IRR welcomes new procurement regulations, flags drafting error

8 November 2022

The IRR welcomes the new procurement regulations recently published by Minister of Finance Enoch Godongwana.

Minister Godongwana has made an extremely positive move by returning the definition of ‘specific goals’ in public procurement to the original language of the Preferential Procurement Policy Framework Act (PPPFA), dropping any direct reference to BEE.

The PPPFA states that ‘specific goals may include’ implementing the old RDP programmes and ‘contracting with persons, or categories of persons, historically disadvantaged by unfair discrimination on the basis of race, gender and disability’. This language clearly provides for alternative ‘specific goals’ beyond those listed.

According to the Zondo Report, ‘maximising value-for-money’ is in the ‘national interest’. It should therefore qualify as a specific goal.

Other specific goals may include combating South Africa’s biggest unresolved problem, according to respondents to every poll commissioned by the IRR since 2013, namely unemployment. On this basis, companies that add employees proportionally may be allocated extra points. Companies that export, pay high taxes, fund social programmes and education, may also receive points for meeting the ‘specific goals’ of combating poverty, illiteracy, and sovereign junk status.

The IRR has a standing policy called Economic Empowerment for the Disadvantaged (EED), which can be taken up by any organ of state that wishes to implement those specific goals rather than Black Economic Empowerment (BEE).

However, in what may be a drafting error, part of the new regulations – specifically, sections 6 and 7 – appear to be unlawful and irrational, for the following reason. They minimise the value-for-money objective by rewarding the company that charges the most for providing the same goods or services as competitors.

It is useful to see how this works mathematically. In section 6 of Minister Godongwana’s new regulations the formula is as follows:

Ps = Points scored for price of tender under consideration
Pt = Price of tender under consideration; and
Pmax = Price of highest acceptable tender.

After applying the formula to competing tenders ‘the contract must be awarded to the tenderer scoring the highest points’. But this formula results in the ‘highest acceptable tender’, meaning the one ‘that has the highest price’, getting the most points – 80 – for price. All other tenders, which are cheaper, will get fewer points for price.

An example will make clear that the most expensive bid will always win on this formula. Company A offers a product for R36 million, Company B offers the same for R40 million, both are alike in meeting ‘specific goals’.

Company B’s points-for-price calculation is 80 * (1 + (40 million – 40 million)/40 million) = 80. Company B gets the maximum 80 points for price.

By contrast Company A’s points-for-price calculation is 80 * (1 + (36 million – 40 million)/40 million) = 72. Company A gets fewer points, and so loses the competition, simply because it is cheaper.

On this formula the most expensive bid always wins on price. For Company A to win it should just charge an extra R5 million. But then Company B could overtake Company A by charging more again.

This is unlawful because the PPPFA says the pro rata formula must calculate from the cheapest, not the most expensive, tender. It is also unconstitutional and irrational because it punishes cost-effectiveness.

The above referred to small contracts, which includes all those below ‘R50 million’ in value. Minister Godongwana should have set a lower threshold. For larger contracts the same points system is set on a 90/10 basis rather than 80/20. But the same irrational mistake is repeated in the Section 7 of the new regulations, which bases the pro rata scale on the maximum bidder, which is once again unlawful, and grants maximum price points to the most expensive bidder, which is irrational.

Minister Godongwana should delete sections 6 and 7 of the new regulations immediately, before they come into effect. The IRR has written to the minister to advise him of the error.

* Afrikaans-language media are requested to retain the abbreviation ‘IRR’, rather than using ‘IRV’.
Statement issued by Gabriel Crouse, IRR Head of Campaigns, 8 November 2022