Breaking up with organs of state: It’s not you, it’s the treasury instruction.

In instances where companies have entered into long-term or existing perpetual contracts with an organ of state, a commercial need to assign such contract may arise. Assigning state contracts to another party is a complex matter that requires careful consideration of legal and constitutional principles. The Public Finance Management Act (PFMA) and section 217 of the Constitution lay down the framework for public procurement and require adherence to principles such as fairness, transparency, and competitiveness. Recently, there has been debate around whether the assignment of state contracts complies with these constitutional and legal obligations.

The assignment of contracts involves the transfer of a contractual obligation from one party to another. In the context of public procurement, it may occur when a supplier wishes to transfer their obligations to another supplier. The PFMA and National Treasury regulations provide guidance on the assignment of contracts. For example, clause 19 of the General Conditions of Contract (GCC) states that a supplier must obtain the purchaser’s prior written consent before assigning any part of their obligations to perform under the contract.

The assignment of contracts with organs of state must comply with section 217 of the Constitution and the PFMA. Section 217 requires that public procurement adheres to principles of fairness, transparency, and competitiveness. The PFMA provides further guidance on public procurement and requires that entities apply a procurement system that is fair, equitable, transparent, competitive, and cost-effective.

National Treasury SCM Instruction No. 8 of 2022/2023 deals specifically with the cession and assignment of contracts resulting from procurement. The Instruction provides clarity on the issue of cession and assignment, and explicitly states that “assignment of contracts is not allowed as it will be contrary to principles of section 217 of the Constitution particularly, fairness, transparency, and competitiveness.” This Instruction directly contradicts the GCC, which allows for the assignment of contracts with the prior written consent of the purchaser. National Treasury has stated that the GCC are currently under review.

Entities that contract with organs of state must assume that consent to the assignment will not be granted unless the assignment does not conflict with procurement principles or the legal and constitutional principles of fairness, transparency, and competitiveness are complied with in relation to the proposed assignment. While the PFMA does not expressly prohibit it and the GCC allows for the assignment of contracts with the prior written consent of the purchaser, the Instruction expressly prohibits it in other circumstances. The assignment of contracts may also raise concerns around transparency and accountability, which are critical in ensuring that public procurement is fair and in the public interest.