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Afribusiness NPC v The Minister of Finance (Case no 1050/2019) [2020] ZASCA 140 (2 November 2020)

1 February 2021

On 2 November 2020, the Supreme Court of Appeal handed down judgment in which it declared as invalid the Preferential Procurement Regulations of 2017 (2017 Regulations) and set same aside, as published by the Minister of Finance under section 5 of the Preferential Procurement Policy Framework Act 5 of 2000 (Framework Act) in the Government Gazette.

BACKGROUND

On 20 January 2017, the Minister (the respondent), in terms of section 5 of the Framework Act adopted the 2017 Regulations and caused them to be gazetted. On 19 May 2017, Afribusiness (the applicant) lodged an application in the Gauteng Division of the High Court, Pretoria against the Minister of Finance, the respondent, inter alia seeking the relief that:

1.       the promulgation and adoption of the 2017 Regulations be reviewed and set aside;

2.       it be declared invalid;

3.       the respondent to pay the costs of the application.

On 28 November 2018, the Gauteng Division of the High Court, Pretoria upheld the respondent’s contentions with costs, including the costs of two counsel. Subsequently the applicant applied for leave to appeal in the same court, which was similarly dismissed.  

Subsequent to the proceedings in the High Court, the South African Property Owners’ Association NPC (SAPOA), a non-profit company whose mission is to represent, protect and advance its members’ commercial property interests within the property industry, applied to this Court to be admitted as amicus curiae. SAPOA alleged that its interest in this appeal is ensuring a competitive bidding process in the property sector and, in particular, properties supplied to organs of state. SAPOA adopted the position that the appeal ought to succeed. The contentions advanced on behalf of SAPOA were clearly new and of assistance to the Court in dealing with the merits of the appeal. As the submissions from the amicus undoubtedly assisted the court in its deliberations, the application for admission had to succeed.

The applicant with SAPOA, brought the matter before the Supreme Court of Appeal (SCA).

The applicant’s application raised particular issue with regulations 3(b), 4, 9 and 10 of the 2017 Regulations.

The applicant submitted that the 2017 Regulations, in particular Regulations 4 and 9 provide respectively, for pre-qualification criteria, which must be applied before determining the award of a tender on the preference point system. It contended that the purpose of pre-qualifying and sub-contracting criteria is to prefer ‘designated groups’ above other tenderers. The result being, that the 2017 Regulations provides that the tenderers who qualify to tender, may first be determined according to, inter alia, race, gender and disability, and only thereafter in terms of the preference points system. It argued that section 2 of the Framework Act does not allow for qualifying criteria, which may disqualify a potential tenderer from tendering for State contracts. The applicant’s counsel referred to previous cases, Mosene Road Construction v King Civil Engineering Contractors and Grinaker LTA Ltd v Tender Board (Mpumalanga).

SAPOA submitted that the pre-qualification criteria provided for in regulation 4 of the 2017 Regulations are contrary to the objective of competitive bidding and inconsistent with section 217 of the Constitution. It argued that the blanket ‘permission’ to apply pre-qualification criteria, in terms of regulation 4, without creating a framework for that criteria, lends itself to abuse and the manipulation of tenders to the detriment of potential bidders. It further submitted that insofar as the respondent may be empowered to create an additional framework outside section 2 of the Framework Act, the respondent has failed to do so in a manner that is rational, lawful and fair.

The respondent submitted that section 2 of the Framework Act does not constrain the respondent. It constrains the organs of state. It argued, when the respondent makes regulations, it does not act as an organ of state and is not exercising powers under s 217(1) of the Constitution. The source of power lies in section 5 of the Framework Act. Section 5 of the Framework Act confers wide powers on the respondent to legislate what is considered to be “necessary or expedient”. Respondent’s counsel relied on cases Omar and Others v Minister of Law and Order and Another; Fani and Others v Minister of Law and Order and Others; State President and Others v Bill 1987(3) SA 859 (A),in which the phrase ‘necessary or expedient’ was interpreted as conferring on the respondent wide discretionary powers.

ISSUES DECIDED

The matter concerns the validity of the 2017 Regulations promulgated on 20 January 2017 under section 5 of the Framework Act. Whether this is a PAJA or legality review, and/or whether or not the respondent exceeded its powers in promulgating the regulations and that it was indeed subject to review.

THE LAW

Section 5 of the Framework Act empowers the respondent to make regulations, and provides that the respondent:

1.       may make regulations regarding any matter that may be necessary or expedient to prescribe in order to achieve the objects of this Act.

2.       draft regulation must be published for public comment in the Government Gazette and every Provincial Gazette before promulgation.

According to its Preamble, the Framework Act was enacted to give effect to section 217(3) of the Constitution by providing a framework for the implementation of the procurement policy contemplated in section 217(2) of the Constitution and to provide for matters connected therewith.

In the Framework Act, “preferential procurement policy’ is defined to mean “a procurement policy contemplated in s 217(2) of the Constitution”. Section 1 further defines ‘acceptable tender’ to mean “any tender which, in all respects, complies with the specifications and conditions of tender as set out in the tender document”.

Section 217 of the Constitution reads:

“(1) When an organ of state in the national, provincial or local sphere 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.

(2) Subsection (1) does not prevent the organs of state or institutions referred to in that subsection from implementing a procurement policy providing for─

(a) categories of preference in the allocation of contracts; and

(b) the protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination.

(3) National legislation must prescribe a framework within which the policy referred to in subsection (2) must be implemented.”

The relevant regulations raised in issue under the 2017 Regulations:

Regulation 4(1):

“(1) If an organ of state decides to apply pre-qualifying criteria to advance certain designated groups, that organ of state must advertise the tender with a specific tendering condition that only one or more of the following tenderers may respond-

(a) a tenderer having a stipulated minimum B-BBEE status level of contributor;

(b) an EME or QSE;

(c) a tenderer subcontracting a minimum of 30% to-

(i) an EME or QSE which is at least 51% owned by black people;

(ii) an EME or QSE which is at least 51% owned by black people who are youth;

(iii) an EME or QSE which is at least 51% owned by black people who are women;

(iv) an EME or QSE which is at least 51% owned by black people with disabilities;

(v) an EME or QSE which is 51% owned by black people living in rural or underdeveloped areas or townships;

(vi) a cooperative which is at least 51% owned by black people;

(vii) an EME or QSE which is at least 51% owned by black people who are military veterans;

(viii) and EME or QSE.”

Regulation 4(2): “…tender that fails to meet any pre-qualifying criteria stipulated in the tender documents is an unacceptable tender.

Regulation 9:

“(1) If feasible to subcontract for a contract above R30 million, an organ of state must apply subcontracting to advance designated groups.

(2) If an organ of state applies subcontracting as contemplated in subregulation (1), the organ of state must advertise the tender with a specific tendering condition that the successful tenderer must subcontract a minimum of 30% of the value of the contract to-

(a) an EME or QSE;

(b) an EME or QSE which is at least 51% owned by black people;

(c) an EME or QSE which is at least 51% owned by black people who are youth;

(d) an EME or QSE which is at least 51% owned by black people who are women;

(e) an EME or QSE which is at least 51% owned by black people with disabilities;

(f) an EME or QSE which is at least 51% owned by black people living in rural or underdeveloped areas or townships;

(g) a cooperative which is at least 51% owned by black people;

(h) an EME or QSE which is at least 51% owned by black people who are military veterans; or

(i) more than one of the categories referred to in paragraphs (a) to (h).

(3) The organ of state must make available the list of all suppliers registered on a database approved by the National Treasury to provide the required goods or services in respect of the applicable designated groups mentioned in subregulation (2) from which the tenderer must select a supplier.

SCA VIEW

With reference to the Framework Act, it held that the respondent may only make regulations “regarding any matter that may be necessary or expedient to prescribe in order to achieve the objects of the Act”. Section 2 of the Framework Act is headed “Framework for the implementation of preferential procurement policy”. On a proper reading of the regulations, the respondent failed to create a framework as contemplated in section 2. It is correct that the application of the pre-qualification requirements is largely discretionary. But the regulations do not provide organs of state with a framework which will guide them in the exercise of their discretion should they decide to apply the pre-qualification requirements.

The discretionary pre-qualification criteria in regulation 4 of the 2017 Regulations constitutes a deviation from the provision of section 217(1) of the Constitution, which enjoins organs of state when contracting for goods or services, to do so in in accordance with a system which is fair, equitable, transparent, competitive and cost-effective.

Any pre-qualification requirement which is sought to be imposed must have as its objective the advancement of the requirements of section 217(1) of the Constitution. The pre-qualification criteria stipulated in regulation 4 of the 2017 Regulations, and other related regulations, do not meet this requirement. Points are to be allocated to bidders based on the goals set out in section 2 of the Framework Act. The discretion which is conferred on organs of state under regulation 4 to apply pre-qualification criteria in certain tenders, without creating a framework for the application of the criteria, may lend itself to abuse and is contrary to section 2 of the Framework Act.

The procurement process must comply with five key principles: it must be equitable, transparent, fair, competitive and cost-effective. The court referred to the case of Airports Company South Africa SOC Ltd v Imperial Group Ltd and Others.

The respondent’s promulgation of regulations 3(b), 4 and 9 was unlawful. The respondent acted outside his powers under section 5 of the Framework Act. In exercising the powers to make the 2017 Regulations, it had to comply with the Constitution and the Framework Act, which is the national legislation that was enacted to give effect to section 217 of the Constitution. The framework providing for the evaluation of tenders provides firstly for the determination of the highest points scorer and thereafter for consideration of objective criteria which may justify the award of a tender to a lower scorer. The framework does not allow for the preliminary disqualification of tenderers, without any consideration of a tender as such. The respondent cannot create a framework which contradicts the mandated framework of the Framework Act.

The respondent’s decision is ultra vires the powers conferred upon him in terms of section 5 of the Framework Act. The Constitutional Court held in Minister of Constitutional Development and Another v South African Restructuring and Insolvency Practitioners Association and Others [2018] ZACC 20; 2018 (5) SA 349 (CC) para 27, that the rule ultra vires ‘forms part of the principle of legality which is an integral component of the rule of law’.

The respondent may not make regulations which permit organs of state to incorporate in their tender documents conditions which are inconsistent with section 217 of the Constitution and the Framework Act. In its application, the antecedent step may well disqualify certain tenderers who do not otherwise fall to be disqualified by the Framework Act. In that the respondent has exercised a power that is reserved for the legislature.

In terms of section 172(1) of the Constitution:

(1) When deciding a constitutional matter within its power, a court─

(a) must declare that any law or conduct that is inconsistent with the Constitution is invalid to the extent of its inconsistency; and

(b) may make any order that is just and equitable, including─

(i) an order limiting the retrospective effect of the declaration of invalidity; and

(ii) an order suspending the declaration of invalidity for any period and on any conditions, to allow the competent authority to correct the defect.’

This may include suspending the order of invalidity to enable the respondent to take corrective action or set aside the regulations, whose provisions are inconsistent with the Framework Act and section 217 of the Constitution.

SCA ORDER:

  1. The appeal is upheld with costs.
  2. The order of the court a quo was set aside and replaced with the following order:

(a)     The application succeeds with costs.

(b)     It declared that the 2017 Regulations are inconsistent with the Framework Act and are invalid. (c)        The declaration of invalidity referred to in para (b) above, was suspended for a period of 12 months from the date of the order.