Corporate Accountability and Human Rights: Aligning South African Business Practices with Constitutional Values
November 18, 2024
Public Sector and Regulatory
Unconscionable Misapplication Of The Exemption Created In Terms Of Section 110(2) Of The Local Government Municipal Finance Management Act: How To Get It Wrong
The principles of procurement are contained in section 217 of the Constitution of the Republic of South Africa, 1996 (“the Constitution”). The section requires that when an organ of state in the national, provincial, or local spheres of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective.
To give effect to section 217 of the Constitution, the Local Government: Municipal Finance Management 56 of 2003 (“the MFMA”), applies in the context of municipalities and municipal entities. Chapter 11 in Part 1 of the MFMA deals with the supply chain management of municipalities. section 111 mandates municipalities to implement a supply chain management policy which gives effect to the provisions of Chapter 11 of the MFMA.
In accordance with the provisions of section 217(1) of the Constitution, section 112 of the MFMA demands that the supply chain management policy of a municipality or municipal entity must be fair, equitable, transparent, competitive and cost-effective and comply with a prescribed regulatory framework for municipal supply chain management. Section 110(2) of the MFMA provides that abovementioned Part 1 of the MFMA, inter alia, applies to all procurement by a municipality or municipal entity of goods and services. However, the provisions set out therein, do not apply if a municipality or municipal entity contracts with another organ of state for, inter alia, the procurement of goods and services under a contract secured by that other organ of state, provided that the relevant supplier has agreed to such procurement.
The court in Blue Nightingale Trading 397 (Pty) Ltd t/a Siyenza Group v Amathole District Municipality 2017 (1) SA 172 (ECG), noted an exemption from procurement processes in the context of municipalities and held as follows:
“An exemption from compliance with such part is provided for in s 110(2), applying with respect to contracts between a municipality and an organ of state for (a) the provision of goods or services to the municipality; (b) the provision of a municipal service or assistance in the provision of a municipal service; or (c) ……”
The Municipal Supply Chain Management Regulations of 2005 (“MSCMR”) in regulation 32, lay out the principles which apply to the exemption granted to municipalities in terms of section 110(2) of the MFMA. Regulation 32 provides as follows:
32. Procurement of goods and services under contracts secured by other organs of state.—(1) A supply chain management policy may allow the accounting officer to procure goods or services for the municipality or municipal entity under a contract secured by another organ of state, but only if—
- the contract has been secured by that other organ of state by means of a competitive bidding process applicable to that organ of state;
- the municipality or entity has no reason to believe that such contract was not validly procured;
- there are demonstrable discounts or benefits for the municipality or entity to do so; and
- that other organ of state and the provider have consented to such procurement in writing.
In Maquassi Local Municipality v Kwane Capital (Pty) Ltd [2024] JOL 64558 (GJ), the High court had to consider an application brought by the Maquassi Local Municipality (“the Municipality”) to review and set aside its decision to appoint and conclude contracts with Kwane Capital (Pty) Ltd (“Kwane”) in terms of Regulation 32 of the MSCMR.
The Council of the Municipality took a resolution to appoint a service provider to assist in the acquisition of new plant and construction equipment to implement programs associated with service delivery. Pursuant to the resolution of the Council, the Municipal manager of the Municipality decided to procure the goods from a service provider which had been appointed by the Tsantsabane Local Municipality (“Tsantsabane”) to provide fleet management services.
The Municipal manager of the Municipality duly obtained consent from the Municipal manager of the Tsantsabane Municipality. Thereafter, in light of the foregoing, the Municipality concluded two agreements with Kwane, an Instalment Sale Agreement and Maintenance Lease Agreement on 20 July 2016.
During August 2016, Kwane submitted two invoices, the first in the amount of R 3 372 901.81 for construction plant and machinery, and the second in the amount of R 346 646.11 for the lease of light vehicles. Despite the Municipality honouring the invoices, Kwane failed to deliver the complete order to the Municipality. The payment was thereafter classified as irregular eenditure for the 2016/2017 financial year.
Edge Forensics and Risk Consultants (“Edge Forensics”) were appointed by the Municipality to investigate the process followed by the Municipality in the appointment of Kwane. Surprisingly, Edge Forensics found that the appointment was above board and done in accordance with regulation 32. Instead, Edge Forensics found against the failure to deliver by Kwane and recommended that the Municipality recovers the money paid by the Municipality.
In the main, the Municipality argued before the court that, first, it had to procure the goods and services under the contract between Tsantsabane and Kwane instead of entering into separate agreements. Secondly, the Municipality argued that there were no benefits and discounts which it would receive from invoking the regulation, and that the regulation contemplated the same services under the contract with Tantsabane Municipality, which was not the case.
Kwane argued that there is no veracity to the arguments raised by the Municipality because Edge Forensics had confirmed in their report that the process undertaken in terms of regulation 32 was above board. Furthermore, Kwane argued that even if the court were to find that the process undertaken by the Municipality was not in compliance with regulation 32, such non-compliance would not pass the test of materiality, and finally Kwane argued that there was an unreasonable delay by the Municipality in bringing the review application, which cannot be overlooked by the court.
The court having heard the explanation proffered by the Municipality exercised its discretion and condoned the delay in bringing the review. In doing so, the court took into account that Kwane had not advanced any case to demonstrate the prejudice which it would suffer if the court were to exercise its discretion. The court proceeded to find that the fact that the Municipality and Kwane concluded new agreements outside the Tsantsabane Municipality agreement was in contravention of regulation 32. The court then concluded that the conduct of the Municipality offended section 217 of the Constitution, and it declared the contracts invalid and set them aside. Furthermore, the Court found that the contracts violated the purpose of regulation 32, therefore, the irregularity was material and cannot be discounted.
In granting a just and equitable remedy, the courtordered Kwane to repay the Municipality an amount of R 3 713 547.92.
It is incontrovertible that invoking regulation 32 confines you to the existing agreement (including the value of such an agreement). The court in Maquassi Local Municipality correctly granted the review. However, we differ with the court’s finding that non-compliance with regulation 32 of the MSCMR amounts to a breach of section 217. We say this because in itself, regulation 32 is an exemption from complying with section 217. Therefore, it is axiomatic that a breach of regulation 32 should not be measured against section 217 of the Constitution but against the regulation itself, because section 217 finds no application to appointments made in terms of regulation 32. To do otherwise would defeat the very purpose of regulation 32.
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We, at MVR Attorneys are specialist in the field of public procurement and government contracts. We have a team of lawyers who are available to assist in advising and litigating on matters relating to public procurement. Please do not hesitate to contact us on 010 012 6675 or reach out via email tiyiselani@mvrlaw.co.za
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