Understanding the Why: Enterprise and Supplier Development
The Preferential Procurement Policy Framework Act (PPPFA) was enacted in order to encourage an equitable, transparent and competitive economic landscape in which the awarding of contracts, products and services occurs. Preference was also specified for categories of persons disadvantaged by unfair discrimination, e.g. Apartheid and its remnant effects and sought to give increased economic access to those communities. South Africa saw the PPPFA’s inception prior to the B-BBEE Act No 53 of 2003 as Amended by Act 46 of 2013 (BEE Act), but its importance became even more apparent when government directed its amendment for these 2 pieces of legislation to be aligned in order to advance the BEE Act’s objectives in order to further promote economic transformation. The PPPFA stipulates that when government assesses contracts, it must take into account a preference point system which prescribes functionality, price as well as a supplier’s BEE rating.
As mentioned in previous posts, The BEE Act is not a mandatory one, but when government is required by the PPPFA to procure from companies who comply with it, and those companies in turn comply by procuring by other compliant companies, because Preferential procurement forms a large part of the BEE scorecard, the trickle down effects of the requirements of the Act can be felt by companies quite far removed from government tenders, and this is where we see its power in terms of economic access. More and more companies are adhering to the BEE Act and taking on transformation as one of their major strategic pillars, less and less begrudgingly so when the internal and societal impacts can be seen first-hand.
With a focus on spending on ESD (Preferential Procurement, Enterprise and Supplier Development) a measured entity cannot only facilitate economic growth for many small businesses but also improve their desirability as a potential supplier. A company’s procurement recognition level increases the better its BEE level, thus making it more attractive for other businesses to procure from it. These elements form part of the priority elements on the scorecard and lead to discounting of a BEE Level should companies not meet the 40% target on each of them. Furthermore, these elements make up almost 40% of the scorecard so its importance cannot be stressed enough.
"More and more companies are adhering to the BEE Act and taking on transformation as one of their major strategic pillars, less and less begrudgingly so when the internal and societal impacts can be seen first-hand."
The key with procurement is timeous and adequate planning as procurement points are built up over the duration of your measurement period, so understanding your Total Measured Procurement Spend and your supplier base is vital. Additionally, focusing only on B-BBEE compliant companies will not completely satisfy you procurement needs as this indicator of the scorecard only accounts for about 18% of the total points available under the Procurement element. A further 15 points can be scored for spending on Empowering Suppliers that are at least 51% Black Owned and 30% Black Women owned. A further 7 points are also available for spending on EME and QSE companies. Ongoing monitoring of a company’s suppliers is necessary to ensure that spend is aligned with the sub-targets under the Procurement element. Companies should endeavour for at least 50% of their procurement spend to be with 51% Black Owned suppliers and 12% with 30% Black Women owned suppliers. Ideally, for the measured entity’s benefit, these companies should also be EME or QSE’s.
In terms of strategies to increase recognizable procurement spend, a measured entity can agree to enter into a 3-year contract with the following entities to qualify it to increase that supplier’s procurement spend by a factor of 1,2:
· A recipient of supplier development contributions
· A black owned QSE or EME which is not a Supplier Development beneficiary. The same recognition for Generic Entities will only be allowed for 5 years from the first time of receiving assistance from the Measured Entity.
· A supplier to the Measured Entity that is at least 51% Black Owned or at least 51% Black Woman Owned utilizing the Flow Through Principle
These are all indicators on the Procurement scorecard that incentivize spend with the above-mentioned entities. For example, if a measured entity spends R100,000 with a supplier that is more than 51% black owned using the flow through principle, the recognizable spend with them will be R120,000. If the measured entity also has a 3-year contract with that entity, the recognizable spend with them will be R144,000.Your B-BBEE verification agency will request proof of these details for each of your suppliers through their B-BBEE Certificates or Affidavits, as well as confirmation and proof of the amounts spent with them throughout the measurement period.
"With a focus on spending on ESD (Preferential Procurement, Enterprise and Supplier Development) a measured entity cannot only facilitate economic growth for many small businesses but also improve their desirability as a potential supplier."
With some industries however, there just aren’t enough local BEE Compliant companies to procure from at the scale required to fulfil a measured entity’s needs. The Codes of good practice further addresses this by incentivising companies to support upskilling and capacity building in the form of enterprise and supplier development initiatives which contribute to their scoring on the ESD Scorecard. Bonus points under each of these elements encourage the graduation of small businesses into the supply chain as well supporting the employment of staff within those businesses.
The various initiatives allowed for in the Codes are there to promote smaller businesses and develop suppliers to fulfil more of the measured entity’s supply chain needs. Companies who take a focused approach to their B-BBEE strategies can begin to understand that it is very possible to creatively make the legislation work for them in terms of creating a sustainable, thriving economic environment and in doing so have a meaningful impact.