ANDILE NTINGI: Tender scoring system confusion

Construction industry stakeholders, legal experts and procurement professionals gathered recently to listen to Stellenbosch University public law professor Geo Quinot give his take on the implications of a legal setback suffered by two subsidiaries of engineering company H&I Group at the hands of the City of Cape Town.

In October the Western Cape High Court handed down a ruling in favour of the municipality against H&I Civil and H&I Construction, which had challenged its newly adopted preferential procurement policy. This had introduced a new tender-scoring system that could see many established companies lose out on future lucrative tenders issued by the city.

The H&I subsidiaries had challenged the tender scoring system on the grounds that it was unconstitutional and irrational. The judgment, which is likely to be appealed, has sent shock waves through the construction industry and stopped H&I in its tracks, after it successfully interdicted SA National Roads Agency (Sanral) last year from implementing a revised preferential procurement policy.

That court action by H&I forced the state-owned road construction and management agency to abandon its bid to implement the new preferential procurement policy to avoid a drawn-out legal battle with H&I.

Quinot believes the significance of the Western Cape judgment will be temporary as the legislation regulating state procurement, the Preferential Procurement Policy Framework Act (PPPFA), will be replaced in 2025 by new legislation to be known as the Public Procurement Act (PPA).

The PPA will take over from PPPFA in regulating spending of R800bn annually by the government when buying goods and services from suppliers. The National Treasury is developing new regulations that will guide how the awarding of government tenders should be carried out.

In the meantime, the implication of the ruling is that organs of state such as municipalities, government departments and state-owned enterprises (SOEs) will adjudicate tenders in accordance with the PPPFA’s 2022 regulations, which came into effect on January 16 2023.

The 2022 regulations replaced the 2017 regulations state institutions previously used to adjudicate tenders on the strength of bidders’ price competitiveness and broad-based BEE statuses or ratings.

Under the 2017 regulations tenders valued at less than R50m were awarded to bidders using the 80/20 preference points system, whereby 80 points were allocated for price competitiveness and 20 points for promoting BEE.

Tenders valued at more than R50m were awarded using the 90/10 preference points system, whereby 90 points were allocated for price competitiveness and 10 points for advancing BEE.

So, if a bidder beat the prices of its rivals and had the same or higher BEE rating it was in pole position to win the tender, since a bidder whose BEE status was level 1 was allocated the maximum 10 points for a tender above R50m and 20 points for a tender below R50m.

However, after the introduction of the 2022 regulations organs of state now have the discretion to introduce preferential procurement policies that don’t award tenders solely on the basis of bidders’ BEE statuses or ratings.

They can decide to allocate the 10 or 20 preference points to promote specific goals such as empowering businesses that are owned by blacks, females or disabled people, or to promote small, medium and micro enterprises (SMMEs), as stipulated in the PPPFA. The 80/90 side of the equation dealing with price competitiveness has remained the same.

H&I challenged the City of Cape Town and Sanral because these state institutions had amended their preferential procurement policies to introduce tender scoring systems that placed heavy emphasis on promoting specific economic redress goals, with minimal focus on bidders’ BEE statuses.

For instance, the City of Cape Town amended its 10/20 preference points system to empower businesses owned by blacks, women and disabled entrepreneurs, and to promote SMMEs.

Double jeopardy

Sanral combined specific goals with a BEE scorecard that created a double jeopardy situation, where ownership and control was part of the BEE scorecard, over and above being measured separately in the specific goals.

The roads agency amended the 10/20 equations to increase weightings that allocate points to bidders with strong black ownership and bidders willing to subcontract a portion of the tenders to black suppliers.

In other words Sanral, which puts work valued at about R20bn out to tender each year, introduced a tender scoring system that required bidders to have 51% black ownership and to subcontract 40%-50% of their work to black-owned companies, if they wanted to have a good chance of winning.

Take for example the City of Cape Town’s new tender scoring system, and how it allocates 10 preference points for tenders worth more than R50m, to which the 90/10 preference points system applies.

Whereas a level 1 BEE supplier would have automatically received the full 10 points under the previous system, the same level 1 BEE supplier will under the new system be awarded a minimum of three points and a maximum of six out of 10 points.

In the case of Sanral, for a tender above R50m a supplier that has black ownership of less than 51% receives zero points, black ownership of 70% but less than 100% is allocated two points, and 100% black ownership gets five points out of 10. Level 1 on the BEE scorecard is allocated one point out of 10 and two out of 20.

For subcontracting, 30% of work bidders are allocated four points out of 10 for tenders above R50m and eight points out of 20 for tenders below R50m.

These new tender scoring systems clearly make level 1 BEE suppliers with low levels of black and women ownership less competitive in bidding processes. Hence companies such as H&I want the old scoring systems to be reinstated as they have spent considerable time and money complying with the broad-based BEE legislation.

According to Quinot, between now and when the PPA is phased in companies that are aggrieved by the new tender scoring systems have the option of either challenging the new systems in court or waiting until the new PPA is phased in next year to replace the PPPFA.

• Ntingi is founder of GetBiz.