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:
“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.
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?
One of the aims of transformation is to grow black business. For true transformation we need more black owned businesses and to support black businesses.
I came across a very typical situation just today. We analyzed procurement spend of a large company, part of a JSE listed business.
The company spends R592 million every year with local suppliers.
Of this, R23 million is spent with companies that are more than 50% black owned. This is 3.92% of their total procurement. Note that this could well imply that the companies are as little as 50.1% black owned and 49.9% white owned.
In addition they spent R2.6 million with companies that are more than 30% black female owned. This is 0.46% of their total spend. This could well imply that the company is 30% black female owned, and the remainder 70% white owned.
All other spend, 95.62% of their spend is spent with companies that are not majority black owned or 30% owned by black females.
In terms of the B-BBEE procurement calculation, the company obtained 16.46 points out of 20, which is relatively good – compared to the many companies we have analyzed.
Minister Davies spoke about B-BBEE during his budget vote: He said the following:
“Regarding economic empowerment more generally, the BEE Codes of Good Practice were promulgated 4 years ago and we are now in a better position to assess their impact. The Presidential Advisory Council has made several policy recommendations to allow for greater participation by black people in productive activities and to tackle what is now emerging as increasingly complex practices of fronting. To this end, the dti and the Presidential Advisory Council are focusing on reviewing the BEE Codes of good practice and possibly amending the BBBEE Act. This could entail, amongst others, refinements to ensure greater policy coherence in the application of BBBEE across government and to strengthen access to procurement opportunities through the now approved and aligned PPPFA regulations. We are also looking at ways to strengthen our efforts to combat the fraudulent practice of fronting.”
Business Day – 20th April 2011 is reporting as follows :
“Department of Trade and Industry acting director-general Lionel October said yesterday the recommendations of the advisory council — now being considered by the economic cluster of government departments — would shift the focus of BEE away from equity investment and ownership towards productive activities.
Currently, companies scored high marks on the BEE scorecard for black ownership, which gave them a high overall score even when they performed poorly in areas such as enterprise development and procurement.
A proposal being examined by the economic cluster is that minimum scores would be required for enterprise development and procurement — or the overall score would suffer. This would compel companies to aim for achievement in all areas.
Mr Davies said what was under consideration was that points would be deducted from the overall score if minimum scores for enterprise development and procurement from small companies were not achieved.
It would also not be enough to merely hand over money for an incubator or enterprise development project. Companies would have to be actively involved in fostering small businesses.
“In Asia, small and big businesses have a symbiotic relationship where big business gets a lot of input from small business and works hard to ensure that it has the required capacity and the technology,” Mr Davies said.
Complex forms of fronting also had to be addressed.
“We have seen that people who participate in ownership deals imagine that they have one thing, but then when they look at the fine print, they have something else,” Mr Davies said.
“There is now a whole industry of lawyers and accountants who are structuring these deals in particular ways.”
The above is not too different from our crystal ball gazing in our previous newsletter. This is what we said:
The dti has been looking at revising the codes, and recently issued a tender for companies, presumably law firms to take this further. Once the service providers are appointed, the process will take many months or even years to evaluate and then re-evaluate the B-BBEE codes. We are quite sure that this will not result in “canceling” B-BBEE, but gazing into a crystal ball we expect in one or two years time to see the following:
Ownership indicators will change to award more points to broad-based and employee ownership schemes. Individual ownership will be awarded less points. Less emphasis will be placed on direct voting rights and more emphasis placed on a new form of economic interest to ensure that new owners get direct benefit out of their investment. To date many companies do not declare dividends so a minority owner has no benefit, other than when he sells his shares, and in private companies there is no good way to value shares like the JSE does.
Will be worth less points than present. Currently one new black director can be “worth” up to 6 points. This is seen as only benefiting a few, it is not broad-based enough. Management may be reduced to 5 points or even consolidated into the Employment Equity element reducing the number of elements to 6.
Definitions will be cleared up. Allowing a significantly more objective measure of “senior, middle and junior” management employees. More points will be awarded. There is a possibility to have the definitions expanded to broaden the reach of the management levels. It should be noted that as from next year the targets for EE go up anyway.
Skills is anticipated to be the biggest beneficiary of the re-evaluations and will certainly be worth more points. Additional indicators, similar to the excellent construction charter will be created. This will include a more detailed breakdown including mentorships and bursaries. The cost of Skills Development will not be a major discussion point, rather what does that spend get used for. The cost will therefore be targeted in more specific and beneficial areas.
As from next year the targets for procurement go up anyway. Definitions and interpretations, especially around exclusions – imports, third party will be cleared up. The procurement element cannot change substantially as it is the theoretical driver behind Black Economic Empowerment.
Points may drop slightly. More indicators like those in the construction charter will be added. Some “easy” points, may decrease in importance. Mentorships for developing enterprises will be added. Increased emphasis will be placed on the type of beneficiary ensuring better Enterprise Development opportunities and not generic spend with any qualifying beneficiary.
Points may drop slightly in favour of the EE and Skills elements.
QSEs may find that the “easy” points on ED and SED will have less value.
The thresholds on EMEs will rise.
The charters will also have to be re-evaluated, so there may be a recommendation to decrease the number of gazetted charters
Let’s re-look at this in two years time and see how accurate we were.
The minister has gazetted proposed changes to the B-BBEE Codes of Good Practice.
The proposals are gazetted in terms of Section 9(5) of the act, which gives interested persons the opportunity of commenting for a period of 60 days from the date of publication of his notice. (18th February 2011).
The proposals affect enterprise development (codes 600/806) and socio-economic development (codes 700/807).
1) Enterprise Development – Shorter payment periods:
Change in shorter payment periods: The existing codes state that you can earn ED points by offering shorter payment periods to suppliers. The codes say that if you pay COD, you can claim 15/15 (i.e 100%) of the value of the payment. If you pay one day after receiving the invoice you can recognise 14/15th of the value. If you pay 5 days after receiving the invoice you can recognise 10/15th , ie. 66.6% of the payment value and so on. The old codes stated that you cannot go beyond 10 days for your payment.
The actual formula used is (15 minus number of days from date of invoice)/15
The proposed amendment allows you to take as long as 15 days to repay. It should actually be only 14 days though!
If you take 14 days to pay then you can recognise (15-14)/15 of your payment: ie 1/15th of the payment – 6.67% of the payment.
If you take 15 days to pay, the formula is (15-15)/15 = 0% which is why we stated that it can only be 14 days!
This is an extra dispensation given to companies and public enterprises that find it difficult to arrange payment as fast as 10 days. The extra benefit is very small though. If you take 12 days to pay an invoice to an approved beneficiary, you can only recognise 3/15th, ie 20% of your payment spend.
What is more interesting is the fact that the minister has given this dispensation on the shorter payment periods. Without doubt shorter payment periods is the most controversial ED activity. In the past many agencies used to regard only a small portion of the shorter payment as being recognisable ED spend. They use the formula of (15 – days to pay) as a percentage. so, if you paid COD, ie zero days, they saw it as (15-0)% of the payment = 15% of payment. We had asked the dti for an explanation and they gave us the interpretation as we have always used. Recently ABVA issued practice notes reverting back to the old arrangements. Fortunately only a few verification agencies are following this incorrect method.
There must be a reason for the dti emphasising shorter payment period, and maybe this is it. In our own submission, we will recommend that the dti issue a very specific explanation and worked example to ensure consistency.
2) Enterprise Development/Socio-economic development – Change from average annual spend to annual basis:
The codes state that ED and SED contributions are measured cumulatively (average annual) from date of inception of the codes, or even up to 5 years prior to the codes (which were issued in 2007.). This means that if your NPAT (net profit after tax) in 2007 was R1m and R1.5m in 2008, R1.3m in 2009 and R2m in 2010, then for your ED calculation our target is set at 3% of the cumulative profit of R5.8m = R174 000.
Your spend is also cumulative so if you spent R24 000 in 2007, R100 000 in 2008, R50 000 in 2009, then you would have reached target in 2010 by 2009 already, and would earn full points in 2010. We used to use the phrase “you can bank your overspend”, so if a company had overspent one year, the overspend would be carried forward to the next. There are good reasons to use the cumulative method: No one really knows what their net profit after tax will be until after their audit and their tax assessment. The best they can do prior to the year-end is use estimates and budgeted figures. With the new proposal, to be on the safe side, a company will have to overspend slightly just in case it turns out that their net profit after tax is higher than expected. The overspend will be lost next year.
Many companies have not yet begun their empowerment journey. Some have spent no money on ED or SED, so they would have had to make up a huge amount of spend if the cumulative had applied. This could have been asking them to spend 12% of NPAT on ED and 4% on SED over the past 4 years. Since the majority of businesses are not yet compliant they will be happy with the new proposed ruling. Businesses that have overspent on their ED and SEC will be unhappy.
Transitional period: There is no direct transitional period for the proposed changes. Paragraph 5 of code 600 and code 700 does state: “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 benefit factor matrix (annexe 600 (a)) lists the various types of contributions that can qualify as ED (and similar with SED). Paragraph 5 states that any changes to this annexure comes into effect only after 12 months. The Minister’s proposed changes however affect both the benefit factor matrix – the early payment periods , and the actual code 600 – the change from average annual to annual.
The shorter payment period will therefore only come into operation in 12 months time, but the change from cumulative to annual would come into effect as soon as it is gazetted.
We do not disagree with the proposed amendments, though we will recommend that the minister allow a transitional period for those companies that have overspent on their ED and SED targets. We welcome the fact that the minister is issuing amendments, proving that B-BBEE is still top of mind. We still have huge problems with lack of standards, fronting and lack of clear interpretations of the codes. Even these proposed changes will not clear up many issues and we will be issuing our comments to the dti recommending that when they issue this amendment, they clarify some of the issues referred to.
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When you spend money on an enterprise development project you would like to know that the business you are assisting is will be viable and sustainable. We know that most new businesses fail within 5 years – 98% of them. What a difference it will make to us, an the world if we can improve the success rate of businesses we help: Less unemployment, more production, more growth, more GDP, more wealth – a better economy!
Msizi of Mabuya Glass Merchants has now made a few sales after our newsletter talked about his business and the glass white boards.
It is really a great feeling to walk into the office and look over at the fax machine and see orders.
In addition to helping Msizi our business will earn points. A real win win.
Mabuya Glass Merchants is one of the businesses we help – not because we have to but because we want to. Msizi Ngwenwa is a running mate of mine – (Comrades silver medalist). He is a glazier, and knows all about glass. He tried very hard to get into the building trade, but due to the competition, and lack of cash flow and expertise he never really succeeded, but he has still not given up.
Some time back we needed a whiteboard for our training room, but do not like the standard boards as they tend to stain, and the ink never really rubs out. Instead we asked Msizi to install a glass white board on our wall, and it works perfectly and looks really good. We can write on it with any marker pen, and a bit of windowlene is all that is needed to clean it. We started discussing ideas for Msizi around producing glass whiteboards. We have assisted him with equipment and he has now started production of glass boards: They are beautifully framed in aluminum and can easily be mounted by a DIYer on your wall. It is the most useful piece of office equipment we have.
Msizi is working very hard on the quality of his framed white board – and quality is still a problem, but Msizi wil not rest until he has produced “the Rolls Royce” of glass white boards.
We purchased his first board and our staff love it.
Our role has been a bit of finance for equipment and we have purchased all his “mistakes” which is good enough to us to use perfectly well. We also help him with his accounts, marketing and most of all we are a shoulder to lean on and able to help him with brain-storming. In a few years his product could well become a well-known brand.
Mabuya Glass Merchants is currently producing trial aluminum framed glass boards 80 cm by 60 cm at a price of R299 (excluding packing and shipping and installation which any DIYer can easily do). The size is perfect for every office. I’d love to take orders for him while he perfects his quality. Take this opportunity to support his enterprise, earn BEE points but more importantly help his business thrive.
We have obviously earned both enterprise development points and procurement points from our positive relationship with Msizi (he is level 3 and is a category A enterprise development beneficiary) so there is enhanced recognition on both our ED scorecard and procurement scorecard so we have great BEE benefits.
Moreover Msizi, is about to finally and able to reach his dream of running a sustainable business. He is not a “bigwig”, not being enriched, just a South African who cares and is beginning to feel good about himself. So do we! This is what true B-BBEE is all about!
The link between Enterprise Development (Mabuya Glass Merchants) and procurement (buying glass white boards) works very well, to find out more attend our Procurement and Enterprise Development conference.
Contact EconoBEE on 0861 11 3094 or firstname.lastname@example.org or Msizi Ngwenwa on 072 263 0130 for more info.
An article in the Business Report quoted the new minister of trade and industry, Rob Davies, as saying ministries must work together and specifically mentioned the need to help grow SMMEs.
It’s time for the minister to “walk the talk”. It time to talk to his colleagues in treasury, energy and those responsible for state owned enterprises to get their act in order – one single BEE code will help SMMEs, and improve BEE compliance. It time to stop making so many demands on SMMEs, like the requirement to have their BEE scorecard verified, and allow self-assessments.
The minister proudly states that regulations have been put in place in the new companies act to make compliance easier.
So they ease one area only to add red tape somewhere else!
The minister also states that government is trying to pay its SMME suppliers in 30 days. This is a big improvement over the existing situation of 3-6 months. However the enterprise development codes state that enterprise can earn BEE points by paying COD, or at least within 10 days. so once again government is setting stadnards for us, that they are not prepared to try to meet.
At least the minister is making the right noises – it’s time for him to really understand how SMMEs operate and the challenges they face and DO something.
This last weekend I went through to the Bruma Flea market. It has been a very long time since I was at a flea market and found it quite fascinating. Hundreds of tiny businesses selling just about everything. The true entrepreneurial spirit is still very much alive in these flea markets.
While browsing I noticed a very nice looking painted picture. The lady selling the art work asked me what I was looking at, which I replied positively, she then asked what I did and where I worked and then eventually I told her that I worked in the BEE Compliance field.
Immediately her eyes opened – her little business selling various artistic things needs help. She even went as far as taking my contact details so she could contact me later.
This opportunity is available everywhere. South Africa has so many businesses, many of which are tiny “subsistence” businesses who have potential to grow but not the skills. Many others are small with lots of potential and given a chance will thrive.
Enterprise Development is everywhere. It is incredibly easy to find the right beneficiary who fits in with your business. Enterprise Developments goal is quite simple, get successful well trained businesses/business people to assist small black businesses succeed.
Finally it is simple, find a business that you can help and help them!