Maximum Profit Recovery (Pty) Ltd v Umkhanyakude District Municipality and Another (D12061/2024) [2025] ZAKZDHC 32 (23 May 2025)

IN THE HIGH COURT OF
SOUTH AFRICA

[7]            
The
applicant has argued that the appointment of the second respondent
based on the quotation process adopted by the Municipality
was
expressly prohibited in its own Supply Chain Management Policy and
the Municipal Supply Chain Management Regulations and further that
the Municipality was obliged to come to utilise a competitive tender
process[1]. The failure to
invite all of the members of the panel to quote for the VAT services
was procedurally unfair[2]. The
quotation process was alleged to be in breach of the constitutional
imperatives contained in section 217 of the Constitution[3],
and the decision randomly to select three members of the panel to
submit quotations was argued to be irrational[4].
Finally, the quotation process was alleged to be in direct conflict
with Regulation 19(a) of the Municipal Supply Chain Management
Regulations[5].

The
municipality’s defence of its decision

[8]            
The Municipality’s submitted that the contractual arrangement
between
itself and the panel members for the award of work on an “as and
when required” basis meant that it had a discretion
to award
work to different bidders guided by its internal prescripts and that
it had followed its Standard Operating Procedures
in exercising its
discretion to allocate work to the second respondent.

The
statutory procurement scheme

[9]            
The
law as it applies to public procurement and how the court should deal
with alleged irregularities in that process is settled[6].

[10]        
The alleged irregularity in the procurement process should be
identified and
if the court evaluates that the alleged irregularity
amounts to a cognizable ground of review, the decision or award falls
to be
set aside.

[11]        
The
Preferential Procurement Policy Framework Act[7]
was enacted to give effect to the constitutional imperatives of
fairness, equity, transparency, competition and cost effectiveness

contained in section 217 of the Constitution. The Municipality was
obliged to determine a preferential procurement policy in terms
of
which the contract was awarded to the tenderer who scored the highest
points in circumstances where (depending on the value
of the
contract) either 80 or 90 points out of a possible 100 points was
awarded for price[8].

[12]        
Price is effectively paramount, and cost effectiveness is conditional
upon
competition. Competition, in turn, demands transparency and
accountability – both for the sake of the organ of state concerned
and the bidders competing to procure work from it.

[13]        
The integrity of the procurement process does not end with the
awarding of
a bid.

[14]        
Section
116 of the Municipal Finance Management Act[9]
deals with contracts and contract management. Whilst it permits a
contract procured through the SCM policy of a municipality to
be
amended by the contracting parties, this may only occur after the
reasons for the proposed amendment have been tabled in the

municipality’s council and the local community has not only been
given reasonable notice of the intention to amend the contract
but
has also been invited to submit representations to the municipality.

[15]        
The
Municipal Supply Chain Management Regulations[10]
set out minimum requirements with which a municipality must comply
when procuring goods and services. Regulation 19 requires that a SCM
policy must specify that goods or services above a transaction value
of (in this case) R200,000 inclusive of
VAT may be procured by the
municipality only through a competitive bidding process and that no
requirement for goods or services
above the estimated transaction
value may deliberately be split into parts or items of lesser value
merely for the sake procuring
the goods or services, otherwise than
through a competitive bidding process.

[16]        
It is beyond dispute that the contract value of the tender published
by the
Municipality exceeded R200,000.

The
Municipality’s internal policies

[17]        
Given the nature of the Municipality’s defence of its decision,
it is
necessary to consider its internal Supply Chain Management
policies.

[18]        
The Municipality adopted a Supply Chain Management policy in terms of
section
111 of the Municipal Finance Management Act.

[19]        
In terms of clause 14, goods and services could only be procured by
way of
formal written price quotations for procurement of a
transaction value up to R200,000 including VAT and a competitive
bidding process
was required for procurement having a transaction
value above that threshold and for the procurement of long-term
contracts. The
prohibition on splitting contemplated in Regulation 19
is repeated in clause 14(2).

[20]        
Clause 16 sets out the requirements in respect of a list of
accredited prospective
providers of goods and services and how
prospective providers can apply for evaluation and listing. In terms
of clause 18, quotations
must then be obtained in writing from at
least three different accredited providers and if it is not possible
to obtain at least
three quotations, reasons for this must be
recorded and approved by the supply chain management manager or the
chief financial
officer of the municipality if the transaction value
exceeds R 30,000. Clause 20 makes clear that goods and services above
the
threshold may only be procured through a competitive bidding
process and splitting into parts “for the sake of procuring the

goods or services, otherwise than through a competitive bidding
process” is not permitted.

[21]        
Clause 25 permits negotiations with preferred bidders arising out of
the conclusion
of a competitive tender process, providing that such
negotiation neither permits the preferred bidder a second or unfair
opportunity,
nor is to the detriment of any other bidder nor leads to
a higher price than the bid originally submitted.

[22]        
The Municipality has also adopted a Supply Chain Management Standard
Operating
Procedure.

[23]        
Clause 5. 1 of the policy is entitled “Sourcing of Quotations
and clause
5.1.2 reads as follows:

‘5.1.2 
From an appointed Panel

The
nomination process has to follow a rotation method as per agreement.

Applicable
preferential point system 80/20 or 90/10 should be stipulated and
specific goals…where applicable.

(i)         
Verify if the panel is still valid;

(ii)        
The invitation for Quotations (RFQ) form will be drafted by an SCM
Official,
which must have a cover page with all the conditions of the
quotation; specifications/TORs and a pricing schedule;

(iii)      
Invite quotations from the minimum number of service providers as per
terms of the Panel;

(iv)      
Once quotation has been received, pricing must be checked against the
unit price/rate as
stipulated in the Panel…’.

[24]        
The Municipality argues that it complied with these provisions in
awarding
the 12-month VAT review contract to the second respondent
and that its decisions to select three of the panellists and then to
award the contract to the second respondent were lawful.

Could
the municipality apply the quotations procedure?

[25]        
Both the statutory scheme and the Municipality’s own SCM Policy and
Standard
Operating Procedure distinguish between the process to be
followed for the procurement of goods and services under R200,000 and

those that exceed this amount.

[26]        
In
the tender under review, the Municipality initiated a competitive
bidding process. This was because the value of the services
to be
rendered over the contract term[11]
exceeded the threshold. Logically, the quotation process could
therefore not be used to procure the accounting and VAT services
that
the Municipality required. The Municipality was obliged to comply
with the law and its own policies in evaluating the bids,
scoring
them and so on.

[27]        
The Municipality has failed to provide real answers to the following
questions:

a)         
why did it decide to award a contract for 12-months instead of the
36-month
period that it, itself, had sought in the tender?

b)         
if the VAT services were going to be discharged completely in the
first
year, why were those services included in the scope of work
contained in the tender to be rendered over 36 months?

[28]        
The Municipality sought to justify its conduct by saying that the VAT
services
required for the 12-month period (and that justified a
request for quotations) were different to that contemplated in the
tender.
However, this is not the case. The tender sought bids for
services which included “VAT
review and recovery: Reconciliation, review, and recovery of
consolidated VAT“. The Request
for Quotations was expressed to be for “The
Value Added Tax review” for the
Municipality. While the required services may have been itemised in
more detail in the Request for Quotation, they
remained VAT review
services.

[29]        
If
new and previously uncontemplated services or needs arose in respect
of VAT between March 2024[12]
and July 2024[13], the
Municipality was obliged to say so and explain what occurred. That it
did not demonstrates that there was no difference in
the services
contemplated.

[30]        
There is no indication in the Record from the Municipality about why
it was
deemed necessary to seek a quotation for the provision of
services for 12 months, when a few months before it had sought bids
for
the provision of services for 36 months, whilst requiring
stipulated hourly rates for each year. Likewise, the Municipality did

not quantify the value of the services ostensibly to be rendered
during the 12-month service period and gave no information about
how
the accepted rate of 14.25% of recoveries quoted by the second
respondent was to be calculated to determine whether it fell
under
the threshold or not.

[31]        
On the evidence before me, contained in the Record disclosed by the
Municipality,
there is nothing that militates against the conclusion
that the contract was “deliberately split into parts… for
the
sake of procuring the services, otherwise than through a
competitive bidding process”.

[32]        
In
any event, the Municipality did not obtain three quotations from
accredited suppliers – even if the second respondent was

somehow accredited by being appointed to the panel[14],
the Municipality obtained only one quotation. Compounding matters,
there was no evidence of the “minimum number of service

providers as per terms of the Panel”[15]
and the price received from the second respondent (being a
percentage-based recovery fee) could not be “checked against
the … rate as stipulated in the Panel”.

[33]        
The Municipality ignored the provisions of its own Policy and
procedure.

[34]        
It
follows that the Municipality was not permitted to make use of the
quotation process in respect of the provision of VAT services
under
the Tender and then to appoint the second respondent[16],
and its decision to do so was unlawful.

Could
the municipality allocate work to members of a panel at its own
discretion?

[35]        
In principle, there is nothing objectionable about a municipality
appointing
a panel of service providers in respect of goods to be
supplied or services to be rendered. Doing so may well increase
efficiency
and service delivery as a municipality will not be
required to go out to tender each time it requires a specific service
to be
rendered, or if the successful bidder is unable to perform or
the services exceed its capacity.

[36]        
There is also nothing objectionable about service providers being
appointed
on an “as and when required” basis and if the
bidders tender for work on that basis, they can have no grounds to
complain.

[37]        
However, a municipality cannot absolve itself of compliance with the
statutory
public procurement scheme for reasons either of efficiency
or because it determines that its internal policies permitted to do
so. If a practice is permitted where tenders are awarded not on the
basis of cost effectiveness, competition or transparency, but
instead
on opaque, internal decisions, then a system designed for fairness
and accountability collapses. Organs of state will be
able to pay lip
service to section 217 of the Constitution and the peremptory
provisions of the procurement laws and nevertheless
award a tender to
a bidder whose bid otherwise would have failed.

[38]        
Neither municipal policies nor standard operating procedures can
expressly
or by implication condone non-compliance with the law. Cost
effectiveness, transparency and competition cannot be sacrificed on

the altar of efficiency or convenience. These imperatives can
coexist, but this must occur lawfully. Otherwise, the door to
corruption
is forced open.

[39]        
Therefore, and even if a panel of service providers is appointed by
an organ
of state, that entity must nevertheless comply strictly with
the provisions of the public procurement laws when awarding bids or

allocating work. Even if bidders are appointed to a panel, the
respective bids must still be assessed in terms of the PPPFA and

ranked accordingly. Depending on the value of the contract, either 80
or 90 points must continue to be allocated for price, and
the
remaining points must still be allocated in accordance with statutory
transformation and empowerment imperatives.

[40]        
It may occur that an organ of state reserves the right not to award a
tender
to the cheapest bidder because of transformation and
empowerment imperatives, but this decision too must satisfy the
lawfulness
and rationality test if it is to survive a challenge.

[41]        
In the ordinary course however, an organ of state remains obliged to
award
a tender to the bidder who achieves the highest score and, if
that party cannot supply the goods or render the services required
in
the time required, the organ of state then must award the bid to the
party with the next highest score, and so on. A rotation
process
cannot be used mechanically and while ignoring these prescripts.

[42]        
Regulation
25 of the Municipal Supply Chain Management Regulations does not
assist the Municipality either[17].
Regulation 25 permits supply chain management policies to permit a
two-stage bidding process in limited circumstances, which include
large complex
projects, projects where it may be undesirable to
prepare complete detailed technical specifications or long-term
projects with
a duration period exceeding three years. If such a
process is permitted, technical proposals on conceptual design or
performance
specifications are to be invited in the first stage,
subject to technical as well as commercial clarifications and
adjustments
and in the second stage final technical proposals and
priced bids are invited.

[43]        
There is nothing in either the tender or the
Record that would indicate that a two-stage process was contemplated
or required. To
the contrary, priced bids were sourced in a standard
form tender (at the first phase) and the contract period did not
exceed three
years. Requiring bidders to tender on price for the
provision of identified services and thereafter seeking quotations
from certain
identified bidders to the exclusion of the rest, does
not constitute the two-stage bidding process contemplated in
Regulation 25.

[44]        
I
accept that a contrary conclusion was reached by Djaje AJP in Maximum
Profit Recovery
(Pty) Ltd v Naledi
Local
Municipality[18].
I respectfully differ with the conclusions reached in that case and
decline to follow them. The Municipality did not call for
technical
proposals in the first stage and pricing at the second stage of the
process, even if the sourcing of accounting services
identified in
the tender fell within the ambit of Regulation 25 – which, to
my mind, it did not. Pricing was required in the tender and bids were
required to be firm for 90 days because
SLA’s were to be (and
were) concluded based on those prices.

[45]        
Further, and if the two-stage process was
properly to be invoked, priced bids would still have to be evaluated
in terms of the scheme
set out in the PPPFA and other statutory
instruments.

[46]        
Organs of state cannot craft a separate system
of awarding contracts that runs contrary to the law, and which is
open to abuse.
Quotations cannot be sourced if the value of the
service to be rendered exceeds the stipulated threshold, and the
threshold is
to be determined by reference to the total transaction
value that informs which procedure (quotation or competitive bid) is
invoked
at the commencement of the process.

[47]        
In these circumstances, it is appropriate that
orders be granted which prohibit the Municipality from using the
quotation process
to procure any goods and services falling within
the tender and directing it to comply with the statutorily required
scoring of
the panel members and the concomitant allocation of work
to the appropriate members of the panel.

Conclusion

[48]        
The applicant has therefore successfully
established that the decisions taken by the Municipality were
unlawful and constitutionally
invalid and fall to be set aside.

[49]        
There is no reason why costs should not follow
the result. I am not persuaded that a punitive costs order is merited
especially
as there was a previous judgement that endorsed the
Municipality’s actions.

[50]        
I am satisfied also that the urgent application
that was launched by the applicant under case number D9873/2024 and
which interdicted
the Municipality and the second respondent from
implementing their agreement was necessary and that the applicant
should be entitled
to its costs in that respect as well.

Orders

[51]        
I make the following orders:

(d)       
The first respondent is interdicted from utilising a quotation
process to procure
any goods and services that fall within the ambit
of Tender S[…];