Introduction
As South Africans, we are currently living in the reality where we hear of misappropriation of public funds, gross mismanagement in the public sector and of flawed procurement processes, almost daily. Words like “state capture” and “corruption” have become part of our lives.
The problem is that what is at the core of the actual state of affairs is often “packaged” as something it is fundamentally not. Practically speaking, we are seeing state departments claiming non-compliance with the regulatory framework in cases where this is not the case or where it is applied outside of context.
The PFMA
Amongst others, sections 66 and 68 of the Public Finance Management Act 1 of 1999 as amended (“PFMA”), seems to be one of those provisions often utilised out of context.
“Restrictions on borrowing, guarantees and other commitments.—(1) An institution to which this Act applies may not borrow money or issue a guarantee, indemnity or security, or enter into any other transaction that binds or may bind that institution or the Revenue Fund to any future financial commitment, unless such borrowing, guarantee, indemnity, security or other transaction—……
Public entities may only through the following persons borrow money, or issue a guarantee, indemnity or security, or enter into any other transaction that binds or may bind that public entity to any future financial commitment.”[1]
Thus, section 66 of the PFMA provides that when borrowing money or entering into any other transaction that binds or may bind a public entity to any future commitment, such transactions must be approved by the relevant designated authority.
This section was intended to apply on lending and guarantees given by public entities; some have applied its provisions to procurement decisions, ostensibly on the basis that such procurement decisions amount to “any other transactions” as outlined in section 68.
“Consequences of unauthorised transactions.—If a person, otherwise than in accordance with section 66, lends money to an institution to which this Act applies or purports to issue on behalf of such an institution a guarantee, indemnity or security, or enters into any other transaction which purports to bind such an institution to any future financial commitment, the state and that institution is not bound by the lending contract or the guarantee, indemnity, security or other transaction. “[2]
Moreso, where approvals were not sought /obtained, some entities have relied on section 68 also, to escape contractually binding procurement decision, on the basis that such transaction does not bind the public entity concerned.
The Courts
In the matter of Road Traffic Management Corporation (“RTMC”) v Waymark Infotech (Pty) Ltd (“Waymark”).[3] RTMC contracted Waymark through a tender process. The contract was to endure for a period of three years and cost +/- R38 million. RTMC initially suspended Waymark’s services and subsequently cancelled the contract, on the basis that it was not bound by the contract as the contract based on sections 66 and 68 of the PFMA.
On appeal, the SCA ruled that the High Court misconstrued the provisions those sections and further, that a term contract does not fall under these provisions. The SCA ruled that the contract is “a present commitment to pay for professional services as they were rendered, albeit over a three-year period” and not a future financial commitment.”
The Constitutional Court concurred with the SCA reasoning amongst others that “A contextual reading of sections 66 and section 68 , given the chapter in which they are located , and the relation of that chapter to the other chapters of the PFMA , lends itself to the interpretation that the phrase “any other transaction” binds or may bind that public entity to future commitment “ as referred to in section 66 must mean a transaction that is somehow similar to a credit or security agreement.
The Court found that the reliance on section 66 and 68 for a pure services procurement contract by RTMC was misguided.
Conclusion
It is vital that business-owners ensure that they have a good understanding of the procurement regulations and frameworks and to seek legal advice when a public entity threatens to cancel an agreement, proceeds to cancel or does not perform in terms of the agreement – with or without cancellation. Contact SchoemanLaw today.
[1] PMFA section 66
[2] PMFA section 68
[3] (CCT73/18) [2019] ZACC 12; 2019 (6) BCLR 749 (CC) (2 April 2019)
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