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[2024] ZAECMKHC 118
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Special Investigating Unit v Kwane Capital (Pty) Limited and Others (CA106/2023) [2024] ZAECMKHC 118 (22 October 2024)
FLYNOTES:
POCA and SIU – Unlawful contract –
Repayment
–
Hire
purchase agreement – Trial court erred in concluding that
rational and verifiable reasons had been advanced justifying
conclusion that respondent was sole provider able to provide
finance municipality sought – Agreement unlawful and
inconsistent with Constitution – Failure to comply with Act
regarding budgetary requirements and SCM policy –
Appeal
upheld –
Special Investigating Units and Special Tribunals
Act 74 of 1996
,
s 5(5)
– Constitution, s 172(1)(b).
IN THE HIGH COURT OF
SOUTH AFRICA
EASTERN CAPE DIVISION,
MAKHANDA
NOT
REPORTABLE
Case No.:
CA106/2023
In
the matter between:
SPECIAL
INVESTIGATING
UNIT
Appellant
and
KWANE
CAPITAL (PTY) LIMITED
First Respondent
MCEBISI
MLONZI
Second Respondent
AMAHLATHI
LOCAL MUNICIPALITY
Third Respondent
JUDGMENT
EKSTEEN
J:
[1]
The
appellant, the Special Investigating Unit
[1]
(SIU), acting in terms of s 5(5) of the SIU Act
[2]
claimed payment of R92 487 183,12 (ninety two million four hundred
and eighty seven thousand one hundred and eighty three rand
and
twelve cents) together with interest, from the first respondent,
Kwane Capital (Pty) Limited (Kwane), and the second respondent,
Mr
Mcebisi Mlonzi, a director of Kwane, jointly and severally. The
claim arose from a ‘Hire Purchase Agreement’
[3]
(HP agreement) that had been concluded between Kwane,
[4]
represented at the time by Mr Mlonzi, and the third respondent, the
Amahlathi Local Municipality (the municipality) in respect
of the
purchase of road construction vehicles (white plant) and plant and
equipment (yellow plant), which the SIU contended had
been unlawfully
concluded and was therefore void,
ab
initio
.
Pursuant to the HP agreement, the white and yellow plant (referred to
jointly as the fleet plant and equipment) had been
duly delivered to
the municipality and it had had the use and enjoyment thereof for
more than two years before the SIU advised
that the transaction was
unlawful. It was accordingly cancelled, and the fleet plant and
equipment repossessed. The amount
claimed represented the sum paid by
the municipality, in terms of the HP agreement, during this period.
The municipality
did not enter an appearance to defend, although a
number of officials in the employ of the municipality, and an elected
councillor,
testified at the trial. The High Court, Makhanda,
dismissed the SIU’s claim and refused an application for leave
to
appeal. The appeal is with leave granted on petition to the
Supreme Court of Appeal.
[2]
Extensive
evidence was led at the trial of the events and circumstances leading
up to and surrounding the conclusion of the HP agreement.
The
material features thereof, for purposes of this judgment, are as
follows: The municipality serves a large area that includes
numerous towns, including Keiskammahoek, Great Kei, Cathcart, and
Tsomo. In order to establish and develop road infrastructure
within
its area of jurisdiction it received annual Municipal Infrastructure
Grants (MIGs)
[5]
from the
National Government, but it also had a limited fleet of plant of its
own for maintenance of existing roads. Towards
the latter part
of 2013 the engineering department in the municipality noted that it
was failing in its service delivery in respect
of construction and
maintenance of roads. In September, the engineering manager presented
his monthly report to the Executive Committee
(Exco) of the
municipality, and it considered the report at its meeting of 25
November 2013. He had raised a concern that
the municipality
had insufficient road maintenance equipment and suggested that it
purchase its own construction fleet plant and
equipment. The
minutes of the Exco meeting reflect the resolutions taken, thus:
‘
1.
That the report for the month of September 2013 submitted by the
Acting Engineering Services
Technician be noted and accepted.
2.
That it be noted that there was a concern raised regarding the
shortage of machinery, and
the matter was referred to the Municipal
Manager in order to respond.
3.
That it be noted that the Engineering Department tried to hire
machinery in order to fast
track the work.
4.
That councillors and community leaders be requested to work
collaboratively in order to develop
a strategy of monitoring graders
in their areas.
5.
It be noted that the issue of purchasing machinery for the
Municipality be considered by council.’
[3]
The council of the municipality met again on the
31 January 2014, to consider the midyear report for the financial
year 2013/2014.
The report reflected that the municipality had
at that stage spent just 12% of its MIG funds during the first six
months and that
National Treasury was threatening to withhold further
MIG funds due to its failure to perform. This, understandably,
placed
councillors in an uncomfortable position as they would be held
accountable by the community. Thus, at the conclusion of the
meeting, the municipal manager, Mr Socikwa, gave an undertaking to
the council to devise a turnaround strategy.
[4]
Shortly
thereafter officials, and the speaker of the council of the
municipality, attended a SALGA
[6]
meeting of all local municipalities in the Amathole Region.
Each local municipality was required to deliver its performance
report. At this meeting, it emerged that several other
municipalities had acquired their own road construction fleet plant
and equipment. These municipalities, including Port St Johns,
were performing substantially better than the municipality,
and the
speaker, who testified for Kwane at the trial, said that she was
impressed.
[5]
At the next council meeting on 25 March 2014, the
minutes of the Exco Meeting of 25 November 2013 served before the
council.
As I have said, the minutes of the meeting reflected a
resolution that the council should ‘consider the issue of
purchasing
machinery’. Accordingly, the council resolved
that management must begin a process of acquiring road construction
machinery
for the municipality. I shall revert to the nature of
the process.
[6]
It was common cause that the council had no budget
for the purchase, and the speaker, Ms Magxaza, said that they had no
financial
report before them at this meeting relating to their
financial ability. However, she was aware of earlier reports
that had
concluded that they could not afford to buy equipment.
She explained that they did not really understand how other
municipalities
had managed to buy their own equipment, but at that
stage they were faced with significant underspending of MIG funds
earmarked
for infrastructure development, and the process had to be
fast tracked.
[7]
By this time the director of engineering in the
municipality, and Mr Socikwa, had envisaged not only expanding its
fleet for road
maintenance purposes, but increasing the fleet to
build inhouse capacity to a point where it could undertake road
construction
itself. The intention was to claim against the MIG
allocation, as roads were built, to make payment of instalments on
the
purchase of the plant.
[8]
Pursuant to the resolution of 25 March 2014, Mr
Socikwa proceeded to sign a letter of appointment in favour of Kwane
dated 3 April
2014 in the following terms:
‘
HIRE
PURCHASE FACILITY FOR FLEET PLANT EQUIPMENT
We hereby confirm that
LAMAN financial Services are hereby appointed by Amahlathi
Municipality to provide Hire Purchase Facilities
for the purchase of
Fleet Plant and Equipment from Barlow World/Bell.
The Hire Purchase
Contract payment shall be in terms of the Hire Purchase with an
initial payment of
R10 388 639
excluding vat
by the 04
April followed by 33 equal payments
R3,317,553.00 excluding vat
equal instalments. The first installment would be end of May
2014 as per the signed agreement.
Kindly confirm acceptance
of this appointment within seven (7) days of receipt of this letter
by a letter addressed to the Municipal
Manager, Amahlathi Local
Municipality.’
[9]
As I have said, the letter was dated 3 April 2014,
but the agreement and the letter of acceptance signed by Mr Mlonzi
reflect the
date of signature as 1 April 2014. The evidence
established that the delivery of heavy plant and equipment to the
municipality
had already commenced on 1 April 2014, to the dismay of
the supply chain management department, which had played no role in
the
procurement process. None of the supply chain management
staff, nor the engineering department, had been involved in any
planning in respect of the delivery of a large fleet of plant and
equipment. No safe storage facility had been prepared and
no
provision had been made for insurance of the equipment, or the
purchase of diesel to operate the equipment. Much of the
equipment required specialised operators, and employees of the
municipality had not been trained in anticipation of the delivery.
[10]
Mr
Cilliers, the senior finance manager, received a letter of demand
from Kwane for the initial payment
[7]
which was due on 4 April 2014. He declined to make payment as
the amount had not been budgeted for. He also contended
that it
was not competent to make payment from MIG funds in respect of
capital purchases. Hence an urgent council meeting
was called
for 8 April 2014. The minutes of the meeting record:
‘
REPORT
ON THE PURCHASE OF INFRASTRUCTURE PLANT EQUIPMENT
·
An explanation was given by the Municipal Manager
regarding the need to fast track Service Delivery and Expenditure on
MIG which
led to the conclusion of the hire purchase agreement with
Laman Financial Services to purchase Infrastructure Plant equipment.
·
It was advised to Council that a new agreement be
concluded with Laman(i) Financial Services taking into consideration
the issue
of affordability whilst at the same time ensuring that each
cluster has enough Infrastructure Equipment as already identified by
Management at its meeting held in East London, however, it was
indicated that the Council has already resolved on the matter.
It was resolved
1.
That the 3 year Contract entered into by
Management and Laman(i) Financial Services
BE
CONDONED
.
2.
That Management should ensure the initial deposit
as contained in the agreement is
PAID
with immediate effect.’
[11]
Pursuant to this meeting and resolution the cost
of the agreement was to be renegotiated. Mr Cilliers was
instructed to pay
the initial deposit, which had been renegotiated to
R8 950 372,56. He did so under protest.
[12]
As I
have said, the fleet
plant
and
equipment
was received and used by the municipality. Kwane provided staff and
training to operate the plant, and additional staff
were employed.
The initial payment, which had not been budgeted for, was made from
cash reserves held by the municipality,
and Mr Socikwa said that he
performed a juggling act, moving money from one vote to another to
provide for the running costs.
It was nearly two years later
when newspaper articles began to circulate that questioned the
lawfulness of the transaction.
The President issued a
proclamation that authorised the SIU to investigate the matter.
They conducted various interviews,
which led them to conclude that
the municipality had not engaged in a competitive tender process, but
rather had purported to rely
on a deviation provided for in
regulation 32 of the supply chain management regulations (SCM
regulations)
[8]
. I shall
revert to regulation 32, but suffice it for present purposes to
record that they concluded, as I have explained,
that the transaction
was unlawful and therefore null and void.
The Pleadings
[13]
I turn
to consider the relevant portions of the pleadings that are material
for purposes of the judgment. The case for the
SIU was that the
HP agreement was unlawful and therefore null and void,
ab
initio
.
It contended that the agreement was concluded in contravention of s
217 of the Constitution
[9]
, and
the municipality’s supply chain management (SCM) procedures and
policies that were binding on the municipality in terms
of Chapter 11
of the MFMA.
[10]
In
addition, it alleged that the HP agreement did not comply, and was in
conflict, with regulation 32(1) of the SCM regulations.
[11]
Regulation 32 provides for the procurement of goods and services
under contracts that were secured by other organs of state,
under
certain prescribed conditions. Thus, it is colloquially referred to
as ‘piggybacking’.
[14]
These averments were met with a bare denial on
behalf of Kwane and Mr Mlonzi and it was pleaded on their behalf that
Kwane was entitled
to assume that the regulation 32 process, as
envisaged in the SCM regulations, had been duly followed as it had
been informed by
the municipality that the HP agreement had been
concluded pursuant thereto.
[15]
The SIU was not satisfied with the response and
further particulars were requested on their behalf. In their
particulars for
trial Kwane and Mr Mlonzi recorded:
‘
The
First and Second Defendants admit that the conclusion of the Hire
Purchase Agreement constituted the procurement of goods, but
not in
contravention of the terms of Section 217 of the Constitution.
It is to be noted that Section 217 of the Constitution
does not
preclude deviations from regular procurement procedures.
Deviations are allowable in terms of, among others, Regulation
32 of
the Municipal Finance Management Act, regulations and provisions
contained in other legislation such as the Provincial Finance
Management Act, Supply Chain Management Policies and the like.’
Their pleadings clearly
reflect that Kwane and Mr Mlonzi had at all times been led to
believe, and understood, that the HP agreement
had been concluded
pursuant to regulation 32.
[16]
However, at the trial, after the SIU had closed
its case, Mr Socikwa testified on behalf of Kwane and Mr Mlonzi.
He acknowledged
that it was not competent for the municipality to
have procured the fleet plant and equipment under regulation 32 and
denied that
he had done so. Accordingly, counsel for Kwane and
Mr Mlonzi sought to amend their plea and their further particulars to
conform with the evidence of Mr Socikwa. The application to amend was
opposed, but the trial court allowed the amendment.
The essence
of the amendment was to abandon all reliance on regulation 32 and to
withdraw the allegation that it had been advised
by the municipality
that the HP agreement had been concluded in terms thereof.
[17]
In the amended particulars for trial, it was now
contended:
‘
1.2
The detail of the specific procurement procedures and processes
undertaken by the Third Defendant is
not known to the First and
Second Defendant. The First Defendant understood that no
competitive bidding process preceded
its appointment and that its
appointment consequently happened as a result of a deviation from the
standard procurement procedures
and processes.’
[18]
It proceeded to explain the new stance thus:
‘
1.3.1
The First Defendant partook in a competitive bidding process in
respect of the procurement of similar fleet plant and
equipment,
which equipment was to be supplied to the Port St. John’s Local
Municipality.
1.3.2 The
First Defendant was the successful bidder in respect of the Port St.
John’s Local Municipality tender.
1.3.3 The
Third Defendant thereafter sought to procure fleet plant and
equipment through a deviation pursuant to Regulation
32 of the
Municipal Finance Management Act. The Regulation 32 procurement
process was pursued by the Third Defendant and
the First Defendant
was requested to consent to this process.
1.3.4 It
transpired that the Regulation 32 procurement process could not be
utilised by the Third Defendant. The
Third Defendant then
resorted to the deviation pursuant to Section 63 of the Third
Defendant’s Supply Chain Management Policy
and in particular
Section 63(1) of the said policy.’
[19]
The effect of the amended pleading was that Kwane
and Mr Mlonzi accepted, as Mr Dörfling did on their behalf, that
no competitive
bidding process as envisaged in s 217 of the
Constitution had occurred, but it contended that the deviation from
such a process
was justified in terms of the municipality’s SCM
policy. The deviation contended for was the “sole supplier”
provision.
[20]
Mr
Buchanan, on behalf of the SIU, argued that the trial court erred in
granting the amendment and accepting the evidence of Mr
Socikwa.
He contended that the reliance on the sole provider deviation was an
afterthought that arose during the course of
the litigation once it
had become clear that regulation 32 was not open to the
municipality. The argument is, on the face
of it, compelling,
but the trial court had the benefit of seeing the witnesses, and it
came to its conclusions on an acceptance
of the evidence of Mr
Socikwa. Generally, the court would be slow to interfere on
appeal with factual findings made by a
trial court, particularly if
the factual findings depend upon the credibility of witnesses who
testified at the trial.
[12]
For purposes of this judgment, I shall accept the credibility
findings made by the trial court in this regard. This
matter
must, accordingly, be decided on the amended pleadings.
The Municipality’s
Supply Chain Management Procedures and Policy
[21]
As I
have said, it was the SIU’s case that the HP agreement had been
concluded in contravention of the SCM procedures and
policy. It
is, accordingly, necessary at this juncture to consider the general
scheme of the SCM procedures and policy and
the legislative structure
in which it applies. The objectives of the policy
[13]
are,
inter
alia
,
to give effect to s 217 of the Constitution and to comply with all
applicable provisions of the MFMA. In addition, a further
objective of the policy is to ensure consistency with all other
applicable legislation, including the Local Government Municipal
Systems Act
[14]
(the Systems
Act).
[22]
In
terms of the Systems Act
[15]
each municipal council is required, at the commencement of its
elected term, to adopt a single, inclusive and strategic plan for
the
development of the municipality (the IDP) which aligns the resources
and capacity of the municipality with the implementation
of the
plan. Once adopted, the IDP is the principal
strategic
planning instrument that guides and informs all planning and
development and all decisions with regard to planning, management
and
development in the municipality, and it binds the municipality in the
exercise of its executive authority, save where the IDP
is
inconsistent with national or provincial legislation.
[16]
[23]
As
adumbrated earlier, one of the objectives of the SCM policy is to
comply with all the applicable provisions of the MFMA.
The
object of the MFMA is to secure sound and sustainable management of
the fiscal and financial affairs of municipalities.
[17]
These include the establishment of norms and standards and
requirements for budgetary and financial processes and supply
chain
management.
[18]
In
pursuit of these objectives, the mayor is obliged to table an annual
budget at a council meeting at least 90 days before
the start of the
budget year.
[19]
The IDP
forms the policy framework and general basis upon which the annual
budget is based.
[20]
Thus, the
municipality is obliged to review its IDP annually, to the extent
that the changing circumstances demand, and it is required
to do so
in terms of a procedure prescribed by regulation.
[21]
When the annual budget is tabled it must be accompanied by any
proposed amendments to the IDP flowing from the annual review.
[22]
Thus, the budget is integrally tied to the IDP.
[24]
The
annual budget must be divided into a capital and an operating budget
in accordance with international best practice as may be
prescribed
by regulation.
[23]
A
municipality may not spend money on a capital project unless the
money for the project has been appropriated in the capital
budget.
[24]
A
transaction that contemplates the acquisition of a capital asset is a
capital project as envisaged in s 19 of the MFMA.
[25]
Irrespective of the nature of the expenditure, save where it is
otherwise provided in the MFMA, a municipality may not incur
expenditure unless it occurs in terms of an approved budget and
within the limits of the amounts appropriated for the different
votes
in an approved budget.
[26]
Where expenditure is incurred other than in accordance with an
approved budget such expenditure is ‘unauthorised’
[27]
.
[25]
A
municipality is entitled to revise its approved budget, so as to
authorise expenditure that would otherwise be unauthorised, by
means
of an adjustments budget,
[28]
but it does not have an unfettered discretion to do so. The
power to pass an adjustments budget is circumscribed by s 28
of the
MFMA. It may appropriate additional revenues which have become
available over and above those anticipated in the annual
budget, but
only to revise or accelerate spending programs already budgeted
for.
[29]
Similarly, it
may authorise the utilisation of projected savings in one vote
towards spending under another vote.
[30]
Only the mayor may table an adjustments budget and he may only do so
within prescribed limits as to timing or frequency.
[31]
When he does so, he is required to provide an explanation of how the
adjustments budget affects the annual budget and the
impact of any
increased spending on the annual budget and the annual budgets for
the next two financial years.
[32]
Where the adjustments budget involves a deviation from the IDP it
requires the simultaneous adoption of a resolution approving
changes
to the municipality’s IDP.
[33]
[26]
I
revert to the SCM policy. The municipality’s SCM policy
outlines the process to be followed in the acquisition of
goods and
services. It begins with a needs assessment that must ensure
that the requirements are linked to budget.
[34]
The SCM policy explains that a demand management system must include
timely planning and management processes to ensure that
all goods and
services required by the municipality are quantified and budgeted
for.
[35]
The process involves
the integration of the SCM in the strategic planning process, linking
the requirements to budget and conducting
a market/industry
analysis.
[36]
[27]
Goods
and services above a transaction value above R200 000.00 (VAT
included) and long term contracts may only be procured through
a
competitive bidding process and goods and services above the
estimated value of R200 000.00 (VAT included) may not deliberately
be
split into parts or items of lesser value merely for the sake of
procuring the goods or services otherwise than through a competitive
bidding process.
[37]
[28]
There
may, however, be instances where the circumstances of a particular
case make the use of a public call for tenders inappropriate.
The SCM policy therefore provides for deviations (exceptions) to the
prescribed use of tenders in limited circumstances.
Mr Socikwa
said that he had invoked the provisions of s 63(1)(b)
[38]
of the SCM which permit a municipality to dispense with the
procedures governing procurement generally and to adopt any
convenient
process, including direct negotiations, if the goods that
it sought to procure are produced or are available from a single
provider
only. When a municipality invokes the provisions of s
63(1), strict compliance with procedures reflected in its SCM manual
must be adhered to.
[39]
In the event that it chooses to proceed by direct negotiations, as Mr
Socikwa did, it is obliged to maintain minutes of such
negotiations
for record purposes
[40]
and if
it is resolved to procure goods by way of negotiation from a source
that it believes to be a single provider, it must be
advertised for a
period of fourteen days prior to the procurement in order to ensure
transparency and fairness.
[41]
The application of
the SCM policy and the legislative framework
[29]
The effect of the SCM policy and the legislation
is that the IDP, as amended from time to time, forms the foundation
of all budgetary
processes. Capital projects require the
approval of council before money may be spent, and the municipality,
including council,
may not incur expenses that have not been budgeted
for unless it is rectified by means of an adjustments budget.
[30]
No
evidence was led in respect of the IDP, but the sequence of the
events and the timeline of the transaction are explained
earlier.
[42]
The
ineluctable conclusion to be drawn therefrom is that the capital
project embarked upon was not provided for in the IDP
and no attempt
had been made to amend the IDP. It is common cause that there
was no budget provided for either the initial
payment in respect of
the HP agreement or the consequential expenses incurred in respect of
additional staff, insurance, diesel
and other incidental expenses.
[31]
The resolution of council on 25 March 2014 to
begin a process of acquiring plant and machinery for the municipality
could only legitimately
refer to a legal process in compliance with
the SCM and the MFMA. It required the commencement of a process
to amend the
IDP, in accordance with the prescribed procedure, to
provide for the acquisition of
fleet
plant
and equipment and the in-house
construction of roads, and for the inclusion of the expenditure in
respect thereof in the budget,
alternatively, if permitted, in an
adjustments budget. Unless and until the expense has been
budgeted for the HP agreement
would be in contravention of s 15 and
19 of the MFMA and the expenditure unauthorised.
[32]
Mr
Dörfling argued that the difficulty was cured by the resolution
on 8 April 2014, where the council of the municipality had
condoned
the HP agreement and authorised payment of the initial deposit as
contained in the agreement. He contended that
insistence upon
an adjustments budget seeks to place form above substance. The
argument cannot be sustained. I have
set out in some detail the
provisions of the MFMA and of the SCM policy earlier herein to
demonstrate the central role of budget
and budgetary planning.
The evidence tendered, and the timeline of events set out earlier,
reflect a total absence of any
considered planning in accordance with
the SCM policy. The idea of an acquisition of fleet plant and
equipment utilising
MIG funds first arose in February 2014 and
delivery of the first plant occurred on 1 April 2014. There was
a total disregard
for the provisions of the SCM which I have set out
earlier, and the initial payment was not budgeted for. In a
circular,
National Treasury
[43]
sought to provide clarity on the procedures when dealing with
unauthorised expenditure. The circular emphasizes that a valid
expenditure decision can only be made by council in terms of a budget
or an adjustments budget. Only council may authorise
instances
of unauthorised expenditure and they may do so only through an
adjustments budget. The principle is confirmed in
s 32(2)(a)(i)
of the MFMA, as read with regulation 25 of the Municipal Budget and
Reporting Regulations, which states that unauthorised
expenditure
must be authorised by the municipality in an adjustments budget that
is approved by the municipal council. As
adumbrated earlier, it
can only be tabled by the mayor, and he is required to provide
various explanations together with the motion.
This did not
occur. The purported
ex
post facto
condonation
of the contract and an unbudgeted expenditure was not competent,
unless it is accompanied by an adjustments budget and
an appropriate
amendment to the IDP.
[33]
For the reasons set out earlier, the HP agreement
constitutes a capital project, and the initial payment is an expense
as envisaged
in s 19 of the MFMA. It had not been reflected in
the capital budget, and, absent an adjustments budget, it was not
competent
for the council to authorise payment thereof. The
trial court failed to have regard to any of these provisions, and in
that
respect it erred.
Sole supplier
[34]
As adumbrated earlier, Mr Socikwa sought to rely
on a deviation that entitled him to dispense with tender procedures
because, so
it was argued, Kwane was a sole supplier. He
explained how he had become aware of the Port St Johns experience at
the SALGA
meeting in February 2014, and their tender processes
enjoyed much attention at the trial.
[35]
Mr Dörfling argued that the context of this
case, the chronology of the events, and the Port St Johns experience
demonstrate
that an open bidding process was impractical and
nonsensical because no one else outside of Kwane offered an HP
finance facility
that enabled municipalities to obtain full sets of
yellow and white plant equipment while awaiting claims against the
MIG.
[36]
Port St Johns had advertised the tender for an HP
facility for the procurement of fleet plant and equipment in order to
build in-house
capacity for the execution of certain infrastructure
projects instead of outsourcing them. The tender was awarded to
‘Sci-Tech
Engineering/SIQTECH’. The evidence did not
disclose how many other tenders had been received. However, Sci-Tech
failed to
deliver, and the contract was cancelled. Thereafter,
in July 2013, Port St Johns readvertised the tender. The new
advertisement
attracted three tenders. One was disqualified
because it had offered a rental contract, as opposed to an HP
contract that
Port St Johns had required. A second was
disqualified as it tendered to supply the fleet plant and equipment
by way of a
direct sale. Kwane was the only remaining tender
and the contract was awarded to Kwane. The Port St Johns HP
agreement
provided for the purchase price to be paid over a period of
three years and for Port St Johns to become the owner of the fleet
plant and equipment upon the payment of the final instalment.
The payment of the instalments for the fleet plant and equipment
would be sourced through claims under the MIG process from the
National Treasury.
[37]
Witnesses
in the trial differed on the lawfulness of the utilisation of MIG
funds in the manner proposed. MIG funds constitute
an
allocation from National Government pursuant to s 214(1)(c) of the
Constitution.
[44]
These
grants are extended on specific conditions and spending of such an
allocation otherwise than in accordance with the
conditions upon
which it is extended constitutes unauthorised expenditure.
[45]
The particular MIG was never identified in the evidence nor have the
conditions upon which it was extended been explained.
Accordingly, it is not possible to resolve this issue. However,
I shall assume for purposes of this judgment that MIG funding
could
be utilised in the manner envisaged, as Port St Johns allegedly did.
[38]
Inspired by the Port St Johns experience, Mr
Socikwa requested the formalities in the Port St Johns tender with a
view to ‘piggybacking’
on the Port St Johns tender in
terms of s 60(1) of the municipality’s SCM policy and
regulation 32(1) of the Municipal SCM
regulations.
[39]
Having
satisfied himself of the conditions of the tender, he consulted the
director of engineering at the municipality and concluded
that the
municipality needed substantially more fleet plant and equipment than
that purchased by Port St Johns. He realised
then that
regulation 32 was not competent for the purchase, thus, he said, he
resorted to the deviation in respect of the procurement
of goods that
are available from a single provider only
[46]
to issue the letter of appointment.
[40]
The effect of the change of plan by Mr Socikwa is
to render the Port St Johns tender process irrelevant for purposes of
this judgment.
Suffice it to say that Port St Johns embarked on an
open tender process in terms of s 217 of the Constitution. It did not
purport
to purchase from a sole supplier, and the result of its
tender process does not justify the conclusion that Kwane was the
only
player in the market and therefore a sole supplier in the sense
required by s 63(1) of the Municipality’s SCM policy.
[41]
As I
have said, in its pleadings Kwane, and Mr Mlonzi, contended that they
had no reason to question the lawfulness of Kwane’s
appointment,
and they were entitled to assume that the appointment was lawful and
constitutionally compliant. The argument
was, correctly, not
persisted with in the appeal. In
Afrisec
Strategic
[47]
Froneman
J explained that the SCM policy of a municipality is ‘a public
document’ and both the municipality, and entities
that seek to
contract with it, are bound by the terms thereof and are required to
familiarize themselves with the content thereof.
It is
therefore not necessary to address this issue further.
[42]
It was
argued on behalf of Kwane, reliant on
SASSA,
[48]
that
an organ of state is not obliged to comply with its supply chain
management policy in the circumstances set out in regulation
16A6.4
of the National Treasury Regulations and the National Treasury
Practice Note No. 8 of 2007/2008. Regulation 16A6.4
provides:
‘
If
in a specific case it is impractical to invite competitive bids, the
accounting officer … may procure the required goods
or
services by other means, provided that the reasons for deviating from
inviting competitive bids must be recorded and approved
by the
accounting officer … .’
[43]
The
difficulty with this argument is that regulation 16A6.4 and National
Treasury Practice Note No. 8 of 2007/2008 were published
in terms of
s 76 of the Public Finance Management Act, which does not apply to
local government.
[49]
The discretion afforded to local government to deviate from
procurement processes is more limited and is circumscribed in
regulation 36 of the SCM regulations, published in terms of the MFMA.
It is mirrored in s 63(1) of the Municipality’s SCM
policy.
[50]
Mr Socikwa said that he relied on the sole supplier provision, but
there was no evidence of any market analysis undertaken.
[44]
I
revert to sole supplier procurement. In
SASSA
it
was emphasised that the reasons for deviation must be rational and
objectively verifiable, and not based on what an official
subjectively regarded as impractical.
[51]
The issue for decision in this matter is whether rational and
objectively verifiable reasons to deviate from the prescribed
procurement regulations have been established.
[45]
The
fundamental requirement of a constitutional procurement process is an
open and transparent bidding process.
[52]
Deviations from such a process should be resorted to only in
exceptional circumstances where such a process cannot be followed.
Sole supplier procurement contemplates a situation where there is
only one supplier capable of providing the goods procured.
It
has been described as ‘the most exclusionary form of
deviation’
[53]
and ‘the
least transparent of all award procedures’.
[54]
Volmink,
in
a very instructive article, noted that the abuse of sole supplier
procurement is well documented and has received much criticism.
The
State Capture Report described it as ‘poorly conceived’,
‘particularly troubling’ and ‘open to
abuse’.
[55]
The report recommended that it should be abolished and that it could
not be defended on the basis of impracticality of the
tender
procedures.
[46]
Nevertheless,
deviation on this ground remains permissible and is universally
accepted. However, a decision to deviate and to dispense
with
procurement procedures cannot be justified on the basis of
inconvenience or a superficial market analysis. It should
be
used only as a measure of last resort where no other alternative is
available.
[56]
Even
where a thorough market analysis leads to the conclusion that there
is only one supplier, the SCM policy still requires
advance public
notice to ensure transparency and fairness.
[57]
This provision is a salutary precaution that accords with article
34(5) of the
UNCITRAL
Model Law 2011
and
it serves as a control measure to ensure that it is only used where
no alternative is available. Thus, clear and persuasive
evidence is
required to establish a rational conclusion that only one supplier
exists.
[47]
In seeking to defend the decision to deviate, Mr
Dörfling emphasized the municipality’s dire financial
position and the
absence of a budget to fund the acquisition of such
a volume of fleet plant and equipment, and he argued that it required
a financier
who would be prepared to offer an HP facility. The
experience in Port St Johns was that only one bidder had tendered to
provide
an HP agreement. Thus, he contended that the evidence
had established that Kwane was indeed the only supplier able to offer
a single HP facility that would enable the municipality to obtain
full sets of yellow plant and white plant equipment while awaiting
claims against the MIG.
[48]
I have explained earlier that the
municipality sought a financier who was prepared to offer them an HP
facility (an instalment agreement)
to fund the purchase of the fleet
plant and equipment. The municipality contended that their
creditworthiness was such that
the Development Bank of South Africa
(the DBSA), as well as other commercial banks, were unwilling to
provide the necessary finance
for the acquisition of equipment.
Mr Socikwa said that the municipality engaged with the DBSA at the
beginning of 2014.
They were advised of the dire need to
acquire plant and equipment and the lack of resources. The
municipality requested the
DBSA to assist them to acquire the plant
and equipment. After careful scrutiny of the municipality’s
financial documents
the DBSA advised that the municipality was a high
risk and that they would not be in the position to assist them.
[49]
These discussions occurred at the beginning of
2014, apparently before the SALGA meeting. There was no
evidence to suggest
that any discussion relating to an instalment
agreement had occurred, or that the DBSA had been advised of the
availability of
MIG funds, already committed by National Government,
which could serve to buttress their ability to pay instalments.
The
evidence suggested that the discussions were directed at securing
a loan and it did not establish what the attitude of the DBSA
might
have been had they been advised of the availability of MIGs. In
respect of the commercial banks, Mr Socikwa said that
the
municipality had wanted to purchase an SUV vehicle for the mayor
earlier in that year, but due to the financial constraints
of the
municipality, First National Bank, Absa Bank and Nedbank declined
their application for financing. Various other witnesses
testified to the general reluctance of commercial banks to fund high
risk municipalities. This does not establish that the
commercial banks, or other finance houses, would have been reluctant
to bid if the tender invitation were to disclose that MIG
funds,
committed by National Government, could be claimed from time to time
in order to fund the instalments due. The
disclosure of the
availability of monies that could be claimed under the MIG, as roads
were constructed, clearly provides a totally
different perspective on
the creditworthiness of the municipality.
[50]
Mr Sethuse, a former executive in charge of fleet
and asset finance for Bidvest Bank, testified on behalf of Kwane.
He said
that at the time of his appointment, Bidvest Bank did very
little business with poor municipalities and black owned fleet
management
businesses. One of his sales managers, employed with
Bidvest Bank, informed him of a business model that he had been
exposed
to by Mr Mlonzi and he suggested that Bidvest Bank should
consider it. Essentially, the model sought to assume the risk
of
finance through the strength of the municipality’s balance
sheet, while the municipalities would claim from MIG funds.
He
had never seen this in his experience as a banker, and he spent some
time considering the impact thereof. Upon consideration
of the
MIG process Bidvest Bank was willing to finance Kwane to the amount
of R90 million to enable it to finance three municipalities.
His evidence demonstrates the impact that the disclosure of the MIG
funding model had had upon Bidvest Bank.
[51]
Mr Sethuse said that he had previously worked with
Standard Bank, and at Absa, and these commercial banks had not
understood the
model. However, he acknowledged that there was
no reason in principle why any commercial bank could not do so in
future.
He said that he had never in his banking career seen an
invitation to tender formulated on the strength of the model and was
unable
to say what the response would be. The result is that
one simply does not know what bids may or may not have been submitted
if it had been made known that the municipal coffers would be
replenished from MIGs already committed by National Government.
[52]
The trial court found that Kwane was the only
supplier that met the tender requirements as a supplier of a hire
purchase facility,
payable for a period of thirty-six months, listing
a full set of equipment (white plant and yellow plant). The
finding is
curious as there was no tender. I have explained earlier
that the tender process in Port St Johns is irrelevant to the enquiry
whether Kwane was a sole supplier, and it was common cause that the
municipality did not embark on a tender process in this case.
There is nothing peculiar about an HP facility (installment
agreement) over a period of thirty-six months.
[53]
The
trial court appears to have been influenced by the fact that the
municipality wanted to purchase both white plant and yellow
plant
under a single HP facility. Save for considerations of
convenience, no compelling reason was advanced for this requirement.
What the trial court failed to recognize is that custom designed
contracts are the most common strategy to defeat competition.
[58]
In essence, what the municipality sought was finance to obtain the
fleet plant and equipment. The evidence did not
establish any
material financial benefit that could arise from a single contract as
opposed to two separate contracts. As
I have said, in terms of
the municipal SCM policy, even if a deviation has been decided upon,
advance notice must be published
for fourteen days to ensure
transparency and fairness. That did not occur. The SCM
policy requires minutes to be kept
of the negotiations which
occurred. While this is merely a formal requirement for record
purposes, it is significant that no record
of the negotiations were
produced. The trial court had no regard to these
provisions of the SCM policy and, in my view,
it erred in concluding
that rational and verifiable reasons had been advanced to justify a
conclusion that Kwane was the sole provider
able to provide the
finance that the municipality sought.
[54]
Accordingly,
the HP agreement was unlawful and inconsistent with the Constitution
both for its failure to comply with the MFMA in
respect of the
budgetary requirements and with s217 of the Constitution and the SCM
policy.
[59]
The
consequences thereof is that the agreement is invalid, in terms of s
172(1)(a) of the Constitution, and must be set aside.
[60]
The
Relief
[55]
Mr Buchanan argued that Kwane and Mr Mlonzi were
complicit in maladministration and impropriety, at least to the
extent that they
were aware, or should have been aware, that the
contract concluded with the municipality was patently unlawful and
did not comply
with the Constitutional, statutory and supply chain
management provisions. Hence, the submission that it would be
just and
equitable, in terms of s 172(1)(b) of the Constitution that
they be ordered, jointly and severally, to repay to the SIU the sum
of R92 487 183,12.
[56]
In
terms of s 172(1)(b) of the Constitution the court is authorised to
make any order that is just and equitable pursuant to a declaration
of constitutional invalidity.
[61]
It has a wide discretion to craft an appropriate remedy based on what
is just and equitable in the circumstances of the case.
However, the Constitutional Court has developed two guiding
principles for crafting an appropriate remedy in cases where a
contract
is set aside. In
Central
Energy Fund
the
Supreme Court of Appeal summarised these guiding principles as
follows:
‘
The
first is the corrective principle, which is aligned with the rule of
restitution in contract, namely that neither contracting
party should
unduly benefit from what has been performed under a contract that no
longer exists.’
[62]
and
‘
The
second guiding principle is the “no-profit-no-loss”
principle which the court articulated as follows:
'It
is true that any invalidation of the existing contract as a result of
the invalid tender should not result in any loss to Cash
Paymaster.
The converse, however, is also true. It has no right to benefit from
an unlawful contract.”’
[63]
[57]
In this matter, by virtue of the conclusion to
which the trial court came, it did not consider an appropriate remedy
under s 172(1)(b).
The SIU provided a hypothetical calculation
to demonstrate that Kwane had derived exorbitant profits from the HP
agreement.
Mr Dörfling did not challenge the arithmetical
correctness of the calculation, but effectively demonstrated, what he
contended
to be material flaws in the underlying assumptions made in
the calculation. On behalf of Kwane evidence was led in support
of the contention that the assumptions underlying the SIU’s
calculation were significantly flawed. However, Mr Mlonzi
was
the only potential witness who could explain the costs structures
utilised to determine the contract price, and he did not
testify.
[58]
In this
regard, in
Allpay
[64]
the
Constitutional Court noted the guiding principles and added:
‘…
[A]ny
benefit that [Cash Paymaster] may derive should not be beyond public
scrutiny. So the solution to this potential difficulty
is
relatively simple and lies in Cash Paymaster's hands. It
can provide the financial information to show when the break-even
point arrived, or will arrive, and at which point it started making a
profit in terms of the unlawful contract. …’
[59]
Similarly, there was a dearth of evidence in
respect of the financial benefit that the municipality derived from
the contract during
the period that it enjoyed the use of the fleet
plant and equipment.
[60]
Accordingly, counsel agreed that it would be
appropriate, if the contract were invalidated, to refer the matter
back to the trial
court to hear any further evidence which the
parties may wish to tender, and argument, in respect of the
appropriate remedy.
[61]
Accordingly:
1.
The appeal is upheld with costs, the costs of
counsel to be taxed on Scale C in rule 69(7) of the rules of court.
2.
The order of the trial court is set aside and
substituted with the following:
(a)
The “Hire Purchase Agreement”
concluded by the first defendant and the third defendant is declared
to have been unlawful
and void
ab
initio
.
(b)
The first and second defendants jointly and
severally, the one paying the other to be absolved, are ordered to
pay the plaintiff’s
costs of the action, together with interest
thereon, calculated at the legal rate from the date of taxation to
the date of payment.
The costs of counsel are to be taxed in
terms of Scale C set out in rule 69(7) of the rules of court.
3.
The matter is referred back to the trial court to
hear further evidence and argument in respect of an appropriate order
to be made
in terms of s 172(1)(b) of the Constitution.
J W EKSTEEN
JUDGE OF THE HIGH
COURT
ZILWA J:
I agree.
P H S ZILWA
JUDGE OF THE HIGH
COURT
POTGIETER J:
I agree.
D O POTGIETER
JUDGE OF THE HIGH
COURT
Appearances:
For
Appellant:
Adv R
Buchanan
Instructed
by:
Whitesides
Attorneys
MAKHANDA
For
1
st
& 2
nd
Respondents:
Adv D
Dörfling SC and Adv L Mokwena
Instructed
by:
Wheeldon
Rushmere & Cole Inc
MAKHANDA
Date
Heard:
26
August 2024
Date
Delivered:
22
October 2024
[1]
Established
in terms of s 2 of the Special Investigating Units and Special
Tribunals Act, 74 of 1996 (SIU Act).
[2]
Section
5(5) provides: ‘Notwithstanding anything to the contrary in
any law and for the performance of any of its functions
under this
Act, a Special Investigating Unit may institute and conduct civil
proceedings in its own name or on behalf of a State
institution in a
Special Tribunal or any court of law.’
[3]
An
installment agreement as defined in
s 1
of the
National Credit Act,
34 of 2005
.
[4]
Kwane
had previously been known as Laman Financial Service (Pty) Limited
and the contract was initially concluded in the name
of Laman.
The company is referred to herein as ‘Kwane’).
[5]
Allocations
made in terms of s 214(1)(c) of the Constitution, subject to
particular conditions for purposes of infrastructure
development.
[6]
South
African Local Government Association.
[7]
The
R10 388 639.00 referred to in the letter of appointment.
[8]
Municipal
Supply Chain Management regulations, published in GN868 of 30 May
2005 in terms of
s
168
of
the Local Government: Municipal Finance Management Act, 56 of
2003 (the MFMA).
[9]
Act
108 of 1996.
[10]
Section
112 of the MFMA requires each municipality to have and to implement
a Supply Chain Management Policy which gives effect
to Chapter 11 of
the MFMA.
[11]
Promulgated
under s 168 of the MFMA.
[12]
Makate
v Vodacom Limited
2016
(4) SA 121
(CC) paras 36-40.
[13]
As
recorded in the policy.
[14]
Act
32 of 2000.
[15]
Section
25(1).
[16]
Section
35(1) of the Systems Act.
[17]
The
objectives are recorded in s 2.
[18]
Section
2(c) and (f).
[19]
Section
16(2) of the MFMA.
[20]
Section
25(1)(c) of the Systems Act and s 17(3) of the SCM policy.
[21]
Section
34 of the Systems Act.
[22]
MFMA
s 17(3)(d) and s 21(2)(a) and (b).
[23]
MFMA
s 17(2).
[24]
MFMA
s 19(1)(a).
[25]
Merifon
(Pty) Limited v Greater Letaba Municipality and Another
[2021]
4 All SA 356
(SCA) para 22.
[26]
MFMA
s 15.
[27]
Definition
of unauthorised expenditure in s 1 of the MFMA.
[28]
MFMA
s 28.
[29]
MFMA
s 28(2)(b).
[30]
MFMA
s 28(2)(d).
[31]
MFMA
s 28(4).
[32]
MFMA
s 28(5)(a) and (c).
[33]
MFMA
s 28(7) as read with s 24(2)(c)(iv).
[34]
Section
15.1(c) of the SCM policy.
[35]
SCM
policy s 17(2)(a).
[36]
SCM
policy s 18(2)(a), (e) and (j). Section 21(1)(b) requires the
accounting officer to establish an acquisition management system
to
ensure that expenditure on goods and services is incurred in terms
of the approved budget with specific reference to s 15
of the MFMA.
[37]
SCM
policy s 29(1) and (2).
[38]
The
material portion of s 63(1) provides:
‘
The
procedures governing procurement in this policy may be dispensed
with and any required goods … may be procured through
any
convenient process, which may include direct negotiations, but only:
(a)
…
(b)
if such goods … are produced or available
from a single provider only;
(c)
…
(f) in any other
exceptional circumstances where it is impractical or impossible to
follow the official procurement process,
… .’
[39]
Section
63(4) of the SCM policy.
[40]
Section
34(3) of the SCM policy.
[41]
Section
63(2)(c) of the SCM policy.
[42]
Mr
Socikwa said that the IDP for the following year was adjusted, but
no mention was made of the IDP for 2013/2014.
[43]
MFMA
circular number 68.
[44]
Definition
of allocation in the MFMA.
[45]
Subsection
(e) of the definition of ‘unauthorised expenditure’
in s 1 of the MFMA.
[46]
Section
63(1)(b) of the SCM policy.
[47]
Nelson
Mandela Bay Municipality v Afrisec Strategic Solutions (Pty) Limited
2008
JDR 1014 (SE) para 30;
[2007] ZAECHC 155
(26 June 2007)
[48]
Chief
Executive Officer, South African Social Security Agency and Others v
Cash Paymaster Services (Pty) Limited
2012
(1) SA 216
(SCA) para 21; [2011] ZASCA 13
[49]
See s
3 and
s 76
of the
Public Finance Management Act, 1 of 1999
.
[50]
Fn
38.
[51]
See
also
RAiN
Chartered Accountants Incorporated v South African Social Security
Agency; in re Black Sash Trust and Another v Minister
of
Social Development and Others (Corporation Watch (NPC) and Another
as amici curiae)
2021
(11) BCLR 1225
(CC) paras 31 and 35; and
Walele
v City of Cape Town
[2008] ZACC 11
;
2008
(6) SA 129
(CC) para 60; [2008] ZACC 1
[52]
Buffalo
City Metropolitan Municipality v Asla Construction
2019
(4) SA 331
(CC) para 91; [2019] ZACC 15
[53]
Peter
Volmink: Deviations and Variations in South African Public
Procurement [A note on SCM instruction 3 of 2021/2022]
published
in (2022) 9
African
Public Procurement Law Journal at 52.
[54]
Bolton:
The Law of Government Procurement in South Africa
p170.
[55]
Volmink
at 65
and
State
Capture Report
Part
1
Volume 1 734.
[56]
Guide
to the Enactment of the UNCITRAL Model Law on Public Procurement
2011,
at 220. Referred to by
Volmink
at
65.
[57]
Section
63(2)(c)
of the SCM policy provides:
‘
For
purposes of the interpretation of
section 59(1):
(a) …
(c) to
ensure transparency and fairness, any goods or services that can
only be obtained from a single provider must
be advertised for
fourteen (14) days prior to procurement.’
The reference to
subsection 59(1) is erroneous and refers back to subsection 63(1).
[58]
See
Bolton
137.
[59]
See
Fedsure
Life Assurance Limited and Others v Greater Johannesburg
Transitional Metropolitan Council and Others
[1998] ZACC 17
;
1999
(1) SA 374
(CC) para 56 and 58; and
State
Information Technology Agency Soc Ltd v Gijima Holdings
(Pty)
Ltd
2018
(2) SA 23
(CC) at para 38 to 40;
Govan
Mbeki Municipality v NICN
2021
(4) SA 436
(SCA) at 456.
[60]
Gijima
para
52; and
Buffalo
City
para
101.
[61]
C
entral
Energy Fund SOC Ltd and Another v Venus Rays Trade (Pty) Ltd and
Others
2022
(5) SA 56
(SCA) para 36; and
Steenkamp
NO v Provincial Tender Board, Eastern Cape
2007
(3) SA 121
(CC) para 29.
[62]
Central
Energy Fund
para
39.
[63]
Central
Energy Fund
para
41.
[64]
Allpay
Consolidated Investment Holdings (Pty) Ltd and Others v Chief
Executive Officer, South African Social Security Agency and
Others
2014
(4) SA 179 (CC)
para
67.