The Treasury has drawn up far-reaching and extensive requirements to set the framework for how preferential procurement will be done by state entities and departments.

The requirements – which run into seven pages – will form part of the Public Procurement Bill, which is under consideration by Parliament. Preferential procurement is enshrined in the Constitution, which requires Parliament to make laws that will give previously disadvantaged groups an advantage in tendering for state contracts. 

The proposals were presented to the Standing Committee on Finance last Friday, the same week in which Harvard's Growth Lab identified preferential procurement as a leading cause of the collapse of state capacity.

In July, The International Monetary Fund also cautioned SA that preferential procurement adds a 20% premium to the state's cost of goods and services. 

There are five different ways in which a state entity can provide for preference. It is obligatory to include preferential measures in procurement policy.

The five ways include: 

• Setting aside specific contracts for preferred groups;
• Setting pre-qualification criteria for who bids for a tender;
• Applying a designated points system to provide preference; 
• The compulsory use of sub-contracting, if viable; and
• Applying government-determined thresholds for local content and production. 

Each of the five alternatives includes detailed provisions. 

Set-asides

These tenders can be set aside for South African-owned small businesses, in general, or those owned by one of the preferred groups. These include women, black people, black women, disabled people, black disabled people, youth, black disabled youth, military veterans, or small businesses in a geographical area. 

Bids must first meet this requirement and then score a minimum amount on the "functionality" aspect of the tender, which assesses the capacity of the bidder to do the work. Once these are applied, the tenderer with the lowest price wins. 

Pre-qualifications

Pre-qualification criteria can be set to restrict who can bid. These include companies with a specific BEE rating, small businesses, and those 51% owned by any of the preferred groups listed above. 

Procuring institutions must first determine if such companies exist in the sector. They must then evaluate the bids, first in terms of functionality and then price. The preferential points system must be applied when assessing the bid price. 

The points system

The new points system gives a far more significant advantage to preferred groups than previous iterations of preferential measures. It must be applied to all bids except those already set aside for particular groups. It will work on a sliding scale of 10% and 40% of the score derived from preference. While the regulations don't specify the rand value thresholds to which the 10% to 40% would be applied, tenders of lower value have a greater preference point weighting in the past. 

The points system will profoundly impact who wins tenders and the price advantage preferred groups will have over bidders that do not score well on the preference measures. While the proposals don't spell it out, it is conceivable that, in the most extreme case in the 40% scenario, where Bid A gets full points for preference and Bid B gets zero, Bid A can win with a price that is three times lower than Bid B's. 

The winner is the bidder who gets the highest score when price and preference points are combined.

Sub-contracting

If a procuring entity believes that sub-contracting is feasible, the winning bidder must sub-contract a part of the contract to a small business in general or small businesses that are 51% owned by any of the preferred groups. The main bidder must identify the proposed sub-contractors. 

The main bid is then evaluated for functionality, and then the preference points system is applied. The bid is awarded to the bidder with the highest score when price and preference are combined. 

Local content

At the request of the minister of trade and industry, the minister of finance must designate certain sectors, sub-sectors or products to be locally manufactured or procured. The designated goods and services list must be published first for public comment and comments considered.

If, following a designation, the goods cannot be locally produced, then the entity must request a waiver. 

Other criteria

Contracting entities can also put in place measures to ensure sustainable development, beneficiation or job creation or set milestones that a contractor must achieve by the end of the contract.