Procurement ruling potential blocker to South Africa’s national infrastructure plan

The first iteration of the draft NIP was approved by Cabinet on 9 March 2022 and subsequently gazetted on 11 March (78-page / 1.43MB PDF). On 16 March, Patricia de Lille, minister of public works and infrastructure, and Dr Kgosientsho Ramokgopa, head of Infrastructure South Africa, briefed the public on the implementation of the plan. However, they did so without addressing the gap left in South Africa’s procurement laws following February’s judgment in Minister of Finance v Afribusiness NPC, in which the CC held that some of South Africa’s procurement regulations are incompatible with the relevant law.

What did the Constitutional Court decide?

Prior to the Afribusiness judgment, public procurement processes in South Africa were guided by the 2017 Preferential Procurement Regulations as read with the Preferential Procurement Policy Framework Act (PPPFA), other applicable legislation and the Constitution of the Republic of South Africa. Of particular relevance are regulations 3(b), 4 and 9 (‘the regulations’) which prescribed that ‘organs of state’ must determine whether pre-qualification criteria apply for the procurement of goods and services within all sectors, including the infrastructure sector, to advance previously disadvantaged groups in the tender procurement process.

The judgment is an appeal from the Supreme Court of Appeal (SCA), where the CC was asked to overturn the SCA’s decision which invalidated the regulations. Whilst the SCA invalidated the regulations, it decided to suspend its declaration of invalidity for a period of twelve months. When the matter reached the CC, the majority court agreed with the SCA’s decision reasoning, amongst other things, that:

• the Minister of Finance exceeded his powers under the PPPFA when he promulgated the regulations; and
• the regulations were not necessary and expedient to give effect to the PPPFA.

On the second point, the CC found that the regulations were not necessary and expedient because their purpose can already be achieved under section 2(1) of the PPPFA, which empowers an organ of state to determine its preferential procurement policy. In addition, the power to create a system of preference in a procurement process vests in the organ of state, and in it alone.

However, the CC’s silence on the SCA’s suspension of the declaration of invalidity has been cause for uncertainty within organs of state – specifically the current status of the regulations and how they are to proceed with public procurement, particularly in the context of preferential procurement.

Implementing the National Infrastructure Plan

Whilst this legal development introduces an interesting conundrum to the practical implementation of the NIP in the context of public procurement processes, the South African government has not slowed down its efforts to advance the NIP. At the recent media briefing, several new initiatives were announced to the public:

• In the energy sector, Eskom is progressing with dividing its generation, transmission and distribution divisions, establishing an independent transmission entity and committing to clean and new generation
• In the infrastructure sector, Transnet Freight Rail is committed to introducing third-party operators onto the rail network. SANRAL has major projects in the works, specifically, “nine construction projects valued at R18 billion [approx. US$1.14bn] in progress, and a further eight major projects valued at R20bn being awarded in 2021”
• In the ports sector, Transnet National Ports Authority is establishing an independent subsidiary which was identified as a key step to implementing the goals of the NIP
• On financing, the Development Bank of Southern Africa (DBSA) aims to allocate R100bn of public funding over the next 10 years to ‘crowd in’ public sector investment through blended financial models involving public-private partnerships.

In addition to the above, South Africa recently received support and commitments from the UK regarding its infrastructure agenda through a Memorandum of Understanding concluded between the two governments. Under the terms of the agreement South Africa can, amongst other things, leverage the UK’s expertise and innovation to advance the initiatives of the NIP.

Could the Afribusiness judgment impede delivery of the NIP?

The regulations caught by the Afribusiness judgment presented a framework for procurement of goods and services by organs of state. Such procurement is an undoubtedly immeasurable contributor to infrastructure development and the overall goals of the NIP.

Although new draft regulations have recently been published for public comment, the uncertainty currently left by the judgment potentially hinders organs of state from implementing a number of initiatives referred to in the media briefing, and more generally advancing the implementation of the NIP, through public procurement processes.

For example, the implementation of SANRAL’s 17 planned construction projects and Transnet Freight Rail’s commitment to introduce third-party operators onto the rail network should be considered in light of the lacuna in the current procurement laws following the invalidation of the regulations. Similarly, DBSA’s ambitious aim to allocate R100bn of public funding to “crowd in private sector investment” in the context of a growing commitment to public-private partnerships, demonstrated by the establishment of the Infrastructure Fund, could also face setbacks. Public funding in the infrastructure sector is inarguably an important aspect of the infrastructure market and contributes to many socio-economic factors. Procurement is the method used for many initiatives in this sector that may aim to crowd in private sector investment, particularly through the use of public-private partnerships.

A temporary solution

On 3 March, South Africa’s National Treasury issued an advisory note to organs of state advising that until the new regulations take effect or there is clarity from the CC on the suspension of the invalidity of the regulations, whichever occurs first, an organ of state may request an exemption from the provisions of the PPPFA for a specific procurement or category of procurement requirements.

SANRAL, Transnet and Eskom are reported to have sought exemptions from the National Treasury with Transnet having been granted the exemption whilst SANRAL and Eskom’s applications are pending approval. The precise parameters of the exemptions issued by National Treasury to each organ of state are presently unclear.

SANRAL recently cancelled adjudicated tenders to the value of R17.47bn related to significant infrastructure projects, including the tender for the construction of the Mtentu River Bridge, due to material irregularities in the tender process. It is anticipated that the effect of the cancellations will be far-reaching for infrastructure development and the construction industry as well as the economy.

Organs of state and private sector role players are advised to keep updated on the legal developments with a focus on the implementation of the NIP in light of the ‘new’ procurement frameworks which will be established in response to the CC’s ruling.

Co-written by Aliyah Ince of Pinsent Masons.