Archive for November, 2011

A key principle of government’s economic growth policy is to encourage the development and growth of small businesses and entrepreneurs. One of the initiatives is to reduce red tape for those small businesses. Recently the National Treasury issued new procurement regulations that were intended to reconcile B-BBEE with government procurement via the PPPFA (Preferential Procurement Policy Framework Act).

These regulations stated that the PPPFA would use B-BBEE principles in evaluating all government tenders. It also meant that a small business could obtain one B-BBEE certificate and use it for both their private enterprise customers, as well as for submission with government tenders. Small businesses, with an annual turnover of less than the threshold are defined as Exempt Micro Enterprises (EMEs) and are exempt from all forms of B-BBEE. This means they do not need to go to the effort and expense of building up a B-BBEE scorecard.

If they are in the tourism industry this threshold is R2.5 million. If they are Built Environment Professionals the turnover threshold is R1.5 million. For all other industries the current threshold is R5 million. This is set by the minister of trade and industry and can be changed by notice in the government gazette.

They do need to prove to both their private enterprise customers and government that their annual turnover is below their threshold. The B-BBEE codes state that:

“4.5 Sufficient evidence of qualification as an Exempted Micro-Enterprise is an auditor’s certificate or similar certificate issued by an accounting officer or verification agency”.

Typically an auditor will check the financials of the company and if its turnover is less than the threshold will write a letter to this effect. Most verification agencies will do the same task. These “EME certificates” are then given to the company’s customers, and to government as required by the new regulations. To date there have been some queries about the issuing of these certificates. We ourselves have queried a number of certificates, mainly on the basis that the company was lying about its turnover, or that the auditor or verification agency did not apply the correct industry thresholds. In some cases private enterprises rejected auditors’ or accounting officers’ certificates and demanded that the certificate be produced by a verification agency. It took some harsh words from us to those companies to get them to recognise that an EME certificate issued by an auditor or accounting officer was acceptable. This was based, not only on the codes but correspondence with the dti who confirmed that both auditors, accounting officers and verification agencies could indeed issue EME certificates.

As always there are complications: In 2009 the minister created the concept of “accredited” verification agencies and “non-accredited” verification agencies. In December 2009 and January 2010 we wrote to the dti and SANAS asking them for the definition of a non-accredited verification agency and received an unsatisfactory answer. In 2009 SANAS began accrediting verification agencies. On the letter of accreditation it clearly identified the type of work, i.e for which code the agency was accredited. We picked up that SANAS had not stated formal accreditation for codes 000, 800 and some of the sector codes. At our insistence SANAS re-issued their accreditation certificates formally allowing verification agencies to accredit for example QSEs (codes 800). They never issued formal notification to accredited verification agencies in terms of code 000. Code 000 is the statement that sets out key principles, defines EMEs and even defines specialised entities.

This is why all EME certificates issued by accredited verification agencies do not bear the SANAS logo because officially they do not have rights to produce EME certificates, and they do not have to follow the verification guidelines, which would include site visits and automatically increase costs. However certificates issued by accredited verification agencies tended to become acceptable, even to the extent that some companies even insisted upon it. The dti and SANAS never had a problem with verification agencies issuing EME certificates as it was in line with paragraph 4.5 of the codes above, and they still do not. As recently as 23rd September, in the notice issued by the dti minister regarding accreditation to IRBA, he re-iterated that paragraph 4.5 still remains valid for EMEs.

The new PPPFA regulations issued on 8th June 2011, and coming into effect on 7th December 2011 are intended to ensure that government procurement follows B-BBEE principles. Basically they state that adjudication of tenders submitted will take into account your own B-BBEE certificate issued in terms of the B-BBEE codes. The higher your BEE level, the more likely you are to win the tender. In the case of EMEs, they automatically qualify as level 4 ( a good level) or even level 3 (a better level) if they are more than 50% black owned. For small tenders, with a value of less than R1 million, a level 3 certificate can contribute approximately 16% of the entire tender adjudication, so it becomes essential for EMEs especially to obtain a valid EME certificate.

The new PPPFA regulations issued by the finance minister chose to use different wording to paragraph 4.5. Their paragraph 10 states:

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Broad-Based Black Economic Empowerment Status Level Certificates

10.    (1) Tenderers with annual total revenue of R5 million or less qualify as Exempted Micro Enterprises (EMEs) in terms of the Broad-Based Black Economic Empowerment Act, and must submit a certificate issued by a registered auditor, accounting officer (as contemplated in section 60(4) of the Close Corporation Act, 1984 (Act No. 69 of 1984)) or an accredited verification agency.

(2)    Tenderers other than Exempted Micro-Enterprises (EMEs) must submit their original and valid B-BBEE status level verification certificate or a certified copy thereof, substantiating their B-BBEE rating.

(3)    The submission of such certificates must comply with the requirements of instructions and guidelines issued by the National Treasury and be in accordance with notices published by the Department of Trade and Industry in the Government Gazette.

(4)    The B-BBEE status level attained by the tenderer must be used to determine the number of points contemplated in regulations 5 (2) and 6 (2).
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We have already highlighted the mistake made by the finance minister in that he defines an EME as being one with an annual turnover of R5 million when that is not currently the case in all circumstances. Their paragraph 10.1 also uses the wording “accredited verification agency”. Effectively 10.1 is incorrect and probably unconstitutional. We had hoped that reading paragraph 10.3 would sort out the problem as it uses the words: “…be in accordance with notices published by the Department of Trade and Industry”. When we wrote to the Treasury Department they told us any interpretations regarding the BEE codes, i.e the entire section 10, should be referred to the dti as they are the gatekeeper.

However, on Tuesday,15th November, SANAS put out the following notice to all verification agencies:
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Dear All

Please familiarize yourself with the newly gazetted PPPFA Guidelines, according to these guidelines EME certificates cannot be issued by Verification Agencies, a letter confirming turn over below R5 million per annum must be written by either an Accounting Officer or an Auditor. There is even an attached format of how this letter should be written. Make sure that you do not mislead the public by issuing these certificates as though they will be acceptable in public service because all these complaints will come back and flood my system.

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The guidelines of course refer to the entire Regulations, especially section 10. The email above states that EME certificates issued by verification agencies to private companies remains valid. However if the same EME wishes to submit documentation to “public service”, they will need to get another certificate, this time issued by an auditor or accounting officer.  The many EMEs that currently have valid EME certficates produced by verification agencies are going to have to pay twice to get a second EME certificate. As noted above some private companies are INSISTING on certificate issued by verification agencies, while govt is now insisting on certificates to NOT be issued by verification agencies. The dti is happy with one set of certificates, while PPPFA is unhappy with it. The only way to win is to spend time and money, and red tape producing the same certificate twice. Apparently PPPFA is now interpreting the codes and insisting both SANAS and accredited verification agencies are following their rules. Even more confusing in our discussions with senior directors at Treasury, their had no idea of the policy as explained in the email above.

The problem could have been avoided if SANAS had issued full accreditation for code 000 to all agencies. It could also be avoided if the dti minister were to issue a ruling that overrides the Treasury’s requirements, or whoever is objecting to verification agencies issuing EME certificates.

At the same time we are well aware that some agencies, and accountants do not perform rigid checks on turnover and simply issue certificates on the basis of a faxed document purporting to be accurate financials. In many cases the company has a turnover of well above the threshold and is deliberately supplying ncorrect information, which is fronting and which the new regulations are trying to stop.

This issues raises more questions than answers.

1) What if a company accepted agency EME certificates in its own verification, and earned procurement points on those certificates. Surely this company’s certificate could not be used by the PPPFA because they used different rules in calculating their certificate?

2) Code 000 also states that all public entities, govt departments, State owned enterprises must obtain their own B-BBEE certificate. The new regulations emphasise this in their conditions by stating that if one agency procures from another the same 90/10 or 80/20 rule comes into affect and each government agency must supply a valid B-BEE certificate. Each government agency must use the specialised scorecard – because they do not have ownership. If the whole reason for excluding verification agencies from verifying EMEs is because they do not have accreditation for code 000, then they also do not have accreditation to verify specialised enterprises either! Therefore, at this point there are no agencies nor auditors able to issue valid certificates for any government enterprise or organ of state.