Archive for category Enterprise Development

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:

“3.2.8.3 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);”

The problem:

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.

Our comment:

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.

Legal Issues:

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.

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:

1. Does the business meet the definition of an ED beneficiary?
2. Are you doing something different to your usual treatment of him and other similar suppliers?
3. Do your activities meet the definition of ED as above?