B-BBEE Preferential Procurement

Practical Insight from the Sage BEE123 Advisory Team

The Puzzle of Preferential Procurement is the second in a series of ‘Beyond the Boardroom’ articles addressing all aspects of the Codes. In this, the members of the Sage BEE123 Advisory Team share their unique insight as to what drives successful transformation. They share red-flag areas that pose a risk to an organisation’s transformation investment, as well as provide tips for optimising the outcome of its verification process.

The BEE123 Advisory Team represents a unique set of skills with its collective expertise gained first-hand from a corporate, verification and consulting perspective. The BEE123 Advisory Team, led by Managing Director Saul Symanowitz, is made up of Micah Gengan, Rene Van Der Walt, Yonela Ntsaluba, Bhavna Maharaj, Tando Dubeni and Denvor Phokaners.

Preferential Procurement is a sub-element of Enterprise and Supplier Development. Given the ‘trickle-down effect’ which drives organisations to ensure their suppliers are B-BBEE compliant, the Preferential Procurement element has perhaps the greatest potential to drive transformation to the broader South African community. Not meeting the sub-minimum requirements of this sub-element results in discounting of one status level, which could be detrimental to an organisation’s overall B-BBEE score.

Currently, many organisations are losing critical Preferential Procurement points on their scorecard at the time of verification. The BEE123 Advisory Team has identified two areas of concern.

Firstly, organisations are accepting invalid B-BBEE credentials. This could be the result of a person accepting and capturing B-BBEE credentials without having the skill to read a B-BBEE Certificate, Affidavit or CIPC Certificate. Not being able to recognise errors at a glance on B-BBEE credentials will result in losing points that an organisation has budgeted to reach a specific status level to achieve a higher Preferential Procurement Recognition.

Secondly, confusion as to what is considered an inclusion or exclusion on an organisation’s ‘Total Measured Procurement Spend’ (TMPS), which forms the basis against which the Preferential Procurement targets are measured. Mistakes around the TMPS calculation could have a dramatic impact on scoring.

BEE123 | Valid B-BBEE Certificates

Recently the B-BBEE Commission issued Practice Guide 1 of 2018. Therein, clarity is provided on what constitutes a valid B-BBEE Certificate. It further provides relevant instructions to verification agencies, including the consequences of issuing a B-BBEE Certificate when in fact only an Affidavit or CIPC Certificate was necessary. The rationale behind small ‘Black’-owned organisations not having to undergo a verification process is to relieve them of the financial burden and red tape associated with the verification process.

“Preferential Procurement must become a central component of one’s B-BBEE strategy.”

Affidavits or CIPC Certificates apply to Exempt Micro Enterprises (EMEs) and Qualifying Small Enterprises (QSE) that are more than 51% ‘Black’-owned. Any deviation is only allowed in the following circumstances:

  • On the Generic Codes, the only case in which an EME can be verified by a SANAS accredited verification agency is if such an EME chooses to be measured on a QSE scorecard to maximise its B-BBEE points to move to a higher B-BBEE recognition level.
  • As the Integrated Transport Code is yet to be amended, an EME in this sector may obtain a letter from an accounting officer confirming their status or be verified by a SANAS accredited agency. However, a start-up in this sector that is measured as an EME that wishes to tender for contracts valued at more than R10m must be verified using the QSE scorecard, and the Generic scorecard for  valued at R50m and above.
  • The Construction Sector Code allows EMEs with an annual turnover of R1.8m for Built Environment Professionals (BEPs) and R3m for Contractors to obtain automatic recognition levels. Therefore, they do not require verification except if they elect to enhance their B-BBEE status levels. In such circumstances, a 40% sub-minimum on Skills Development and verification by an accredited SANAS verification agency is required.
  • The Financial Services Sector Code has granted an option to 51% and 100% ‘Black’-owned QSEs to present a SANAS accredited B-BBEE Certificate instead of an Affidavit. However, for consistent application, EMEs measured on this sector code should opt for an Affidavit due to there being no elements to verify.

Therefore, other than those instances highlighted, any verification agency that issues a SANAS accredited B-BBEE Certificate to an EME or a QSE that is more than 51% ‘Black’-owned violates the B-BBEE Act. The consequences of being found guilty of violating the B-BBEE Act, specifically an offence under section 13O (2), could lead to imprisonment of up to 12 months, a fine, or both.

It is vital to bear in mind that, in terms of section 13O (2), a verification professional, procurement officer or any official of an organ of state or organisation who becomes aware of the commission of, or attempt to commit, any offence referred to under section 13O (1) and failed to report it, is guilty of an offence.

BEE123 | Total Measured Procurement Spend

This is the total spent on all goods and services to secure the overall operation of an organisation, other than the items specifically excluded. The prescribed exclusions and inclusions are listed in the table below as per the Generic Codes. However, there may be accounting anomalies that may require further interrogation into the validity of a specific transaction to determine whether it is deemed part of the TMPS or not. Such circumstances should be validated by an organisation’s verification agency in line with the ‘Spirit of the Codes’ and the intention thereof. TMPS is calculated as the total of all costs less the specified exclusions, guided by an organisation’s financial statements.

BEE123 | Top Tips

  • Ensure that all employees driving the Preferential Procurement process are fully versed on what constitutes a B-BBEE Certificate, Affidavit or CIPC Certificate.
  • Provide an Affidavit checklist and a template as part of the supplier application process.
  • Be aware of your sector-specific TMPS exclusions.
  • Have processes in place for reporting invalid B-BBEE credentials.
  • Ensure that all representatives of your organisation are fully aware of the consequences of not reporting Fronting Practices.
  • Have a plan in place to ensure procurement aligns your organisation’s overall targets.
  • Communicate your expectations to your supply chain directly.
  • Try to incorporate the collection of B-BBEE Certificates and affidavits as a part of the initial on-boarding process. Suppliers are quick to get amnesia when asked for a copy of their certificate once they have been paid.
  • Organisations should not leave procurement to chance. To minimise risk, they should have a robust system in place that can:
    > Calculate the B-BBEE procurement score throughout the year;
    > Identify expired B-BBEE Certificates; and
    > Provide monthly analysis of a supplier’s recognised spend and create a consolidated view of all suppliers.
  • Distinguish what spend is core vs non-core. This will allow you to drive effective
    decisions that are precise and sustainable to mitigate any impact on profitability.
  • Preferential Procurement must become a central component of one’s B-BBEE
    Strategy. Make sure it is not only about collecting certificates, but that it facilities a strategic and transformative outcome.

BEE123 is a content contributor and strategic partner to TFM Magazine.

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