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State Tenders – Preferential Procurement and how it fits into the BEE arena

What determines the BEE level of compliance?

No minimum BEE level of compliance is required in terms of legislation.  A measured entity’s level of compliance will be determined by the following three questions:

  • What do my customers want?
  • What are my competitors doing with regards to BEE?
  • What are my organisation’s BEE capabilities?

Business owners working on tender document

Two of these questions run together, namely what do my customers want and what are my competitors doing. Is your business heavily dependent on government tenders?

If a competitor has a better BEE compliance level, customers are more likely to enter into agreement with them as a supplier as this would boost their BEE score. EMEs, QSEs, 51% black-owned or 30 % black women-owned entities are focused on when verifying the Procurement element (now a sub-element to Enterprise and Supplier Development) for BEE purposes.

Doing business with the government, state-owned enterprises, big corporates and certain industries such as mining can prove to be challenging, as the emphasis here is on the level of black ownership and overall level 2 compliance. Entities with a lower BEE level need to lower their prices substantially in order to be competitive when applying for tenders. Often these reduced prices are not as lucrative as desired and in the end do not make for sustainable service delivery. It goes without saying that an entity needs to be sure it has the competitive edge in order to optimise business and turnover. How then does an entity achieve the competitive edge when dealing with state tenders?

State tenders and Preferential Procurement

The Preferential Procurement Policy Framework Act, 2005 (Act No. 5 of 2005) (PPPFA) provides guidance on how an organ of state must determine its preferential procurement policy and implement it within the framework as set out in the Act. On 20 January 2017, the Minister of Finance promulgated regulations as set out in the Schedule to the PPPFA. Some of these regulations are briefly discussed below.

Section 4 of the schedule stipulates that if an organ of state decides to apply pre-qualifying criteria to advance certain designated groups, the invitation to tender must state that only bidders who meet the pre-qualifying criteria may respond. One of these pre-qualifying criteria might be that the bidder must have a minimum level BEE contributor status.

Although there are many factors that might give a business a competitive edge when dealing with the public in general, there are two main elements that will determine how competitive a business is when dealing with state tenders, namely pricing and the level of BEE compliance.

Sections 6 and 7 deal with the preference point system for acquisition of goods or services. For rand values equal to or above R30 000 and up to R50 million, the 80/20 preference system would apply. This means that 80% of the points scored for the tender will be awarded for price, which will be calculated according to a specific formula, while 20% of the points will be awarded based on the bidder’s BEE level. A level 1 bidder will receive 20 points, while a level 6 bidder will only receive 6 points. A bidder who is not BEE compliant will not be excluded from the tender process; however, they will only be able to score points on pricing. The tender will be awarded to the bidder who received the highest score, although there are exceptions to the rule. The 90/10 point system will come into play for acquisition of goods or services with a rand value above R50 million. The same principles will apply as for the 80/20 point system, with the only difference being the 10 points awarded for a level 1 BEE-compliant bidder.

Section 10 provides guidance on an important question: If two bidders score the same number of points, to whom will the tender be awarded? The tender should be awarded to the bidder with the highest BEE level. This means that one bidder might have received higher points for pricing because the tender price is lower; however, due to a poor BEE level will lose points on the BEE scoring, ending up with the same points as a bidder with a higher price for the tender. This means that a bidder with a lower BEE level will need to charge less in order to compete with competitors. A bidder tendering at market-related price with a good BEE level will in all probability win tenders if they are not excluded as per the Act or any of the pre-qualifying criteria set in the tender advertisement.

Note: The Regulations (as referred to above) refers to the person applying for on bidding on the tender as the “tenderer”, whilst the correct term to be used is “bidder”. The “tenderer” is the person issuing the invitation to tender (the state). When writing this blog, the term bidder was used for the person bidding on the tender.

About the authorAudrey Cloete obtained her LLB degree from the North-West University Potchefstroom in 2003. She completed her articles with the main focus on Criminal Law and broadened her horizons after being admitted as attorney to take on other legal disciplines. She is also an admitted Conveyancer. Audrey joined SERR Synergy in 2015 where she currently works as a Legal Compliance Advisor.