A draft amendment of Code Series 400, which is the section that looks at Enterprise and Supplier Development, was released on the 15thof June 2018. The amendment effectively increased the targeted preferential procurement that Government requires of companies, with relation to larger companies, but the impact of that will be a decrease of spend with smaller companies.
The spend that companies need to have with SME’s (EME/QSE) has been reduced. In the past this spend was 30% (15% EME + 15% QSE), but now the combined total is 25%. For many generic companies this is a great sign of relief as a large percentage of their spend was bundled with larger contractors. Not only that, many companies expressed that they were finding it difficult to source smaller suppliers.
QSE and EME in one SME bracket
What is interesting is that companies don’t have to be concerned any more about developing their EME supplier (under 10 ZARM) into a QSE supplier (under 50 ZARM) and then losing the points for EME spend thereby starting the whole process over again. This makes the life of a procurement practitioner a lot simpler and allows them to do better planning in the future. In essence there is now a SME bracket for procuring from companies below 50 ZARM in turnover. We could say that this negatively affects those in the QSE bracket, but these effects are negligible.
The points allocated to spend with small companies has also decreased. From a total of 7 points in the past it is now a total of 5 points. Where did the extra 2 points go? It would seem as if the emphasis is less on small companies and more on 51% black owned entities. The target spend with 51% black Owned suppliers has now increased to 50% (from 40%) for 11 points (previously 9 points) in total. This change could substantially impact many companies.
No more enhanced spend with first time suppliers
The enhanced spend with first time suppliers has now been removed, and companies can no longer multiply this spend by a factor of 1.2 (20%). There might therefore be less of an incentive for companies to bring a new supplier on board, although it might also be said that this encourages long term relationships with current suppliers. Companies still have the benefit of putting in place long term contracts.
Another interesting introduction is the enhanced benefit of spend with 51% Black Owned and 51% Black Female Owned suppliers using the flow through principle only. Any spend with these suppliers will be enhanced by a factor of 2. Effectively this means that if you spend R1 with a Level 2 51% Black Owned supplier, you can now claim R2,50 on your scorecard. This is hugely beneficial and would certainly help in achieving the 50% compliance target for 11 points.
Clearly defining Supplier Development Beneficiary
More clarity has been provided around the definition of a Supplier Development beneficiary and an Enterprise Development beneficiary. A Supplier Development Beneficiary is a part of the Measured Entity’s supply chain whereas an Enterprise Development Beneficiary is not. In effect this means that the Supplier Development beneficiary must be invoicing the measured entity, whereas the Enterprise Development does not.
Beneficiaries of Supplier Development or Enterprise Development are EMEs, QSEs or Generic Entities which are at least 51% Black Owned or at least 51% Black Women Owned utilizing the flow through principle. This questions the true intent of the codes. Previously, the aim was that a measured entity would support a small Black Owned business in finding their feet (through grants, loans, etc.) in the hopes that they then form part of your supply chain in future. This means that you can effectively “assist” entities with a turnover of greater than 50 ZARM.
B-BBEE Procurement Spend from Generic Entity Suppliers which are at least 51% Black Owned or at least 51% Black Women Owned utilizing the flow through principle can be recognized under Point Indicator 2.1.2 of the Enterprise and Supplier Development Scorecard. 2.1.2 is the EME and QSE spend. This raises alarm bells, as measured entities may end up supporting already established companies vs. uplifting smaller suppliers.
The shift in size…
It would seem as if the DTI is making a trade-off between large black industrialists and small to medium sized companies. It could be argued that in some cases this move in BBBEE is good. For instance it is necessary to consider the development of larger manufacturing companies in the corporate value chain. This trade-off can be managed by making specific reference to the development of younger companies vs. larger companies. A younger company, for instance a company that has been registered for less than three years, but still has a sizable turnover would therefore have a chance to gain access to the corporate supply chain, but most of the younger companies will still be SME’s.
If these amendments do go ahead we will be reverting back to the codes prior to 2013. In effect at that time there were category A and B beneficiaries. Category B beneficiaries were the larger companies. What we saw companies doing at that stage was to use the ESD beneficiary matrix as part of their negotiation tactics with larger suppliers. So for instance if a large supplier provides discounted services then the large corporate company (the measured entity) will provide them with purchase order financing options attached to early payment. In this way ESD, in essence, becomes redundant. As a country, should we be focusing on the development of larger companies? After all the focus on SME’s, is bigger really better?
ABOUT THE AUTHORS:
Zahn-Michelle Abreu, is a senior consultant with Collective Value Creation and has been in the B-BBEE Transformation space for the last 7 years. Her understanding of the transformational policy framework and social development landscape has enabled her to achieve great success for her clients.
Wybrand Ganzevoort, Managing Director of Collective Value Creation, specialises in the development and implementation of Enterprise and Supplier Development (ESD) strategies. Wybrand is a fellow of the Global Entrepreneurship Institute and a regular columnist for magazines and speaker at conferences on Supplier Development and Supplier Diversity.