South Africa's new Public Procurement Bill. Will it do its job?

National Treasury has put the draft Public Procurement Bill out for public comment. We have reviewed it and have provided a set of comments on arguably the most critical part of the Bill, it objectives.

South Africa has indeed seen hard times pre 1994 and since then has also indeed come a long way. The efforts of the draft Public Procurement Bill are a testimony to the efforts of the South African government to, in part at least, to right some of the wrongs of the past in providing a means to place a preference on the use of the historically disadvantaged to deliver both services and products to South Africa’s public sector clients. This is an extremely noble action, and necessary.

As a South African based company, we are pleased to see the approach taken in the latest draft and support it to our fullest. We do however have good insight on some of the potential flaws that the draft bill may create, and as such, those which may prevent it from achieving its objectives. We provide some possible solutions for consideration.

Section 2 of the Bill

Within Section 2 it is clear why the Public Procurement Bill has been drafted. A few of these are noted here; to provide for procurement that is developmental in nature; that ensures value for money in the use of public funds; aspires to expand the productive base of the economy; achieve maximum competition; and the protection and advancement of persons and categories of persons disadvantaged by unfair discrimination.

Perhaps the clearest difference between this draft and the Preferential Procurement Policy (2000) (PPP2000 onwards in this article) is that the current draft Public Procurement Bill (PPB) looks to standardise an approach across all state entities, that this approach is decided upon by the Minister, which is (and the rest of the procurement process) regulated by a Public Procurement Regulator, which the bill establishes. This is a big leap forward.

In assessing whether or not the goals of the PPB will be achieved, we must remember that the service/product provider is needed to perform a function, which is provision of goods or services, and that those goods and services, are, by default, needed. As such, this also implies that the goods and services are needed to be of a certain minimum quality. If the goods or services are not provided to the requisite level of quality then the procurement process has failed in its function. This is an important aspect as the public sector does not go out to tender for the sole purpose of providing jobs, appointing Level 1 BBBEE service providers, and to do so, develop an arbitrary need for goods and services. This is a simple but important idea as it related back to economic growth and competition. Economically, there must be a need for a product/service and a need to provide that product or service for an economic exchange to occur.

Also, competition is the cornerstone of the development of any society because it inspires the population to reach above and beyond their current situation to achieve something of economic significance. This is really important in third world countries where poverty is sometimes expected opt be solved through government intervention alone. If everyone waited for economic gold to fall on their lap there would be no push to improve, to work, to produce, to serve; and therefore no economic growth. Competition in a not only thriving, but highly entrepreneurial economy, is therefore an imperative to achieve the states developmental functions. It gets people working harder and smarter. Brains and brawn. This grows the economy.

But do the current procurement practices achieve these goals that the new Act enshrines?

We believe some changes are necessary and have provided the following to present our point of view, which we hope is considered. Here, we specifically focus on the three-stage procurement process.

Current tendering practices often involve this three stages process, (and sometimes more), which is generally laid out as follows:

- Stage 1: Administrative,

- Stage 2: Technical / Quality

- Stage 3: Price / BBBEE.

These three stages are important because they allow the public entity to filter out certain undesirable aspects through prequalification. These may be tenderers that are too small, not local enough, not registered with Central Supplier Database, not able to provide the correct quality, to name a few. The staged approach is thus critical.

But how could one design the staged approach specifically to achieve the objects of the draft Public Procurement Bill? We provide some suggestions for consideration below.

Stage 1: Administrative / Prequalification

Stage 1 is typically used to ensure that tenders are compliant with several government institution, including SARS, CIPC, National Treasury and others.

Administrative checks of ownership, registration, tax clearance etc are essential, and should remain as a first means to eliminate tenderers who are not suitable to perform the task at hand. For example, a government entity would not want a SME to deliver an infrastructure megaproject. Failure would be highly likely. But, they would want SME's to deliver multiple small infrastructure projects.

We are not of the opinion that a minimum BBBEE level should be included in Stage 1. Currently however, this criterion is almost always included in Stage 1. This has recently been found unconstitutional by the high courts (at least in terms of the BBBEE act). See

https://businesstech.co.za/news/business/445780/a-major-court-ruling-has-gone-against-bee-in-south-africa-but-it-wont-change-existing-rules-say-authorities/. However, it seems that there is not yet clarity yet on what this means for public procurement.

The problem with including BBBEE in Stage 1 is that it also appears in Stage 3, i.e. a 'double dip'. This is likely to encourage BBBEE fronting. BBBEE fronting is not permitted by the BBBEE Act. It is therefore of our opinion that BBBEE level is best included in Stage 3 only, as it is required in PPP2000, where it permits a trade-off between price and BBBEE level, giving a distinct price advantage to companies of higher BBBEE level.

In addition to this, a criterion for skills transfer, and / or a criteria here for a minimum % of previously disadvantaged, woman, disabled, SME involvement could also be included in Stage 1, but, it should not preclude anyone in South Africa from tendering based on race, sex, or age. In our opinion, this is an absolute requirement of the developmental state and achieves its objects. In this way skills will get transferred to these PDI's as well as those within these entities. This however also needs to be monitored and audited during the delivery of the goods and services. Also, some tenders currently require these in Stage 1, but others include it in Stage 2, where it should not appear because it distorts the quality criterion (see Stage 2 comments below).

Another aspect which could be included in Stage 1 is a criterion for local content / participation requirement, i.e. tenderers who are geographically close to the tendering entity. This is however probably suited only for smaller non developed towns / settlements / villages where local skills are in extreme shortage and where the use of locals through the services/good can have a very significant impact on that specific community.

Stage 2: Technical / Quality

Stage 2 is tricky. There are many ways it is currently done and many of these get it wrong.

This section is needed to ensure the correct quality is provided by the service provider. One does not want to have a Ferrari when one is looking for a Golf V. Neither, if one wishes for a Golf V, does one wish to end up with a Kia Picanto.

A general approach to the overall tender process is that the price offering should be balanced with the overall tender, and in particular, quality. We do not believe that this is necessary, and in fact, it should not be balanced as it can open up the door for lower than required quality. This goes back to the argument that we are trying to procure something at a minimum desired quality, and that the good is needed at that level of quality to grow the economy. One does not want to have a Ferrari when you are looking for a Golf. Also, neither does one wish to end up with a Kia Picanto. Rather, a minimum quality must first be achieved, then a lowest price associated with that minimum quality. Hence, Stage 2, as it usually is, needs to be separate from Stage 1 and 3, as this fixes the minimum level of quality to that desired. This would ensure a minimum ‘value’ for money in the use of public funds while procuring the minimum quality of goods and services that are needed. Whomever can provide that minimum quality for the best price (and BBBEE level) wins the tender.

Perhaps the largest problem with many of the technical evaluations that are required by state owned entities, is that there are many non-technical , or non quality related, criteria in the technical evaluation. Stage 2 is meant to define and depict as accurately as possible what level of quality the tenderer is offering the client. With too many categories, the end quality gets diluted, especially so when the criterion are not related to quality. For example, companies with a strong track record, and good team of experienced individuals, simply add their best corporate profile and best CV’s and get through Stage 2, very easily. They can then easily provide a lesser quality methodology/approach or product specification, and therefore get carried through Stage 2 by the points in other criteria. This is important because a reduced quality means cheaper price. It is then possible for a tenderer to win based on price in Stage 3, but this is because it is attached to a quality below the minimum required, assisted by the remaining categories to score on in Stage 2.

Some notes on the 'usual' Stage 2 evaluation criteria are presented below:

1. Experience and qualifications of individual team members. The team members are the people who both develop the technology, services or products that are tendered for. They key in determining the final level of quality, and in delivering the good or service to the stipulated requirements. Experience and qualifications is probably the only measurable criteria available to evaluate their potential to provide quality. This criterion should be evaluated in here in Stage 2.

2. Experience of the bidding entity. Companies don’t deliver services or goods, people do. One could argue that this is a matter of semantics, but it is not. This criteria adds no value other than potentially bringing in prior technologies developed on prior projects/goods. This must be said, in some, or even many, instances, is highly valuable for clients. But it must be remembered that any benefit of this would be reflected in the final price (Stage 3), because having a technology, drawing, specification, or product design already means a tenderer can provide that same service/good at a cheaper price than a competitor, simply because economies of scale come into play. In this case the client should benefit by being able to procure something (the same thing) for cheaper than from another bidder, while the bidder should benefit by winning the work. This is simple and fair. The price in Stage 3 would then capture this benefit for the tendering entity. Another issue is that 30 – 50% of points in Stage 2 are usually given to this criterion. This does not benefit new small to medium enterprises because it almost automatically precludes them. This approach runs contrary to the goals of the developmental state, as well as an economy which need entrepreneurial activity to flourish. This item should therefore not be included in Stage 2. If a large company or SME for that matter is preferred for a valid reason, then this should be pre-qualified in Stage 1, and not mixed up with quality.

3. Methodology / product. The methodology / specification is the what the public sector client is getting for his money. If this is incorrect then the value can never be realised, and, by default, the attainment of value for money will never be realised. If ‘too much’ quality is provided here by the tenderer, this is fine, as the price will then be too high, and the client will be overpaying for something of higher quality than he is after. The tenderer will not be successful. If the price is low, then the public sector gets high quality at low price, which is fantastic. If ‘too little’ quality is provided in the methodology however, there must be a way to pick this up. The only way to do this is to have in house experts critically assessing the methodology / specification to see that it meets the minimum level. It then gets scored appropriately.

4. Skills transfer. This is imperative to achieve the goals of the Act, but is not related to quality. This criterion should be part of Stage 1, prequalification, where it can be certain that this requirement is included. In this way the preferential requirement of the Act is achieved from the beginning, without an unnecessary trade-off against quality.

5. Locality /distance to project site or client office. This is also one that gets included here but is irrelevant to quality. It does however affect price, and teams who are closer to the client locality wise will be able to deliver at lower cost, all else being equal. This should be omitted form this stage, and will be reflected in price automatically. If needed and considered of high importance, it can go into Stage 1 as a prequalification criteria.

6. Delivery Schedule: This should be a part of the points provided for methodology. Better quality almost always takes longer, so there should rather be an appreciation of the value and quality for the proposed methodology that feeds accurately into the proposed delivery schedule. The key here is that the schedule must make sense on its own, and also be in line with the methodology. This therefore needs the right technical team to evaluate and make a decision on. The schedule should not be defined via a 'top down' approach where a required delivery schedule is defined upfront. This will no doubt have a negative impact on the quality in the instance where schedule and methodology / specification are evaluated independently within Stage 2. If a certain schedule is important to achieve it must be defined upfront in Stage 1, as a prequalification. If technical quality is achieved after fixing a schedule in Stage 1, this may result in higher costs, which is the price one must be prepared to pay for good quality done quickly.

Stage 3: Price / BBBEE

This section is needed to balance price with BBBEE level, and in effect gives an advantage to a bidder who has higher BBBEE level rating.

We believe that this approach is well founded and provides a good means to give preference to the preferred parties, as required in PPP2000. It gives an edge to the firm on the price, and is independent of quality. Consideration could be given to amending the weightings from 80-20 / 90-10 to something slightly more substantial.

Conclusion

The objectives of the Act in its current draft format are a sound means of achieving the goals of the developmental state. However, the current approaches in the procurement space for some, maybe all, public entities will not necessarily comply with the objects of the new Bill, and do need to be amended. In our opinion, the following staged procurement approach will achieve all the new draft Bill's objectives.

The main drivers here are that prequalification in Stage 1 as above immediately achieves many of the goals of the developmental state, while removing some of them from the Stage 2 where they do not belong. Stage 2 is directed strongly towards quality, in order to achieve a minimum requirement and no less, where this minimum quality is needed and an absolute requirement. This minimum quality requirement is then priced in Stage 3. Stage 3 includes a preference for BBBEE level, which is realised through an advantage in pricing.