Labour's Submission on the

Preferential Procurement Policy Draft Regulations

Presented at NEDLAC, 27 July 2000


Table of Contents

  1. Introduction and process

  2. Areas of concern and alternative formulations
  1. Definitions: Historically Disadvantaged Individuals (HDIs)
  2. Section 2: Potential for exemption from the Act
  3. Section 11: Goals
  4. Section 7: Principles
  5. Awarding of equity points to HDIs:
  6. Agents
  7. Exclusion of public companies from preferential points
  8. Clauses 10 and 8:



  1. Introduction and process

This constitutes the joint submission of the Labour constituencies to NEDLAC on the Preferential Policy Framework Act Draft Regulations [No. R. 562] ("the Draft Regulations"). A NEDLAC task team meeting of 19 July 2000 took a briefing from officials of the Department of State Expenditure on the Draft Regulations and initial questions and comments were raised. In terms of process, both business and labour delegates expressed their great dissatisfaction with the fact that government representatives had come with no mandate; and government’s proposal that the process be purely one of comment was rejected. Labour’s understanding is that the Draft Regulations have been tabled at the task team in order for meaningful negotiations to take place. The meeting closed with a proposal that government assimilate public comments received on the Draft Regulations as well as views expressed by NEDLAC constituencies at the meeting of the 19th and their written comments, make the appropriate amendments to the Draft Regulation, and revert to the NEDLAC task team with an amended draft for negotiations. We hope that government will co-operate with the proposed process.

At this stage we would also like to record a serious concern that we have still not had sight of the White Paper years after the publication of the Green Paper. It is highly irregular for legislation to be passed when a White Paper is apparently in existence but not publicly available, notwithstanding the commitment that it will still be released for public comment and the Act amended accordingly. The longstanding procedural problems on this issue, as raised in Parliament’s deliberations on the Bill, make it all the more important for proper negotiations to take place on the Draft Regulations.

This submission raises Labour’s key concerns with the Draft Regulations and where appropriate proposes alternative drafting.

 

  1. Areas of concern and alternative formulations

2.1 Definitions: Historically Disadvantaged Individuals (HDIs)

A possible drafting problem with the definition of HDIs is that the exclusion of persons who obtained South African citizenship after the first democratic election in April 1994 from HDI preferences may inadvertently exclude people who were formerly classified as citizens of the so-called "independent homelands". Labour supports what we believe to be the intention of the definition, but suggest a rewording along the following lines to avoid any possible confusion:

[Persons who obtained South African citizenship after the first democratic election in April 1994, cannot qualify for preference as an HDI.]

Only persons who were South African citizens or who were classified as citizens of the former homelands prior to the first democratic election in April 1994 can qualify for preferences as HDIs.


2.2 Section 2: Potential for exemption from the Act

Section 2 states that "Subject to the provisions of any Act of Parliament/Provincial Legislation, the application of any preference system shall be done by all organs of state as contemplated in section 1(iii) of the Act, only in accordance with this Act." [emphasis added.] We raise this in the context of the stipulation in clause 2.1 of the Act that "An organ of state must determine its preferential procurement policy and implement it within the following framework" [emphasis added].

In the previous NEDLAC meeting Labour sought clarity as to whether, for example, a certain province could pass provincial legislation exempting itself from the Act. Clarity was not forthcoming from government representatives. In the absence of clarity as to the need and implications of this rider, labour proposes the deletion of the words "Subject to the provisions of any Act of Parliament/Provincial Legislation".


2.3 Section 11: Goals

As the Draft Regulation currently stands, the section on Goals seems to be tacked on the end of the Draft Regulation and seems to bear little relation to the rest of it. This section provides that "the goals as contemplated in section 2(1)(d)(ii) of the Act, are the goals that inter alia may be prescribed in the tendering conditions as goals to be achieved." The relevant clause of the Act refers to "implementing the principles of the Reconstruction and Development Programme as published in Government Gazette No. 16085 dated 23 November 1994".

There is no apparent connection between this provision and section 7 of the Draft Regulation, which sets out the principles to be applied to the preferences during the evaluation process. Section 7 provides for only one criterion for which preferential points can be awarded, namely equity ownership (this section shall be discussed in more detail later in this submission). As the Draft Regulation stipulated (under section 7(4)(iii)) that the number of points scored for equity ownership by HDIs shall be added to the number of points scored for price in order to establish the total number of points scored and the contract must then be awarded to the tenderer who scored the highest points (unless objective criteria in addition to the goals justify the award to another tenderer). This formulation and the actual formulae contained in the Draft Regulation make no provision for the goals referred to in section 11.

A further concern with section 11 is that it fails to unpack the meaning of the RDP for preferential procurement policy. A concern was raised in the course of the parliamentary process on the Bill, both by Members of Parliament and by stakeholders, that the formulation on "implementing the programmes of the Reconstruction and Development programme" was too vague and open to divergent interpretation. Nevertheless, it was recommended to parliament by government representatives that an Act was not the appropriate place for disaggregating this in more detail and that the Regulation would be the appropriate document for this. Labour is thus surprised that the Draft Regulation makes no attempt to do so. At the NEDLAC meeting government representatives indicated that they had perused the RDP in an attempt to flesh out specific relevant aspects of the RDP but had found it difficult to identify relevant points, and requested constituencies’ assistance/proposals in this regard.

The RDP makes three references to the issue of procurement/tendering as follows:

Labour believes that these references, taken in the context of the overall thrust and logic of the RDP, provide sufficient basis for unpacking "RDP Programmes" into specific objectives for inclusion in the Regulation.

Labour Proposals

Labour thus proposes that section 11 be moved up to immediately before the current section 7 and be amended as follows:

    1. job creation
    2. the promotion of worker rights and labour standards
    3. human resource development
    4. the promotion of small, medium, and micro enterprises.

Every goal to be achieved must be clearly specified in the tendering conditions, including the method to be used to calculate the points scored for achieving the specified goals.

The goals must be measurable and quantifiable and organs of state must monitor the execution of the tender for compliance.


2.4 Section 7: Principles

As discussed above, Labour was surprised and disappointed that the section on principles to be applied to the preferences during tender evaluation, as contained in the Draft Regulation, deals exclusively with the issue of equity ownership. Instead of providing breaking down RDP Programmes into employment creation, labour standards, promotion of domestic content, and so on, it is completely ignored in the Draft Regulation.

Labour agrees that equity ownership needs to be one of the criteria for preferential procurement, but we would be completely opposed to preferential procurement being reduced to a question of equity ownership.

Labour proposals

Labour proposes the insertion of a clause 7.1 (now 8.1 if section 11 is moved up) reading as follows:

The following principles must be applied to the preferences during the evaluation of the tenders:

Equity ownership;
Job creation;
Domestic content;
Labour standards and worker rights;
Human resource development;
Promotion of small, medium, and micro enterprises.

Labour proposes that the Regulation should elaborate and quantify each of these principles as discussed below, for which we do not at this stage have specific legal drafting. The formulae proposed in the Draft Regulation would obviously need to be modified to allocate points to each of the above objectives. Labour proposes that a minimum floor and maximum ceiling of preferential points be set for each of above six principles. We would be available to assist in development of appropriate formulae to give effect to these proposals.

Equity ownership

As quantified in the manner proposed in the Draft Regulation.

Job Creation1

Labour proposes that employment creation be included as a specific aspect of RDP Principles. In particular, the principle of promoting labour intensity must be extended to all of government procurement and must be applied by government in its partnerships with the private sector.

Tenderers should provide projections of how many new jobs they would generate if awarded the contract; what method of recruitment they will use to employ people; the sustainability and skills composition of these jobs; and the proportion of these jobs expected to go to women.

These projections should be a basis for the allocation of preferential points. Furthermore, monitoring mechanisms need to be built into the Regulation to ensure that they are realized, failing which relevant penalties could be invoked by the tendering authority.

Domestic content

Closely related to employment creation is the promotion of domestic content. Current preference systems give extensive price and point preferences to domestic goods2. Labour proposes the development of a similar system for the allocation of preferential points on the basis of percentage domestic content.

Labour standards and worker rights:

It can be noted that the Green Paper proposed that:

Labour proposes the development of a Workers’ Rights Index as a tool for evaluating tendering firms compliance with workers’ rights in a measurable and quantifiable manner. Such an index would identify several key "best practices" in terms of worker rights and sound labour relations and identify points on this basis, in order to advantage firms which actively promote these goals over and above the minimum legislated requirements. For example, companies which provide for six months of paid maternity leave instead of the legislated four months, or which can show good faith participation in centralised bargaining institutions where these exist, should be favoured in the allocation of points.

Further proposals around the advancement of the labour standards goal will be made with reference to section 10 of the Draft Regulation.

Human resource development

Procurement policy needs to be used as leverage in encouraging the promotion of human resource development within tendering companies. The Regulation would need to identify key indicators of human resource development upon which points for preferential procurement could be based. One such indicator could be the percentage of the company’s wage bill spent on education and training.

Promotion of Small, Medium and Micro Enterprises

The Draft Regulation attempts to promote this objective by separating tenders into those above and below the R2 million threshold and awarding more preferential points relative to points for price to those tenders below R2 million. This is seemingly (and per the logic of parliamentary deliberations on the issue) on the premise that SMMEs will be better capacitated to tender for smaller contracts and require greater preferential points in order to compete equitably. Labour supports this approach.


2.5 Awarding of equity points to HDIs:

"Historically Disadvantaged Individuals" (HDIs) are defined as all South African citizens who had no franchise in national elections prior to the introduction of the 1983 and 1993 constitutions; women; and disabled persons. The definition is a clear and inclusive one. However, while recognising that all three of these categories have suffered oppression and unequal opportunities, it also needs to be recognised that not all of these categories have suffered to the same extent. Specifically, it is blacks and Africans in particular who have been the most disadvantaged. It also needs to be recognised that people fall into more than one category, suffering multiple disadvantages.

Such an appreciation needs to be incorporated into the Preferential Procurement system in a way that that is streamlined and equitable. It would not make sense, for example, to equate a company owned by white women to one owned by disabled African women.

Labour proposes that the formulae for quantifying equity ownership thus need to be refined to recognise both a ranking of categories of disadvantage and people falling into multiple categories.


2.6 Agents

Labour also harbours serious concerns around the provision for Agents. An Agent is defined in the Draft Regulation as "an independent institution or individual which has the proxy from another institution or individual from the industry, to independently do business on behalf of or represent such an individual or institution." Clause 7(3)(b) provides that "equity claims by persons/companies that fall within the definition of an "Agent" will be able to claim preference points if substantiating documents are submitted thereby validating their appointments." Labour believes that the provision for Agency in the Draft Regulation would allow for a situation where an Agent which scores high preferential points based on its equity ownership purchases goods from an unrepresentative manufacturer and resells them to government at a premium. There is no requirement that an Agent be in any way involved in the actual business of supplying goods or services to government.

In our understanding the Draft Regulation opens the space for a situation where, hypothetically, a firm composed exclusively of white men could mandate a white women, African man, or any person or group of people falling into the definition of HDIs to act as their Agent in tendering for a government contract. Such an Agent would not need any involvement in the manufacture or distribution of the goods or services but the tender would be awarded full equity points with the Agent taking a commission. In Labour’s view this provision actually opens the way to legal "fronting". Far from promoting empowerment and equitable economic opportunities, such a system could effectively entrench the economic status quo.

Although we sought clarity on the implications of this in the previous NEDLAC meeting, government representative could neither clarify it nor indicate that the provision for Agency would not in effect provide for large-scale fronting.

Labour thus proposes the deletion of section 3(b) and accordingly the deletion of the definition of "Agent" in section 1.


2.7 Exclusion of public companies from preferential points

Section 7(2)(b) of the Draft Regulation stipulates that "As public companies are subject to a constant change in shareholding, no preference points will be awarded to public companies."

Firstly, we are unclear as to whether this is intended to apply to publicly listed companies or to all public companies; this needs to be clarified.

Secondly, whilst Labour is cognisant of the difficulties of quantifying equity ownership with respect to listed companies, the Draft Regulation would have the effect of excluding all such companies from any preferences in tendering. We propose that an accurate and equitable mechanism be developed for quantifying equity ownership with respect to publicly listed companies.

Thirdly, the additional principles as proposed by Labour above would be just as relevant and quantifiable for listed as for non-listed companies, and so irrespective of the difficulties in quantifying equity ownership for listed companies such companies could still qualify for preferential points with respect to the other principles.

Clause 7(2)(b) thus needs to be amended accordingly.


2.8 Clauses 10 and 8:

Section 10 of the Draft Regulation provides that "No contracts will be awarded to tenderers who have failed to submit an original Tax Clearance Certificate from the South African Revenue Services certifying that their taxes are in order or that suitable arrangements have been made with the South African Revenue Services to satisfy them".

Labour supports this provision, firstly as state tenders should not be given to companies which owe the government tax revenue and secondly because procurement is a powerful tool to promote the adherence to legislation and other objectives. In fact, we believe that tax clearance is one of the key preconditions which firms should have to meet before qualifying for any state tenders. Similarly, there are other fiscal and non-fiscal requirements which firms should be obliged to meet prior to consideration for state tenders.

In terms of statutory requirements, in addition to the submission of an original Tax Clearance Certificate (which should include company tax, VAT and all other relevant taxes), tendering firms should be required to submit the following:

Labour believes that this would not exert an excessive administrative burden on the state and that it would promote compliance of companies with payments they are obliged to make.

Labour believes that procurement policy should also be used as leverage to ensure compliance with other relevant legislation. As noted above, the RDP and hence by implication the Act) identifies worker rights and labour standards as goals to be advanced through procurement policy, and we believe that firms which do not comply with the laws of the land with respect to labour standards do not deserve to be awarded state tenders.

Labour proposes that adherence to relevant bargaining council agreements and compliance with all other relevant legislation, in particular the Basic Conditions of Employment Act, the Labour Relations Act and the Employment Equity Act, should be a precondition for firms to qualify for state tenders. We would have preferred a situation where the contracting authority were to verify that there is indeed such compliance, but have accepted the arguments of government representatives at the NEDLAC meeting that this may not be feasible at present. The representative indicated that processes are in motion together with the Department of Labour to ultimately provide clearance certificates to companies complying with labour legislation. Labour believes that this process needs to be expedited so that submission of such certificates be made a precondition for consideration for state tenders. In the meantime, and as our proposal for inclusion in the Regulation, firms should be required to declare their compliance as part of their tender. Accordingly we propose the inclusion in section 8 of a new clause 8(c) such that the current 8(c) becomes 8(d). The new clause should read as follows:

8(c) The tenderer is complying fully with all relevant labour-related legislation, other relevant collective agreements, sectoral determinations and bargaining council agreements.

Should this aspect of the declaration later be found to be untrue, the remedies available to the state under section 9 of the Draft Regulation could be invoked.

In order to deal with the problem of monitoring of this compliance given the current inability of tendering authorities to do so, workers in the relevant firms have an important role to play. The Regulation should include some public notification mechanism where companies submit tenders, information around what that company has declared with respect to its employment and other practices, and accessible channels for workers or their representatives to bring contrary information to the attention of the tendering authority.


Footnotes:

  1. Note that the Green Paper also argues (at 3.6) that priority must be given to labour intensive employment generating technologies and that government must see to it that "the private sector implements policy relating to employment creation on public sector contracts".

  2. These include the following:

  • A sliding scale of preferences (determined by the Minister of Finance) which range from a 1% price preference for not more than 5% domestically manufactured to a 10% price preference for more than 95% and up to 100% domestically manufactured.

  • In order to promote the domestic electronics industry in particular a series of price preferences are granted for electronic components as follows: Locally designed 5%; adapted local designed 3.5%; manufactured designed2.5%; and adapted manufactured 1%. [Note that these preferences are not in addition to the aforementioned domestic preferences, but may be claimed as part of the local manufacture preference for "design".]

  • Discretion is currently available to the State Tender Board to grant local price preferences of up to 20% for domestically manufactured goods. The condition for this is that the products should have a minimum local content of 60% and a maximum import duty of 20%.

  • Discretion is also available to the Department of Trade and Industry, on referral by the STB to grant unlimited further preferences.

  • In order to promote product quality, all products bearing the South African Bureau of Standards (SABS) mark are entitled to a 2.5% price preference.




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