1. The City of Cape Town ("the City") welcomes this opportunity to make submissions on the Preferential Procurement Policy Framework Act, No. 5 of 2000 ('the Procurement Act") and the Preferential Procurement Regulations ("the Regulations"). As an organ of state the City is under a constitutional obligation to develop a procurement system that is fair, equitable, transparent, competitive and cost effective.
2. The City is also under an obligation to adopt a preferential procurement policy to provide for categories of preference in the allocation of contracts and the protection and advancement of persons, or categories of persons, disadvantaged by unfair discrimination.
3. The City is fully committed to fulfilling both these obligations and indeed has already developed policies consistent with these obligations.
4. National Government has adopted a Strategy for Broad-Based Black Economic Empowerment ("the BEE Strategy") and is in the process of passing the Black Economic Empowerment Bill as enabling legislation to give effect to the BEE Strategy.
5. National government clearly intends to review its preferential procurement policies to enhance the impact of the policies on BEE. This is both reflected in the BEE Strategy and the BEE Bill. The City supports this review as it has been desirous of placing greater emphasis on promotion of BEE in its preferential procurement policies, but has been constrained from doing so by the Procurement Act and Regulations.
6. Almost all of the City's submissions deal with the need for greater emphasis to be placed on BEE in preferential procurement policies and legislation. We deal below with:

1. the preferential procurement points system;
2. the beneficiaries of preferential procurement;
3. the weighting to be attached to BEE;
4. the Balanced Scorecard approach;
5. "fronting";
6. selling and letting of assets;
7. "closed tenders"; and
8. contracts where price is not relevant.

1. The Procurement Act applies to all organs of state, including municipalities. It provides that an organ of state must determine its preferential procurement policy and implement it within the stipulated framework, which provides for a points system.
2. In terms of the points system, points are allocated for price and for "specific goals". These specific goals include contracting with persons, or categories of persons, historically disadvantaged by unfair discrimination on the basis of race, gender or disability ("HDIs") and implementing the programmes of the Reconstruction and Development Programme ("RDP").
3. For contracts with a value of more than R500 000.00 a 90/10 preference points system applies in terms of which 90 points are awarded for price and 10 points are awarded for the specific goals. An 80/20 preference points system applies to contracts with a value equal to or above R30 000.00 but less than R500 000.00. In terms of this system, 80 points are awarded for price and 20 points are awarded for specific goals.
4. The system therefore allocates more preferential procurement points for contracts of low value and fewer preferential procurement points for contracts of higher value. The aim of the system is to take into account and balance the constitutional principles in terms of which procurement must be in accordance with a system which is fair, equitable, transparent, competitive and cost effective. The system recognises that historically disadvantaged tenderers may often be unable to compete effectively for government contracts by offering the best price.
5. The contract must be awarded to the tenderer who scores the highest points, unless objective criteria, other than RDP goals and promotion of HDIs, justify the award to another tenderer.

1. Section 217 of the Constitution provides that national legislation must prescribe a framework within which organs of state are to implement a procurement policy providing for the protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination.
2. The Procurement Act specifies that specific goals may include contracting with persons who have been disadvantaged by unfair discrimination on the basis of race, gender or disability. The Procurement Act therefore narrows the group of persons in respect of whom preference may be claimed to persons who have suffered unfair discrimination based on three of the grounds of unfair discrimination listed in the equality clause of the Constitution (section 9), i.e. black persons, women and the disabled.
3. The Employment Equity Act, No. 5 of 1998, in terms of which designated employers are required to implement affirmative action measures, also targets black persons, women and the disabled as the designated groups.
4. Certain organs of state, for example the Provincial Administration of the Western Cape, have adopted policies in terms of which the preferential procurement points allocated for HDI participation are weighted by awarding higher points for those discriminated against on the basis of race. The Procurement Act and the regulations do not suggest a basis for distinguishing in this manner between HDIs.
5. In the BEE Strategy, there is a move away from the concept of HDI and a greater emphasis on increasing the participation of black persons in the economy. Preferential procurement is one of the measures outlined to give effect to this policy.
6. The BEE Bill (as adopted by the National Assembly) defines "black people" as "a generic term, which means Africans, Coloureds and Indians, who are also South African citizens with permanent residence of the Republic."
7. "Broad-based black economic empowerment" is defined as "the economic empowerment of all black people including women, workers, youth, people with disabilities and people living in rural areas through diverse but integrated socio-economic strategies, that include but are not limited to...preferential procurement...".
8. The BEE Bill provides that the Minister may by notice in the Gazette issue Codes of Practice on BEE that may include qualification criteria for preferential purposes for procurement and other economic activities, and that every organ of state must take into account any relevant Code of Practice issued in terms of the Act in inter alia developing and implementing a preferential procurement policy.
9. The Procurement Act and Regulations will clearly have to be brought in line and reconciled with the BEE Bill. It would not be advisable possible to simply repeal the Procurement Act and to rely instead on the Codes of Good Practice issued under the BEE legislation to govern preferential procurement. Section 217(3) of the Constitution provides that national legislation must provide a framework for preferential procurement. The BEE Bill does not meet this requirement. It is in any event desirable that legislation to govern preferential procurement is introduced because Codes of Good Practice are merely guidelines and do not have the same legal status as an act.
10. A decision will have to be taken whether preferential procurement should only be in respect of black persons or HDIs as currently defined in the Procurement Act, i.e. including women and the disabled who are not black.
11. If the categories of persons in respect of whom preference may be claimed remain HDIs as currently defined, it may be appropriate to include different weighting to persons claiming preference depending on the ground of unfair discrimination, for example providing a framework in terms of which higher HDI points may be claimed in respect of a black woman than a white woman. This would assist in ensuring that preferential procurement policies truly redress historical disadvantage.
12. In these submissions the terms "BEE" and "HDI" are used interchangeably.

1. As set out above, an organ of state is obliged to award a contract to an entity or person if it achieves the highest points on the preferential procurement points system, unless there are objective criteria in addition to the specific goals of promotion of HDIs and implementing the programmes of the RDP which justify the award of the contract to another tenderer.
2. Accordingly, even if an entity or person scores 0 for equity ownership by HDIs and implementing the programmes of the RDP, if its points in respect of price are such that it nevertheless scores the highest points on the preferential points system, the City would be obliged to award the contract to such an entity. This approach was confirmed by the Transvaal High Court in the case of Grinaker LTA Ltd and Another v Tender Board (Mpumalanga) and Others 2002 JOL 9298 (T). In that case, the relevant Tender Board had awarded a tender to an empowerment company despite the fact that it had not achieved the highest points on the preferential procurement points system. The Tender Board's decision was set aside.
3. The City recognises that when it contracts for goods and services it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost effective. However, the City believes that a minimum HDI threshold would not contradict these requirements (see section 217(2) of the Constitution) and that too great an emphasis is placed on price at the expense of promotion of HDIs.
4. In the City's experience, it often happens that an HDI owned entity scores marginally lower than another entity on the preferential points system, but cannot be awarded the tender in terms of the current system. In the City's view, a balance of the constitutional principles in such a case may well mean that it would be acceptable and desirable for the contract to be awarded to the HDI entity.
5. A minimum HDI threshold and the awarding of greater weight to be awarded to HDIs on the points system may be fairer than the current system. The City wishes to introduce greater flexibility into its procurement policy. Strategies it wishes to adopt include providing that in respect of certain types of contracts a fixed percentage, in the region of 25%, be set aside for HDIs. The City may wish to, for example, provide that out of a total of 10 contracts to be awarded for procurement of a particular good or service, three of the contracts must be awarded to HDIs. Currently it is only able to do so for contracts with a value below R30 000.00 in respect of which the Procurement Act and Regulations do not apply.

1. There has been a tendency to focus too narrowly on equity ownership of entities in advancing BEE generally, and in particular, in preferential procurement. The Regulations are narrowly focused on preference points for equity ownership by HDIs (see generally section 13 of the Regulations). An attempt is made in the Regulations to get around problems with "fronting" or "window-dressing" by providing that equity ownership by HDIs must be equated to the percentage of HDI individuals who are "actively involved in the management of the enterprise or business and exercise control over the enterprise, commensurate with their degree of ownership at the closing date of the tender."
2. These provisions are confusing to implement in practice and may also have a constraining effect on the promotion of BEE. The provisions blur the distinction between HDI ownership and the percentage of HDI members in management. A company may be 100% black owned, i.e. 100% of the shareholders are black, and yet 50% of management may not be black. Depending on the nature and size of the company, the shareholders will in all probability not meet the requirement of "active involvement in the management of the enterprise." In terms of this provision of the Regulations, the company will only be able to claim 50% equity ownership for HDI preference points.
3. The BEE Strategy introduces the balanced scorecard approach which broadens the focus from equity ownership by HDIs to include a number of criteria in assessing whether an entity is advancing BEE. It is envisaged in the BEE Strategy that the balanced scorecard will be introduced as a Code of Practice issued under the BEE Act. The BEE Strategy envisages the following criteria comprising the scorecard:

1. equity ownership
2. management
3. employment equity
4. skills development
5. preferential procurement
6. enterprise development
7. residual 10% to be determined by sector/enterprise.

4. The City welcomes the balanced scorecard approach. As the Procurement Act and Regulations stand, the City is prevented from including this balanced scorecard approach in its preferential procurement policy and from applying it to the award of contracts, because HDI points may only be awarded for equity ownership by HDIs.
5. In balancing the various constitutional principles applicable to procurement, a minimum HDI threshold or increased weighting to be attached to HDI may be fairer than under the current system if the balanced scorecard approach is incorporated into preferential procurement policy and legislation because it provides a wider spectrum of aspects in respect of which an entity can claim preference points for HDIs.

1. Section 15(1) of the Regulations provide that an organ of state must, upon detecting that a preference in terms of the Procurement Act and the Regulations has been obtained on a fraudulent basis, or any specified goals are not attained in the performance of the contract, act against the person awarded the contract. Section 15(2) outlines the penalties which may be awarded in such instances.
2. The wording of this clause suggests that the organ of state can only act once the contract has been awarded. It would be useful to include a provision in the Procurement Act and Regulations which governs disqualification of tenderers from the tender process in the event of fraudulent claims in respect of preference prior to the contract being awarded. The City is aware that the Department of Trade and Industry is developing a policy on fronting and suggests that this policy should be considered together with any suggested amendments to procurement legislation.

1. The BEE Strategy includes as one of the means to achieve BEE the disposal of state owned assets or enterprises. The Procurement Act was designed to give effect to section 217(3) of the Constitution which applies to contracts for goods and services. This is confirmed by the long title which reads "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."
2. The wording of the Constitution and the Procurement Act indicates that they are limited to contracts for goods and services, as opposed to contracts pertaining to the disposal of assets. Section 2(1)(b) of the Procurement Act also refers to "the lowest acceptable tender" and section 2(1)(c) refers to "any other acceptable tenders which are higher in price must score fewer points, on a pro rata basis, calculated on their tender prices in relation to the lowest acceptable tender." The only reading consistent with these sub-sections is that the Procurement Act is confined to contracts for goods or services rather than contracts for the sale of assets.
3. However, Regulations 5 and 6 are clearly intended to apply to the sale and letting of assets. The headings of these sections refer to the point system for the sale and letting of assets and the point system prescribed in those regulations awards the most points for the highest tenders, in contrast to the provisions of section 2 of the Procurement Act which requires the highest marks to be awarded for the lowest tenders. Regulations 5 and 6 appear to be ultra vires and invalid because the regulations may not exceed the powers imposed by the Procurement Act.
4. The City, however, is of the view that it is desirable that BEE goals are advanced in the disposal of state assets. The invalidity of the provisions dealing with the sale and letting of assets in the Regulations should be cured by broadening the ambit of the Procurement Act itself to include disposal of assets, alternatively disposal of assets should be dealt with in separate legislation.

1. It is not clear whether the Procurement Act permits "closed tenders", i.e. tender processes in which specific parties are invited to tender, rather than the tender being made open to the public. The Constitution does not appear to preclude closed tenders absolutely. Closed tenders are naturally not generally advisable given the constitutional requirements of fairness, equity, transparency, competitiveness and cost effectiveness.
2. There may, however, be instances in which it may be more cost effective and efficient not to go to public tenders but simply to invite specific parties to tender, for example, in instances where there are only a few suppliers of certain goods and services, usually where such goods or services are highly specialised or rare., or in circumstances of urgency.
3. Section 10G(5) of the LGTA provides that a municipality may dispense with the competitive process in emergencies or sole supplier situations. Although a tender process will generally be the most effective way of complying with the principles of fairness, equitability and competitiveness, it may undermine cost effectiveness, particularly in relation to contracts which are of a relatively minor value. It may be useful for these aspects to be clarified in procurement legislation.

The City has experienced difficulties with the inflexibility of the preferential points system in the Procurement Act in circumstances where it wishes to evaluate a tender without reference to price. This has occurred, for example, in circumstances where the City wishes to appoint a service provider to collect certain levies at a specified commission determined by the City and wishes to select an appropriate services provider through a tender process. The City is aware of litigation in Gauteng in similar circumstances and suggests that a measure of flexibility in this regard is introduced.