Public-sector construction tenders open to bidders from abroad

The current economic climate has slowed the development of infrastructure in many countries. In contrast, the South African government has allocated U$115 billion for the development of public sector infrastructure, and the World Bank has lent U$3.7 billion to Eskom (a South African state-owned entity) to provide funding for renewable energy projects as well as the completion of two coal-fired power plants. These circumstances afford a unique opportunity for international construction and engineering companies to expand their businesses in South Africa. Set out below is a basic introduction to how international companies can be eligible for government work, and the procedures governing government tenders. It is important to note that there is a raft of legislation governing tenders, and this introduction focuses only on the most important aspects of the relevant legislation.

The law governing tenders

Companies that tender for public-sector construction contracts need to comply with the Construction Industry Development Board Act, 38 of 2000 (the Act). This Act applies to “organs of state” that have put out tenders for “construction works”. “Organs of state”, as defined in South African law, include municipalities, government departments and state-owned entities. “Construction works” means a combination of goods and services utilized for, among other things, the development, repair, maintenance and renewal of a fixed asset, which includes building and engineering infrastructure.

In addition to the Act, there are a number of other statutes which apply to tenders. These other statutes have been created to fulfil the requirements of the South African constitution, which states that tender awards must be made in accordance with a system that is “fair, equitable, transparent, competitive and cost-effective” and acknowledges that a procurement system may provide for categories of preference and for the advancement of categories of persons. These acts include:

• the Promotion of Administrative Justice Act, 3 of 2000;
• the Preferential Procurement Policy Framework Act, 5 of 2000; and
• the Public Finance Management Act, 1 of 1999.

In order to be eligible to tender for public-sector construction contracts, foreign and local companies are required to register with the Construction Industry Development Board (CIDB). A failure to do so can result in the contractor being fined up to 10% of the contract value. The Act provides for a registration process which differs slightly between local and foreign contractors. An application for registration must be accompanied by the following:

• registration and annual fees;
• financial statements for the two financial years preceding the application;
• the company’s registration number, certificate of incorporation, a certified copy of the shareholders’ certificates and, if applicable, the latest name change;
• original tax clearance certificate issued by the South African Revenue Service or, in the case of a foreign enterprise which has not performed work within South Africa, proof that all outstanding taxes owed in its country of origin are paid;
• certified copies of the identity documents of the contractor’s principal(s); and
• where supporting documents are not in English, the application must be accompanied by an English translation prepared by a sworn translator.

A company registering with the CIDB will be evaluated and categorized depending on its:

• grading designation (see below);
• status as a potential emerging enterprise;
• status in terms of a best practice recognition scheme; and
• Broad-Based Black Economic Empowerment commitment.

The grading designation is used to determine the type and complexity of public sector contracts for which a contractor is eligible to apply. The grading designation categories are based on contractors’ financial and work capabilities. These are determined by a contractor’s:

• turnover for the two-year period immediately preceding the application;
• value of the contracts undertaken during a five-year period immediately preceding application;
• available capital; and
• number of qualified employees.

This information is critical to the CIDB in determining whether a contractor has the required experience and available finance to be considered for large value, complex construction contracts. The same standards apply to foreign companies, but the contractor’s financial statements and value of contracts undertaken will be converted and calculated in South African currency.

The Act specifies procurement procedures, evaluation methods and standard-form contracts to be used for different types of construction works. For example, one of the standard procurement procedures needed for design and build works requires expressions of interest to be advertised. Only those parties who express interest, satisfy objective criteria and are selected to submit tenders are invited to do so. This standard procurement procedure is coupled with a standard evaluation method by which the tender’s quality and value for money are evaluated.

Although the Act does not stipulate any sanctions for a non-compliant tender process or award, South African case law shows how courts may deal with any issues arising from a non-compliant tender process or award. In instances of fraudulent tenders, the courts have awarded damages to the losing tenderer. In instances where there was an error in the procurement process or evaluation, a court may find that the contract should be re-tendered. More recently, it was held that if there is non-compliance, whether technical or substantial, such non-compliance will not necessarily cause a successful tender to be replaced. In this, the courts will give consideration to the consequences of declaring such a tender invalid.

In consideration of the above, it is our view that current legislation affords foreign companies equal opportunity in tendering for public-sector construction contracts. It is crucial however, that tenderers ensure compliance with the Act and other relevant statutes.

Nikita Lalla is a director and Jonty Sacks is a candidate attorney at Edward Nathan Sonnenbergs

Johannesburg

150 West Street

Sandton

Johannesburg

South Africa

2196

Tel: +27 11 269 7600

Fax: +27 11 269 7899

E-mail: info@ens.co.za

www.ens.co.za