DRAFT PREFERENTIAL PROCUREMENT REGULATIONS NATIONAL TREASURY Henry Malinga

Content Purpose Background Legislative Environment Current Preferential Procurement System Alignment of PPPFA with BBBEEA Way forward National Treasury

PURPOSE

Purpose To provide an overview of the draft Preferential Procurement Regulations (Alignment of the Preferential Procurement with the aims of the Broad Based Black Empowerment Act and its Codes of Good Practice)

BACKGROUND

Background On 10 September 2003, government adopted of a Policy Document, titled “Policy to Guide Uniformity in Procurement Reform Processes in Government” On 05 December 2003 the Framework for Supply Chain Management was published in the Government Gazette as part of Treasury Regulations in terms of section 76 (4) (c). On 5 March 2005 the Framework for Supply Chain Management was included into the Treasury Regulations as Chapter 16A. On 09 January 2004 the Broad Based Black Economic Empowerment Act was promulgated.

LEGISLATIVE ENVIRONMENT National Treasury

Statutory Framework for Public Sector Procurement Legislative Framework Uniform Procurement directives to three spheres of government Supply Chain Management Guidelines Standard Bidding Documents Practice Notes Constitution PFMA / MFMA Acts PPPF Act and Preferential Procurement Regulations B-BBEE Act Other prescripts Standard for Uniformity National Treasury Best practice guidelines CODES OF CONDUCT FOR SCM PRACTICTIONERS AND BID COMMITTEE MEMBERS

Procurement Reform The PFMA and MFMA gives effect to the Constitutional Requirements in order to bring about sound financial management by: Replacing the outdated procurement and provisioning processes with uniform simplified procurement procedures Establishing supportive SCM structures. Promoting consistency in policy application. Devolving accountability and full powers to accounting officers/authorities. Consistent with the aims of the PFMA and MFMA that accountability and responsibility for all expenditure vest with accounting officers/authorities The above initiatives resulted in the introduction of the INTEGRATED SUPPLY CHAIN MANAGEMENT function in government.

Legislative Environment Section 217(I) of The Constitution provides the basis for procurement by determining that: “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 and services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective”. The PFMA and MFMA with their respective regulations give effect to this prescript. National Treasury

Legislative Environment Section 217(I) of The Constitution further confers: an obligation for national legislation to prescribe a framework providing for preferential procurement to address the social and economic imbalances of the past. The Preferential Procurement Policy Framework Act (PPPFA) of 2000 and its accompanying Regulations were promulgated to achieve these goals. (This Act incorporated the 80/20 and 90/10 preference point systems.)

Current Preferential Procurement System

Preference Points System The PPPFA and its associated Regulations incorporate the 90/10 and 80/20 preference point systems 10 or 20 points make provision for the promotion of equity ownership by HDIs or the specific RDP goals Allows the state to pay a maximum of 11.1% and 25% premiums respectively. A maximum of 90 and 80 points represents price. Contracts awarded to the bidder who scores the highest total points (points for price added to points for RDP goals)

90 / 10 Preference Points System Compulsory for Procurement > R500 000 Maximum of 90 Points for Price Maximum of 10 Points for promotion of HDIs and / or Specific RDP goals

80 / 20 Preference Points System Compulsory for procurement = > R30 000 - R500 000 May be used for <R30 000 (database of suppliers for price quotations) Maximum of 80 Points for Price Maximum of 20 Points for promotion of HDIs and / or specific RDP goals.

Preference Points System Ambiguity was identified between PPPFA and BBBEEA thus alignment of the two legislations was necessary. Some of the identified shortcomings were but not limited to: Inconsistency in the policy application The definition of HDI was too broad leading to huge fronting BBBEE and PPPFA were out of sync A work group was established between National Treasury and the BEE unit of the DTI to align the Preferential Procurement Regulations with the BBBEE Act, i.e. Preferential Procurement Regulations to be revised.

ALIGNMENT OF PPPFA WITH BBBEE ACT

Long term legislative process for repeal PPPFA Repeal PPPF Act New Treasury Regulations would incorporate SCM Regulatory Framework (including preferential procurement) The same process will be applied for the municipalities

Immediate Alignment Initiatives For immediate, short term retain the PPPFA and amend Preferential Procurement Regulations to be brought in line with the aims of the B-BBEE Act using the balance scorecard methodology as prescribed by the B-BBEE Act and its Codes of Good Practice Use definitions contained in the B-BBEE Act and Codes of practice eg. Black people vis a vis HDIs Use Verification Certificates issued in terms of the B-BBEE Scorecard to calculate points out of 10 or 20

B-BBEE Codes of Good Practice Balance Scorecard Elements of the B-BBEE Codes of Good Practice Balance Scorecard that would be used to determine B-BBEE level of contribution are as follows: Black ownership Management control Employment Equity Skills development Preferential procurement from BEE suppliers Enterprise development Socio-economic development These elements include black ownership and the RDP goals

Draft Preferential Procurement Regulations Points to be awarded to a bidder based on his or her B-BBEE status level Eg. Level 1 contributor would receive 20 points whilst level 4 contributor would receive 12 points out of a maximum of 20 points. Level 1 contributor would receive 10 points whilst level 4 contributor would receive 5 points out of a maximum of 10 points. Calculation of points to be based on the B-BBEE ratings of a bidder as follows:

Draft Preferential Procurement Regulations Calculation of points for B-BBEE RATINGS B-BBEE Status Level of Contributor Number of points (90/10 system) Number of points (80/20 system) 1 10 20 2 9 18 3 8 16 4 5 12 6 7 Non-compliant contributor

Draft Preferential Procurement Regulations Threshold values 80/20 preference points system Compulsory for procurement = > R30 000 – R1m 90/10 preference points system Compulsory for Procurement > R1m

Draft Preferential Procurement Regulations Exempted Micro enterprises (EME) (Entities with total revenue of less than R5 million) automatic level 4 recognition.

Draft Preferential Procurement Regulations Verification EME need to prove revenue status. Non-EME’s to submit B-BBEE verification certificate obtained from Verification Agencies accredited by SANAS. Certificates issued by non-accredited Verification Agencies prior to 9 April 2009 will only be valid for 12 months from date of issue.

Draft Preferential Procurement Regulations Remedies to be made available for false B-BBEE claims etc. Enterprise awarded a contract may not sub-contract more than 25% of the value of the contract to a person who does not have equal or higher B-BEE status level. Preferential Procurement Regulations will be extended to all organs of state for uniformity purposes

Way Forward

Draft Revised Regulations has been published in National Draft Revised Regulations has been published in National Government Gazette and all Provincial Gazettes for public comments – Closing Date 14 September 2009 Comments will be evaluated and incorporated in consultation with the DTI – Legally refined Minister of Finance will formally promulgate Regulations Roll-Out will be properly communicated to government institutions (including training, information sessions and workshops) Treasury would monitor policy outcomes closely – to influence national policy Public sector required to monitor own outcomes to influence own policy

Comments must be submitted in writing for attention Mr. HML Malinga or Mr. Jan Breytenbach The Director-General National Treasury Private bag X115 PRETORIA, 0001 or faxed to 012-3155355 or 012-3155343 or email:henry.malinga@treasury.gov.za or jan.breytenbach@treasury.gov.za respectively

Discussion