A Guidebook Toprocurement & Enterprise Development

A GUIDEBOOK TOPROCUREMENT & ENTERPRISE DEVELOPMENT

January 2012

Table of Contents

DISCLAIMER

Defining Broad-Based BEE

The BEE Act

PROPOSED CHANGES TO THE BEE ACT

The beneficiaries of BEE

THE DIFFERENT BEE SCORECARDS

Generic Enterprises

Qualifying Small Enterprises (QSE)

Exempted Micro Enterprises (EME)

The BEE Scorecard

PREFERENTIAL PROCUREMENT

BEE Codes Reference: Code 500 and Code 805

Generic Preferential Procurement Scorecard

Explanation of Terms

What qualifies as Total Measured Procurement Spend?

INCLUSIONS

EXCLUSIONS

Key Points

ENTERPRISE DEVELOPMENT

BEE Codes Reference: Code 600 and Code 806

Generic Enterprise Development Scorecard

Explanation of Terms

What qualifies as a contribution?

Key Points

DISCLAIMER

1)NPI GOVENANCE CONSULTING accepts no responsibility or liability of any nature in regard to any actions taken by the client as a result of any information provided in this document.

2)This document is given solely in relation to South African BEE legislation and the verification of the clients points thereof, and is not be used for any other purposes.

3)It is noted that the law relating to Black Economic Empowerment is limited and that there are various interpretations on how to apply the law. As such it is recommended that the client engage with their appointed Verification Agency to determine their interpretations, which may differ from those of NPI GOVENANCE CONSULTING.

4)This document is drafted in accordance with the laws of South Africa and is not applied in any other jurisdiction.

5)NPI GOVENANCE CONSULTING has exercised due and customary care in drafting this document, but has not, save as specifically stated, independently verified information provided by the client.

6)No other warranty, express or implied, is made in relation to the content of this report.

7)This document has been prepared at the request of the client. The use of the report by unathorised parties shall be at their own risk and NPI GOVENANCE CONSULTING accepts no duty of care to any such third party.

8)NPI GOVENANCE CONSULTING does not accept any liability for any comment made in this document which does not relate directly and solely to the scoring of the structure against the BEE Codes of Good Practice.

Defining Broad-Based BEE

The phrase "black economic empowerment" (BEE) has been used in many different contexts and ways – sometimes not accurately reflecting how it is defined by government.

The issue can be confusing. According to the BB-BEE Act No 53 of 2003, government views black economic empowerment in the broadest sense possible, and includes community empowerment and the empowerment of people living in rural areas, as well as persons with disabilities in its definition.

The Broad-Based Black Economic Empowerment Act of 2003 defines "black people" as a generic term that includes "Africans, Coloureds and Indians". According to the Act, "broad-based black economic empowerment" (with an emphasis on "broad-based") refers to the economic empowerment of all black people including women, workers, youth, people with disabilities and people living in rural areas.In a June 2008 landmark ruling, the Pretoria High Court ruled that South Africa's 10 000-strong ethnic Chinese community be included in the definition of "black people" for purposes of black economic empowerment status.

The socio-economic strategies envisaged include increasing black ownership and management of businesses, facilitating community and worker ownership of "enterprises and productive assets", skills development, equal representation in the workplace, preferential procurement, and investment in businesses that are owned by black people. In addition the B-BBEE Codes of Practice has expanded the realm of empowerment by ensuring that businesses procure from both small (EME) and medium (QSE) sized enterprises who are B-BBEE compliant; which does not mean that these businesses are black owned, but they do adhere to the other elements of BEE.

Black Economic Empowerment (BEE) aims to substantially increase black participation at all levels in the economy. This legislative strategy tries to redress the imbalances of the past by transferring more ownership, management and control of South Africa's financial and economic resources to the majority of its citizens. It also aims to ensure broader and meaningful participation in the economy by black people.

However BEE is not a stand-alone legislation, as it feeds into supporting legislation such as the South African Constitution; including the Bill of Rights, Employment Equity Act, Skills Development Act, Preferential Procurement Policy Framework Act, Labour Relations Act, Companies Act and the Codes of Good Practice on the Employment of Persons with Disabilities.

The BEE Act

The BEE Act is the central legislation through which the BEE process will be managed. It does not set out offences or penalties relating to BEE performancebut rather seeks, through the economic measures discussed below, tofacilitate a uniform approach to BEE in the South African economy. Thus, at the outset it is necessary to state that there is no “hard law” requiring that any entity in South Africa must meet specific BEE targets ormust implement a BEE policy within the entity.

However, from a practicalperspective any company wishing to do business in the South Africanenvironment must consider and develop its BEE position. In addition to the pressures from government discussed below, an entity that does nothave a good BEE rating, or does not strive to improve its BEE rating, will behampered in the conduct of day-to-day business with government, organsof state and private-sector customers. Most private-sector businesses to which services are rendered or goods are sold will themselves have BEEprocurement targets to meet and so the BEE rating of entities from whichgoods and services are procured will be a factor in determining who to dobusiness with. BEE is an issue that is taken very seriously by government in South Africa at present. Corporate restructurings and acquisitions are often seen as anopportunity to introduce a BEE component into the ownership structureof a business and any proposed transaction which does not include acomponent of BEE participation will be difficult to “sell” to government. In the regulatory approval process, the exchange control process and at various other stages in a transaction, government approvals will berequired. In most instances, these approvals are discretionary and as such, the BEE element needs to be carefully considered.

PROPOSED CHANGES TO THE BEE ACT

The envisaged amendments to the BEE Act have been published on 9 December 2011 for public comment by8 February 2012. Some of the proposed changes include:

The definition of a “black person” to mean African, Coloured, Indian and Chinese who are South African citizens by birth or descent before April 27, 1994. Or would have been entitled to acquire citizenship by naturalization prior to April 27, 1994, but were precluded from doing so by the Apartheid policies.

A specific emphasis onwomen, workers, youth, people with disabilities and people living in rural areas(Codes are likely to change to reflect this, possibly in the Employment Equity, Skills Development and Enterprise Development pillars);

Procurement to now also including the promotion oflocal content procurement(this means that a new procurement code is likely to set specific targets in this regard for business to score BEE points), with a definition of local content provided (similar to that of the Preferential Procurement Regulations);

Fronting B-BBEE Practices whilst not clearly defined, the consequences of fronting have been outlined;

Inclusion of start-ups, micro and medium enterprises and black entrepreneurs, including in theinformal black business sector;

BEE can be used by all organs of state to determine "criteria for the awarding of incentives,grants, and investment schemes in support of broad-based black economic empowerment." (e.g. Research and export grants may in future be affected, for example);

A new development is that the Minister of Trade and Industry may allowany state department to apply its own transformation policy to its sector, and that policy would be of the same status as the BEE Codes;

The other new development is that the Minister of Trade & Industry also makes provision for the appointment of a BEE Commissioner (by the Minister of Trade & Industry) to ensure that the spirit and intent of BEE is being adhered to.

The beneficiaries of BEE

The definition of who should benefit from empowerment has shifted in theBEE Act from the concept of “previously disadvantaged” to one of race. This shift makes it a lot clearer as to whom the intended beneficiaries areand removes some of the “artifice” and confusion which characterised theearly BEE policies. The BEE Act defines the beneficiaries of BEE as “Africans, Coloureds and Indians”. These were the population classifications applicableunder apartheid. This is a distinct departure from previous pieces oflegislation that have allowed BEE to benefit white women or white disabledpeople, by targeting HDSAs, PDI s or HDls.

As we state above, a multi-faceted or broad-based approach to BEE has been adopted by the government. The Act defines “broad-based black economic empowerment” as the economic empowerment of all black people, includingwomen, workers, youth, people with disabilities and people living in ruralareas through diverse but integrated socio-economic strategies that includebut are not limited to:

Increasing the number of black people that manage, own and controlenterprises and productive assets;
Facilitating ownership and management of enterprises and productive assets by communities, workers, cooperatives and other collectiveenterprises;
Human resource and skills development;
Achieving equitable representation in all occupational categories andlevels in the workforce;
Preferential procurement; and
Investment in enterprises that are owned or managed by black people.

The BEE Act and the “broad-based” approach represents a departure from the previous approach to empowerment embodied In the PreferentialProcurement Act. The previous approach focused largely on ownership ofan entity and not on “empowerment” of the entity as a whole. This led tomany entitles engaging in “fronting” and other sorts of “window dressing”.

THE DIFFERENT BEE SCORECARDS

Different types and sizes of organizations are dealt with differently in the Codes. There are four different types of organizations that the Codes recognise:

Generic Enterprises

AnnualturnovergreaterthanR35million.

MeasuredusingtheGenericscorecard (all 7 elements of the Scorecard to be audited)

Qualifying Small Enterprises (QSE)

AnnualturnoverbetweenR5millionandR35million.

MeasuredusingtheQSEscorecard (4 out of the 7 elements of the Scorecard to be audited).

Exempted Micro Enterprises (EME)

Annual turnoverlessthanR5million.

Automatically get Level 4 BEE status unless they are over 50% black owned in which case they get Level 3 status.

Do not need to be verified, but can be verified if they choose to as there is the possibility of the organization achieving a higher status.

Needacertificatefromanauditorcertifying that theirturnoverislessthan R5million

If an EME tenders on large projects they must submit a scorecard. The value of the tender will determine whether they are required to submit a QSE Scorecard or a Generic Scorecard.

The BEE Scorecard

The following table shows the different weightings for the different types of organisations.

Element / Generic Weighting / QSE Weighting / Adjusted Scorecard for Specialized Enterprises
Generic Weighting / QSE Weighting
Ownership / 20 / 25 / N/A / N/A
Management Control / 10 / 25 / 15 / 25
Employment Equity / 15 / 25 / 15 / 25
Skills Development / 15 / 25 / 20 / 25
Preferential Procurement / 20 / 25 / 20 / 25
Enterprise Development / 15 / 25 / 15 / 25
Socio-economic Development / 5 / 25 / 15 / 25
TOTAL / 10 / 100* / 100 / 100*

*NOTE: The scorecard for Qualified Small Enterprises (QSE) only requires the entity to be measured on 4 out 7 elements and hence the total score is out of 100 points.

Remember that only companies that do not achieve a score of 30 points are considered non-compliant or “non-BEE”. Once an organisation has achieved a score above 30 points, its BEE contribution status is measured by the number of points it has attained. It cannot simply be said that an organisation is “BEE”, one has to look at their BEE score.

BEE Score / BEE Status Level / Recognition Level %
100 + / 1 / 135
85 – 99 / 2 / 125
75 – 84 / 3 / 110
65 – 74 / 4 / 100
55 – 64 / 5 / 80
45 – 54 / 6 / 60
40 – 44 / 7 / 50
30 – 39 / 8 / 10
< 30 / NON COMPLIANT

PREFERENTIALPROCUREMENT

BEE Codes Reference: Code 500 and Code 805

Your score under Preferential Procurement is dependent on the BEE scores of your suppliers. This means that the higher a supplier’s BEE Score, the more they will count towards your Preferential Procurement score. The amount of contribution is illustrated in the table below:

Generic Preferential Procurement Scorecard

In the scorecard (see above) you will see percentage targets for procurement spend. It is the above figure that is compared to the target to calculate the score. This is important to understand as many people incorrectly interpret the targets as “I have to spend 50% of my budget with BEE companies”.

Preferential procurement has been included as an essential element of the BEE Scorecard. It is not only an incentive to purchase from BEE certified suppliers but it is also the driving force behind the spread of BEE from customer to supplier. Without this section there would be little to no pressure on your business to adopt BEE, if you were not interacting directly with government.

In order for any business to score points in this section you need to procure from a supplier that also has a BEE Certificate. However, any customer may adopt any procurement policy they wish. They may choose to only deal with companies in their geographic area, or only with suppliers with trading history longer than 2 years but if they do not include the requirement that their suppliers have a BEE Certificate, then they will not be able to secure BEE points and are therefore restricting their ability to compete for business with their customers who are looking for suppliers with high BEE scores.

Explanation of Terms

NOTE: These explanations have been simplified to make it easier to understand. For the official definitions, refer to Schedule 1 of the Codes.

BEE Level:The status given to an organisation dependent on their BEE Score. Levels range from 8, which is the lowest through to 1 which is the highest.

BEE Score:The total number of points a company secures on a BEE Scorecard.

BEE Recognition Level: The amount a customer may multiply their total spend by with a specific supplier to arrive at the BEE spend for that supplier.

BEE Procurement Spend:The amount calculated by multiplying total spend with a specific supplier by their BEE Recognition Level as illustrated in the example above.

Total Measured Procurement Spend:The total amount spent in a 12 month period on any goods or services bought from outside the organisation. A list of inclusions and exclusions is given below.

50% black owned Where black people hold 50% or more of the voting rights and economic interest and have earned all the points for Net Value.

30% black owned Where black women hold 30% or more of the voting rights and economic interest and have earned all the points for Net Value

EME:Exempt Micro Enterprise (R0m to R5m turnover per annum)

QSE:Qualifying Small Enterprise (R5m to R35m turnover per annum)

What qualifies as Total Measured Procurement Spend?

INCLUSIONS

Cost of sales (raw materials, components etc.)

Operational expenditure (stationery, rent, telephones etc.)

Capital expenditure

Third party procurement (you must include this if it has been invoiced to your organisation first. e.g. if an interior design company purchases furniture on behalf of a client and they are invoiced by the supplier, this would be included in the procurement spend of the interior design company)

Outsourced labour expenditure (Labour brokers and independent contractors)

Pension and medical aid admin payments (typically a pension contribution consists of a contribution into the pension fund itself as well as a fee payable to the fund administrators. Only the admin fee would count as part of procurement)

Trade commissions (any commissions paid to other entities or to people who are not formally employed by the organisation)

Empowerment related expenditure with NGOs(any goods or services procured in the process of contributing to your BEE score, with the exception of Enterprise Development or Socio-economic Development contributions.)

Imports (all imports with the exception of those listed below under Exclusions)

Intra-group expenditure (all goods and services that are bought from other companies within the same group structure – as soon as an expense is incurred with another legal entity it counts as procurement spend)

EXCLUSIONS

Taxes and levies (any statutory tax or levy such as income tax, skills development levy, municipalrates etc.)

Staff remuneration (any salaries, commissions, allowances, subsidies, directors fees or any other payment that is part of a remuneration package)

Purchases from state or public entities that hold a monopoly (the exception to this is where the public entity procures the goods or services from a private supplier and then resells the goods or service. In this case the procurement will be included and the BEE status of the supplier will be used to calculate the BEE Procurement Spend – e.g. if a municipality uses a private company to do refuse removal, then the procurement will be included)

Pass-through third party procurement (any purchase made on behalf of another entity where the other entity is invoiced directly and not the organisation being measured)

Enterprise Development and Socio-economic Development contributions (if these contributions have already been counted as contributions under these elements then they cannot be counted under procurement)

Imported goods for value-adding in South Africa
Provided that these goods are not produced locally and that importing these goods promotes value-added production in South Africa. (for example imported components for a production plant could be excluded as the plant would be used for value-adding in South Africa)

Imported goods not produced in South African
Provided that the goods or components are not produced locally or if they are produced locally that the imported version carries a different brand or has different technical specifications to the local version as long as the difference in technical specifications is significant.

Investments made to an Associated Enterprise
If a company has undertaken an asset sale instead of selling equity in the business under Statement 102 (see Recognition of Asset Sales above), then any investments made in the enterprise to whom the assets were sold is excluded.

Key Points

Only organisations that can supply valid BEE certificates can be counted towards the Preferential Procurement score of your organisation.

Global best practice in procurement tends to encourage rationalising the supplier base by focusing on finding a few large suppliers who can supply more of the companies needs. This reduces the number of suppliers and makes the process easier to manage. The scorecard ring fences 8 points for spending with smaller organisations (turnover less than R35 million per annum) and black owned and black women owned organisations. This means that in order to score maximum points your organisation will have to consider a strategy that deals with smaller suppliers, which means going against the global best practice to an extent.

As most organisations are going to be put under more and more pressure to contribute to BEE, one would expect that over time your suppliers will increase their BEE scores and hence your organisation’s Preferential Procurement score would also increase.

If you buy from a company you are supporting through Enterprise Development then the BEE spend with that company can be multiplied by 1.2.

Entities that can prove that their labour cost added to the profit before tax figure is greater than 25% of their turnover are termed Value Adding Enterprises. If you buy from a Value Adding supplier you can multiply the BEE spend with that supplier by 1.25.

ENTERPRISEDEVELOPMENT