Archive for category BBBEE Knowledge
The dti minister has gazetted the final Agriculture B-BBEE Sector Code. All organisations in the agriculture sector will now follow the agri code, instead of the B-BBEE Codes of Good Practice.
The 7th of December 2012 was a landmark day in terms of B-BBEE legislation. State owned enterprises, such as Eskom, Telkom, ACSA, Transnet – business listed on schedules 2 and 3 of the PFMA, are now required to follow the revised PPPFA regulations that take into account the B-BBEE status of supplies for tender purposes.
In June 2011 the finance minister gazetted revised regulations for the PPPFA (preferential procurement policy framework act) which government and all state owned enterprises must follow when they do any procurement or issue tenders. The new regulations of the PPPFA,(sometimes known as the tender act) uses the well known 80/20 or 90/10 rules whereby 90% of the tender is evaluated via the price quoted, and 10% is based solely on the verified B-BBEE status of the tenderer.
Therefore 10% (or 20% in the case of smaller tenders below R1million) of the tender evaluation is based on a valid B-BBEE certificate. The higher the BEE level, the better the chance of winning the tender.
The regulations came into affect on 7th December 2011. This applied to all organs of state and state owned enterprises. It meant that for procurement purposes, government were given a rigid and objective approach to evaluating all tenders received. Unfortunately, on the same day, the minister of finance issued an exemption notice whereby all state owned enterprises could choose not to follow the 80/20 rule and the apply the BEE status of tenderers. This exemption applied to all state owned enterprise, but not government departments. The exemption was for a year, ending December 2012. Treasury has not issued any new documentation around the exemption which implies that as of now, all tenders issued by, for example PRASA, ESKOM, ACSA and all other state owned enterprises has to strictly follow the new PPPFA regulations.
Until now it can be said that government has not applied B-BBEE principles in its own activities – nearly 6 years after the codes were gazetted. From now on all spheres of government will have to apply the new regulations in their adjudication of your tenders.
In practice, many SEOs did somewhat follow BEE principles. For example the following tender issued by ACSA gives a pre-qualification criteria. It includes the statement “Bidders must be a minimum Level 4 B-BBEE Contributor verified in accordance with the Codes of Good Practice for B-BBEE”. At the time that the tender was issued, pre-December 2012, ACSA was allowed to pre-qualify tenders in this way. The new regulations do not allow for the exclusion of anyone who does not have a valid B-BBEE certificate or specified level. However, the new regulations do take into account the status achieved if any. So even if a company does not have a valid BEE certificate, it could still win the tender if the price quoted is markedly below that of the competition that has a valid BEE certificate.
Recently Saatchi and Saatchi lost the ESKOM account because they did not have at least 50% black ownership. If the tender had been issued post December 2012, ESKOM would not have been able to use black ownership as a pre-qualification criterion.
A good BEE level will be essential to win the tender. Without a good level the only way to win the tender will be to discount prices by up to 11% for large tenders, and up to 22% for small tenders. Black ownership is not a per-requisite, though without black ownership a company may struggle to obtain a high score. The target for black ownership is 25%, not 50%. From now on for businesses wanting to do business with government or state owned enterprises, a BEE certificate alone is not enough – it has to show a high verified level.
The good news is it is still very easy to comply and to reach good B-BBEE levels.
The dti minister, Dr Rob Davies has issued a gazette, notice 922 of 2012 on 7 November 2012 covering the shorter payment periods, and the definitions of Measurement Period and Measurement Date.
Background: Shorter payment periods is used as a method of performing Enterprise Development. Code 600 identifies many activities that will be recognised as ED. This includes a grant, minority investment in a black owned EME or QSE and shorter payment periods.
Shorter payment periods is described in code 600 as follows:
“220.127.116.11 settlement of accounts with beneficiary entities over a shorter period of time in relation to the Measured Entity’s normal payment period, provided the shorter period is no longer than 10 days;”
Annexure 600 gives the recognition value of each of the ED activities. For example a grant contribution is recognised at 100%. i.e if you spend R100 on a grant contribution to an ED beneficiary then you can recognise R100 * 100% = R100 as ED spend, and this counts towards the 15 points for generic companies.
Code 600 also defines exactly what constitutes ED:
“3.2.1 Enterprise Development Contributions consist of monetary or non-monetary, recoverable or non-recoverable contributions actually initiated and implemented in favour of beneficiary entities by a Measured Entity with the specific objective of assisting or accelerating the development, sustainability and ultimate financial and operational independence of that beneficiary. This is commonly accomplished through the expansion of those beneficiaries’ financial and/or operational capacity.”
Codes 600 also defines who can be beneficiaries of ED:
“(a) Category A enterprise development contributions involves enterprise development contributions to exempted micro-enterprises or qualifying small enterprises which are 50% black-owned or black-women owned;
(b) Category B enterprise development contributions involves enterprise development contributions to any other entity that is 50% black-owned or black-women owned; or 25% black-owned or black-women owned with a BEE status of between level one (1) and level six (6);”
Annexure 600 describes the recognition of shorter payment periods as follows:
“Percentage being 15 days less the number of days from invoice to payment”.
When we first saw this we contacted the dti for clarity. The chief director of dti gave an explanation that if payment was received on the same day as invoice, i.e zero days after invoice received, then the calculation would be (15-0)/15 = 100%. If payment was received one day later, the formula would be (15-1)/15 = 14/15 = 93.3% and so on. This has always been a controversial aspect a it was deemed “too easy” to earn points. What many people did not realise is the huge benefit to many EMEs that this provided. Our own ED beneficiary, Msizi Ngwenya of Mabuya Glass has a dream of selling thousands of glass whiteboard to one of the big corporations. His biggest fear is he will land the deal and not be able to pay his glass supplier. He has not yet won the deal, but if he could have benefited from shorter payment periods, and his customer earned points it would have given him the kickstart he needed. Like many others we also felt that this concept was abused, by both measured entities and their “ED Beneficiaries” that sometimes were large corporations. The error that was made was in allowing those “beneficiaries” to be considered ED beneficiaries, as the activities offered to them did not meet the definition of enterprise development.
Many agencies followed the dti’s letter, while some did not. Those that did not followed the logic that if you paid on the date of invoice you would recognise 15% of the invoice value. If you paid one day later you could recognise 14% of invoice value and so on to a maximum of 10 days late where you could recognise (15-10) = 5% of invoice value.
It gave rise to the ridiculous situation where a company could spend say R10000 on shorter payment and earn either 15 points or 2.25 points depending on which agency was chosen to verify your business. This is a 12.75 points differential – two levels.
Notice 922 issued by the minister on 7nd November 2012 (replacing an earlier gazette dated 2nd November 2012 gives a detailed explanation of how the minister would like this to be followed.
The public has 30 days to comment. The methodology that is being proposed is to use the “15-x”% principle.
The wording in the gazette is:
“The refined principle relating to shorter payment periods”
(a) In terms of recognition of enterprise development beneficiaries as per the Codes of Good Practice, shorter period means settlement of accounts with beneficiary entities over a shorter period of time by the measured entity.
(b) In order to claim points for shorter period, the payment must be made within a period of fifteen (15) days from the date of the invoice.
(c) This means that if payment is at least made within the first fifteen (15) days from the date of invoice by the qualifying supplier, then the amount that can be claimed is a percentage of the invoice amount which is equal to 15 minus the number of days from invoice to payment date.
Example: Say that the invoiced amount is R10 and that the measured entity makes payment thereof 5 days after the invoice date then the measured entities. contribution to Enterprise Development is measured as follows:
R10 x (15- 5)% = R10 x 10% = R1 (contribution amount)
(d) This mechanism is only applicable to shorter payments made to Exempted Micro Enterprises (EMEs).
The proposal is to recognise shorter payment up to 15 days (increased from 10 days). It also proposed that the lower calculation (maximum 15%) should be used. It further limits this benefit only to EMEs.
Shorter payment was heavily used, and did go to benefit some tiny black owned businesses that could otherwise not won any business. It was abused. The new method will be more expensive and not used as much as previously, to the detriment of some tiny businesses.
The limit to EMEs is acceptable, though we would like to see QSEs included. The minister should also clarify that it should only apply to ED beneficiaries.
Code 600 states:
5 The Benefit Factor Matrix
The Minister may from time to time, by notice in the gazette, revise or substitute the Benefit Factor Matrix. Any changes will only be applicable to Compliance Reports prepared for a Measured Entity in respect of the first 12-month period following the gazetting of a revision or substitution.
The question is whether the minister himself recognises that the move from 100% recognition to 15% is a revision of the codes. The gazette uses the term “refinement principle”
This is important because it will guide us to whether the new rules around shorter payments comes into effect on the day that it is gazetted, or gives a transition of a 12 month period. It will also help verification agencies know where they stand because even today some agencies use the 15% principles, whereas the majority use the 100% rule. We need to know what is going to happen for the next 12 months after the rules are gazetted.
Many companies are hooking into what they consider a unique way to front and misrepresent their BEE status.
The BEE codes define an EME (exempt micro enterprise) as one that has an annual turnover of less than R5 million. The codes also state that a start-up must be measured as an EME in the first year following their formation or incorporation.
Section 6 of Code 000 states:
6 Start-up enterprises
6.1 Start-up enterprises must be measured as Exempted Micro-Enterprises under this statement for the first year following their formation or incorporation. This provision applies regardless of the expected total revenue of the start-up enterprise.
6.2 Start-up Enterprises are deemed to have a B-BBEE Status of “Level Four Contributor’ having a B-BBEE procurement recognition of 100% under this paragraph
6.3 In order to qualify as a Start-up Enterprise, the enterprise must provide an independent confirmation of its status.
6.4 Despite paragraph 6.1 and 6.2, Start-up Enterprises must submit a QSE Scorecard when tendering for any contract, or seeking any other business covered by section 10 of the Act, with a value higher than R 5 million but less than R35 million. For contracts above R35 million they should submit the generic scorecard. The preparation of such scorecards must use annualised data.
The idea that many companies have is to form a new business, that does the exact same work as the old business, but regard themselves as an EME in the first year.
What they don’t know is that “start-up enterprise” is defined in the codes as:
Means a recently formed or incorporated entity that has been in operation for less than one year. A start-up enterprise does not include any newly constituted enterprise which merely a continuation of a pre-existing enterprise;
Note the grammar error “which merely a continuation”.
Also paragraph 2.5 of Code 000 states:
2.5 Initiatives which split separate or divide enterprises as a means of ensuring eligibility as an Exempted Micro-Enterprise, a Qualifying Small Enterprises or a Start-Up Enterprise are a circumvention of the Act and may lead to the disqualification of the entire scorecard of those enterprises concerned.
This has not stopped hundreds of companies choosing to ask their verification agency for an EME status. Some companies are getting quite innovative. They don’t inform their verification agency that they are a start-up – they simply produce audited statements for the first year of operation of this new business. If they have not fully transferred their activities across to this new entity, then the entity will have a turnover of less than R5 million and be an EME. The Codes for Complex Structure and Transactions & Fronting do talk about how complex structure should be verified.
It is certainly a circumvention of the Act to produce or issue an EME certificate if the entity is not an EME.
The B-BBEE Amendment Bill makes allowances for up to 10 years in jail for fronting offenses.
The long awaited draft B-BBEE Codes were officially launched by dti Minister Rob Davies on 2nd October 2012.
The B-BBEE act requires that any changes to the BEE Codes be gazetted as a draft, giving the public a 60 day commentary period. Thereafter the dti minister can gazette the codes in terms of Section 9(1) which becomes the final codes. In practice it takes far longer than 60 days – usually about a year before draft codes, particularly as far reaching as these drafts can be finalised and put into practice.
It is important to understand the draft codes, to be able to comment if necessary, and also to begin preparing to change your B-BBEE strategy for when the final codes are gazetted.
DISCLAIMER: This article is written based on the minister’s presentation. The formal draft codes giving the detail are not yet available
Draft Codes – Generic Scorecard
|Enterprise and Supplier Development||40|
There is some good news for small businesses:
EMEs (Exempt micro enterprises – businesses that are exempt from calculating a B-BBEE scorecard): The threshold has increased from up to R5 million annual turnover to a maximum of R10 million. EMEs are automatically given a level 4, but 100% black owned EMEs are level 1 and 50% black owned EMEs are level 2.
QSEs (Qualifying small enterprises – businesses that followed a more lenient scorecard): The threshold has increased from between R5 million annual turnover and R35 million to R10million up to R50 million.
The codes have defined three priority elements:
Enterprise and Supplier Development
If a generic does not achieve minimum targets on all three of the priority elements, it calculated BEE level will decrease 2 levels. For example if your company has no black ownership but reaches level 4, it will be dropped down to level 6.
A QSE has to comply with Ownership and any one other priority elements. Otherwise it will drop one level.
Summary of each element:
Ownership – points available: 25
Little significant changes other than to points on indicators.
New entrant threshold increased from R20 million to R50 million
An enterprise must achieve at least 40% of the net value targets (points?) in order to comply with the priority requirements. If they do not, then they drop 2 levels.
Management Control – points available: 15
The indicators for management and employment equity have been combined into one element.
Still awards points for board members, directors
Points for top management (senior top and other top have been removed)
Points for Senior management
Points for Middle management
All points for junior management have been removed
The calculation for adjustment for gender has been removed and poits awarded specically for black women and black people (same effect)
Skills Development – points available: 20
Target spend has gone up from 3% to 6%.
5 extra points awarded for “absorption of learners”. Refers to providing permanent employment of learners after they complete their learnership program
Is a priority element: 40% threshold is a requirement – alternatively the company drops 2 levels
Enterprise and Supplier Development – points available: 40
Is a simple combination of both preferential procurement and enterprise development, with additional indicators
Is a priority element: 40% threshold is a requirement – alternatively the company drops 2 levels.
Recognition levels thresholds have changed.Recognition only awarded for value-adding suppliers.
ECONOBEE note: Details are not fully available. Most companies are not value adding suppliers and have no way of becoming a value adding supplier. Therefore their certificate cannot be used by their supplier and they have no incentive to produce a BEE certificate. If they have no need or ability to produce a BEE certificate, then they will have no incentive to ask their suppliers to produce a BEE certificate. BEE has been driven by large companies asking their own suppliers for scorecards.
Recognition from all suppliers: Target increases to 80% (previously 70%) – only 8 points awarded (previously 12)
Recognition from 50% black owned suppliers: Target increased to 40% (previously 12%) – 9 points awarded (previously 3)
Points awarded for enterprise development – sector specific programs
Bonus points for new venture creation
Clarification that early repayments may only be used to earn points for assisting black owned EMEs and QSEs, and limiting points to 15% of the available 15 points
Socio-Economic Development – points available: 5
No change, other than an emphasis on sustainable access to the economy, job creation
As more information becomes available and we analyse the codes, we will give more commentary.
EconoBEE will be holding a series of briefings on the new codes and provide a submission to the dti. Watch this space for details.
DATE: 2 OCTOBER 2012
TO: ALL JOURNALISTS AND EDITORS
BEE REMAINS AN IMPERATIVE IN SOUTH AFRICA – MINISTER DAVIES
The Minister of Trade and Industry, Dr Rob Davies says black economic empowerment remains an imperative in South Africa. Minister Davies was speaking at the launch of the revised Broad-Based Black Economic Empowerment Codes of Good Practice in Midrand, today.
“Black economic empowerment is not just a social and political imperative. We need to make sure that in the country’s economy, control, ownership and leadership are reflective of the demographics of the society in the same way the political space does. That’s why we are saying BEE remains an economic imperative. We cannot expect to grow and develop as a country if the leadership of the economy is still in the hands of only a small minority of the society,” said Minister Davies.
He added that the talent pool that is available in the country will not be drawn in its totality if the majority of the country’s population was still excluded from the control of the economy.
“We will only be able to realise the number of benefits of the demographic and democratic changes when all our people have the opportunities which they ought to be having in terms of the values of our Constitution. So BEE is also an economic imperative,” added Davies.
Minister Davies said the revised Codes sought to amend the secondary legislation arising from the Broad-Based Black Economic Empowerment Act to make sure that people were truly and broadly empowered in South Africa, and genuine broad-based black economic empowerment took place. The amendment of the BEE Act and the revision of the Codes, said Minister Davies, would go a long way in plugging the gaps that businesses have taken advantage of such as fronting, “tick-box” compliance, and the exorbitant amounts of money that small enterprises have to pay to consultants to prove they were BEE compliant.
“The current generic scorecard contains seven elements and these have been reduced to five in order to align the elements more closely with the trajectory of the economic growth and development in the country, with a total of 105 points assigned to the five elements. All companies, except the exempted micro enterprises (EMSs) should comply with all the elements of the scorecard. There is also some adjustment to the points allocated and the qualification criteria. There is also an enhanced recognition of the status of black-owned micro enterprises,” said Davies.
He said one of the new things being proposed in the revised Codes was the introduction of minimum requirements for priority elements. These are ownership, skills development and enterprise and supplier development. Qualifying small enterprises are required to comply with two of the elements, although ownership is compulsory, while large entities will have to comply with all of the requirements.
Minister Davies said the launch of the Codes signalled the opening of a sixty-day period in which business and all other members of the public can submit their comments on the Codes for consideration before the amendments are finalised.
The CEO of the Black Business Council, Mr Xolani Qhubeka said the Codes of Good Practice should be the minimum standard for all sectors in the country’s economy, adding that the revised Codes were a step in the right direction although there was still a lot that needed to be done.
Sidwell Medupe-Departmental Spokesperson
Tel: (012) 394 1650
Mobile: 079 492 1774
Issued by: The Department of Trade and Industry
Follow us on twitter: @the_dti
Comments on BEE Advisory meeting held on 20 September 2012 – Narrow-Based BEE makes an unwelcome return
It was reported that the President chaired a meeting of the BEE Advisory Council on 20th September 2012. See http://www.info.gov.za/speech/DynamicAction?pageid=461&sid=30860&tid=84460
The long awaited BEE Amendment Bill has again been delayed. It was initially reported that it would be submitted to parliament some weeks ago. Current reports are that the bill is with the State Law Advisors. Thereafter the portfolio committee will hold public hearings. The chances that it will be enacted into law this year law are now diminished.
The council also reported on the proposed revisions to the codes. Note: once the revisions are gazetted they will be open for public comments and only after that process will they become a final code of good practice. This takes up to a year. It has already been reported that the codes will be reduced to 5 elements.
EMEs and QSEs that are 100% black owned will be level 1
EMEs and QSEs that are more than 50% black owned will be level 2
The above is going to be quite controversial. Currently EMEs (exempt micro enterprises – annual turnover less than R5 million – depending on industry) have been regarded as level 4, and EMEs that are more than 50% black owned are level 3. All QSEs currently need to produce a scorecard by choosing 4 elements. The proposal by the BEE Advisory Council is to exempt all black owned businesses from BEE requirements if they are EMEs or QSEs. The highest level of compliance is level 1, and any 100% black owned QSE business is automatically level 1.
This takes us way back to the bad days of narrow-based BEE – where the only criterion was black ownership. We liked broad-based because it supported the economy, employees, skills, enterprise development and society via socio-economic development. We disliked narrow-based because it only looked at black ownership, and it was a major cause of fronting and corruption. We accepted the slight benefit given to black owned EMEs, as it was seen as enterprise development.
We are very unhappy with a blanket dispensation given to all black owned QSEs to exclude them from BEE requirements. It will encourage fronting and it is counter productive to the aims and objectives of the B-BBEE Act.
There is some background to be taken into account. The PPPFA (Preferential Procurement Poicy Framework Act, the act governing all statement procurement and tenders, had never fully followed B-BBEE principles or the codes of good practice. Tenders were adjudicated on the basis of black ownership and management only. There had been calls for many years to align the PPPFA with the B-BBEE act, i.e take into account the B-BBEE status of the service provider – using broad-based principles. Finally in 2011 the finance minister issued new PPPFA regulations to take B-BBEE into account. This caused an out cry from some black businesses – that they would lose out on business because they either did not have a good BEE status, or that other “white” owned businesses were able to compete by also obtaining a good BEE status. As a result, when the new PPPFA regulations came into effect on December 2011 to align the PPPFA with B-BBEE, the finance minister issued an exemption to all SOEs (state owned enterprises) allowing them to continue their old methods of evaluating tenders. This exemption is due to expire in December 2012, and makes nonsense of government’s intention of streamlining and reconciling all government regulation in line with BEE principles.
There has obviously been a lot of lobbying by vested interests to solve the PPPFA problem. The finance minister cannot easily continue issuing extensions, and the big parastatals cannot be seen to be going against BEE principles. For example even though Eskom also has this PPPFA extension it continues supporting B-BBEE principles. This has obviously been a problem for many black owned businesses that refuse to obtain a better B-BBEE level than their opposition.
The solution to the above problems is now contained in the revised codes. According to the BEE Council, majority black owned QSEs are to be exempted from BEE. It’s an elegant political solution, but is going to harm true transformation.
Remember that QSEs (companies with an annual turnover of generally less than R35 million) make up the majority of businesses in South Africa. At the same time we note there are too few black owned businesses – especially QSEs, and we do encourage the creation, development and support of black owned businesses. A black owned QSE can easily reach a high BEE level, and if it has a turnover of say R20 million, it can be argued that it has as much a duty to contribute towards true empowerment by obtaining a good and valid BEE certificate as anyone else. It was acceptable to give a small benefit to black owned EMEs – level 3 instead of level 4, but to give a 100% black owned QSE a level 1 is too much.
President Zuma convenes B-BBEE Advisory Council Meeting
20 Sep 2012
President Jacob Zuma convened the fifth meeting of the Broad-Based Black Economic Empowerment Advisory Council at the Union Buildings in Pretoria today.
The focus of the meeting was to monitor and evaluate progress on the overall review of the BBBEE Act and the Codes of Good Practice. The Minister of Trade and Industry gave an update on the progress on the review of the BBBEE Act and the Codes of Good Practice. Of chief importance was that the Bill has recently been approved by cabinet for introduction to Parliament very soon. The Bill is addressing the following key issues:
Circumvention: B-BBEE Fronting;
Establishing a B-BBEE Commission;
Trumping provision: B-BBEE Act to take precedence over conflicting provisions in legislations dealing with empowerment;
Monitoring of B-BBEE in Public and Private sector; and
Redesign of the B-BBEE Verification Industry.
The Bill is currently being certified by the State Law Advisors; and the Portfolio Committee will commence with the public hearings once the process is done.
On the Codes of Good Practice, Cabinet has also approved for the Codes to be gazetted for public comment for a period of 60 days. The purpose of the Codes is to assist and advise the public and private sectors in their implementation of the B-BBEE Act.
The revised Codes will enhance the implementation of B-BBEE in a meaningful and sustainable manner.
Key areas of refinement amongst others include:
The generic scorecard has been reduced to five elements with the Employment Equity and Management Control being consolidated, and Preferential Procurement and Enterprise Development merged to form a Supplier Development Element;
The points for Ownership have been broadened to include designated groups in the main points;
Thresholds for Exempted Micro Enterprises (EMEs) and Qualifying Small Enterprises (QSEs) have been adjusted;
All companies, except Exempted Micro Enterprises, will be required to comply with the five elements of the B-BBEE scorecard;
The introduction of the priority elements: Ownership, Skills Development and Supplier Development, and large enterprises to comply with all three priority elements. The priority scores of entities that do not comply with sub-minimum requirements in each priority will be discounted;
Entities (EMEs and QSEs) that are 100% black-owned will qualify as Level 1;
Entities (EMEs and QSEs) that are more than 50% black-owned will qualify as Level 2;
QSEs must comply with all 5 elements on the scorecard.
The B-BBEE Summit has been postponed to the second quarter of 2013/2014 financial year because:
The review of the B-BBEE legislative framework is not finalised; and
B-BBEE Diagnostic report has not been completed.
Two Universities have been appointed to conduct a B-BBEE research.
The task team including Advisory Council members and the dti will be appointed to coordinate and oversee the affairs of the B-BBEE Summit.
Minister of Labour also presented on the 12th annual Commission for Employment Equity Report. The quality of Employment Equity Reports received from employers improved drastically since the2009 Reporting period mainly due to tightening of regulations in 2009 and online reporting.
In terms of the report , government is performing much better than the Private Sector in terms of both race and gender representation at all three tiers, i.e. National, Provincial and Local government.
Some of the key issues raised by the minister include the following:
The Community/Social/Personal Services is the best performing sector across nearly all occupational levels, which could be related to the fact that government is included in this sector.
Manufacturing appears to be the least progressive across most sectors.
Educational institutions have also been identified as an area for attention in order to improve on their race, gender and disability representation.
The Code of Good Practice HIV and AIDS and the World of Work has been finalised and is now in line with the ILO Recommendation, 200.
The President applauded the Ministers and the Council members of a job well done, and encouraged them to continue working to ensure that transformation is achieved as envisaged in the BBBEE Strategy and Constitution.
Issued by: The Presidency
20 Sep 2012
Enterprise development is worth 15 points on the generic scorecard and 25 on the QSE. The revised codes are talking of combining ED with Preferential Procurement and calling the new element Supplier Development.
ED has always been an integral part of the BEE codes. It helps grow the economy and create employment. The link between procurement and ED is also very important. We believe that a business has a better chance of succeeding if it is supported via extra business, than simply providing seed capital.
One of the ways to perform ED with a supplier has been to assist with cash flow – specifically by arranging early payment of invoices. Many large corporations have red tape to the extent that it can take many months to be approved as a vendor and up to three months to be paid. Small businesses simply cannot afford to finance their big customers. They need the cash flow to purchase raw materials, pay expenses – rent , salaries and wages. Almost by definition if the business is small and in need of ED support it has no, or limited, financing or overdraft. We know of small businesses whose biggest dream, but also nightmare is that they will win a big contract with a large company due to cash flow constraints. That is why the BEE codes suggested that a company that pays ED suppliers early – less than 10 days from issuing of invoice to payment would earn points on the ED scorecard.
Let us re-look at the definition of ED:
“…with the objective of contributing to the development, sustainability and financial and operational independence of those beneficiaries”.
Lately we see too many ED activities that do NOT meet this definition. A company will identify a potential beneficiary that meets the requirements for being a beneficiary – i.e at least 25% black owned (with various other clauses not important to this discussion). The company will then pay invoices from that beneficiary early and claim points. Verification guidelines require that the beneficiary agree to being appointed as an ED beneficiary and supply a “request for assistance letter” and “thank you” letter.
If you visit your local supermarket (let’s assume it meets the definition of being a beneficiary) and you pay your invoice at the till, i.e within 10 seconds of receiving the request, can this really be seen as you performing ED because you have paid for your goods COD? We generally say that if your usual terms to your supplier is 30 days, and he approaches you and explains his financial constraints, and you then decide to change your financial policy towards him and ensure that he receives payment within 10 days, then you will earn ED points.
We have seen many situations where large companies that meet the definition of being a beneficiary are given ED assistance in the form of early payment of invoices. All companies will, naturally, accept any form of cash flow benefit because it makes business sense. We would ask whether the beneficiary could genuinely state that they are receiving ED assistance. We have seen these standard form letters – we even designed them, but we expected them to be used to state the truth!
Put another way would a large listed company that has a annual turnover of many billions be prepared to put out a SENS announcement stating: ”
We would like to thank XYZ company for appointing us as their enterprise development beneficiary. The early payment on our invoice no. 34567 dated 31st August to the value of R1596.87 will assist us to develop our business further. This assistance will contribute to us becoming sustainable. We hope that we will eventually become financially and operationally independent”
The acid test is:
- Does the business meet the definition of an ED beneficiary?
- Are you doing something different to your usual treatment of him and other similar suppliers?
- Do your activities meet the definition of ED as above?
The dti has issued a document clarifying the effective dates of government notices.
This is a very welcome move. The purpose of the document is to explain which sector code a company must follow and from which date if the sector code is newly released. The signatory is Nomonde Mesatywa, the chief director in the BEE Unit.
Recently two new sector codes have been gazetted – the Property Charter and the ICT Charter. Both state that the sector code is effective as from the date of the gazette.
The clarification statement explains that if a company falls within the sector code it must apply that code as from the date of publishing of the sector code. The date of publishing refers not to the date that the minister signed the notice (which is generally some weeks prior to publishing), but the date of publishing of the gazette. In the case of the ICT Sector code, this is 6th June 2012. A problem that cropped up is a company may have been half-way through its verification using the Codes of Good Practice when the ICT sector code was gazetted. The question we asked was must the verification agency redo the verification because the date of issue on the certificate would be after the date of gazetting of the sector code. The dti’s statement also clarifies this. It says that any verification that was begun, i.e applied for verification, prior to the gazetting of the sector code would use the Codes of Good Practice, whereas a verification applied for after the sector codes were gazetted would need to follow the sector code.
We are very happy that the dti issued a statement so soon after the issue was raised. It completely explains to everyone if a sector code should be followed or the Codes, and there is no room for misinterpretation. We applaud the chief director for clarifying an issue that does affect a fair number of companies. We recognise that the chief director has no discretion over the actual sector codes and is unable to vary it by for example adding in a transitional period as some are requesting. We sincerely request the BEE Unit to issue more clarification statements of this nature. It will instantly solve most the the problems we have seen with interpretations.
We would recommend that all verification agencies or approved auditors that are affected,i.e who were busy with the verification of a property company or ICT company prior to the gazette include a statement on the certificate as follows:
“Please note that (insert company name) falls within the (ICT Sector/Property sector). The verification agreement was signed prior to the gazetting of the (ICT/Property sector code) and the company was verified in terms of the Codes of Good Practice. This makes their certificate valid”
This will ensure there is no confusion in for example 6 months time when the company’s B-BBEE certificate is scrutinized and a query raised that the certificate was only issued on say 1st July 2012, but not following the relevant sector code. If the disclaimer as suggested is not on the certificate, the company runs the risk that someone will see that the wrong sector code was used and disqualify the certificate. This is especially important if the company is tendering for business, and they do not have the opportunity of explaining why their certificate appears to be incorrect when it is actually entirely valid.