-owned entities will be left to their own devices to implement BEE, local content requirements and mandatory subcontracting to small and micro enterprises. This means that the boards of state-owned entities need to take the lead in putting in place procurement policies that will realise fair and equitable procurement including preferential procurement as enjoined by section 217 of the Constitution of the Republic.

The Chief Justice of the Republic concluded in the State Capture report that “One of the fundamental difficulties inherent in our procurement legislation is to reconcile the particular objectives separately addressed in sections 217(1) and 217(2) of the Constitution.  The potential for misunderstanding is increased by the fact that the PFMA and the MFMA collectively address the requirements of section 217(1) leaving the correction of the disparities of the past to be dealt with in separate legislation under the PPPFA. This uncoordinated approach leaves a critical question unanswered: is it the primary intention of the Constitution to procure goods at least cost or is the procurement system to prioritise the transformative potential identified in section 217(2)”. The debate that is currently ensuing on the efficacy of the 2022 PPPFA Regulations affirms the difficulties observed by the Chief Justice in the State Capture Report.

While the debate rages on regarding the fairness or lack thereof of the 2022 PPPFA Regulations, since the 2017 PPPFA Regulations having taken effect, the boards of state-owned entities are now the last line of defence for the cause of BEE and preferential procurement in line with section 217(2) of the Constitution.  This is so because in the absence of prescribed parameters such as those in the 2017 PPPFA Regulations, the lodestar on preferential procurement will be the procurement policies of the respective state-owned entities.  The boards of state-owned entities have a final say on the policies that apply in each entity including supply chain management policies.  

board members

Under the 2017 PPPFA Regulations and their forerunners which were prescriptive on matters of preferential procurement, it was not uncommon for some state-owned entities to have scant procurement policies which merely mirrored the PPPFA regulations by reference.  In light of these recent developments, state-owned entities boards need are now required to reinforce and regulate these matters within their procurement policies.  This calls for courageous decision making for each state-owned entity to implement progressive policies that govern preferential procurement.  Naturally this needs to be done while considering the circumstances and nature of business of each state-owned entity.  The outcome of these revised policies will of necessity not please everybody. It is highly likely that most state-owned entities’ procurement policies will be challenged in court by both the proponents and detractors of BEE and preferential procurement.

The President of the Republic in his response to the recommendations of the State Capture Commission, has called for several public procurement reforms including that in line with good governance practices, no board member will be allowed to be operationally involved in procurement processes beyond playing an oversight role.  Although it is trite that in line with good corporate governance, that board members should not be operationally involved with entities they oversee and direct, due to past failures and in some cases for ulterior purposes, boards of state-owned entities have gravitated towards operational involvement in public procurement.  The most common practice which will fall foul of the President’s direction is that boards are tasked with approving and in certain cases adjudicating procurement bids of a predetermined financial quantum or strategic nature. 

Of priority, is for the boards to immerse themselves on how each entity will deal with preferential procurement in the absence of prescribed regulations, as was the case under the 2017 PPPFA Regulations.  Policy determination of this nature will aptly fall within the oversight role of the boards.  The practical challenge being that in order to proceed with procurement, organs of state must ensure adherence of their SCM policies with the newly effective 2022 PPPFA Regulations, within the limited timelines offered.

The management and boards of state-owned entities must step up to ensure that there is no vacuum on how to implement preferential procurement in their respective entities post the 2017 PPPFA Regulations.  Courageous decision making will be required to come up with policies that will not negate transformational objectives as some have suggested.

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