The right business structure will unlock BEE supply prospects
Traditionally the main drivers of any procurement decision are price, quality and service, but with the importance placed on BEE compliance, the fourth driver of procurement decisions is a supplier’s BEE status.
The competitiveness of your BEE status is more complex than just answering the question: “what is my BEE Level?” Signa CEO Murray Chabant writes in this month’s SmartProcurement.
At first glance a BEE Level 1 company that has 135% procurement recognition is seen as much better than a Level 4 company with 100% procurement recognition or a Level 7 company with 50% procurement recognition, but the composition of your BEE status is far more important than merely your BEE level.
Critical factors that determine the competitiveness of your BEE status are:
1. the size of your business;
2. the extent of black ownership;
3. the extent of black-women ownership; and most importantly
4. whether your business is an Empowering Supplier or not.
As can be seen from the Preferential Procurement scorecard in the amended Codes of Good Practice, there is much greater emphasis on size, ownership and empowering supplier status of a business than merely the BEE level when it comes to procurement recognition.
The amended Codes only recognise procurement from Empowering Suppliers. This means that if your business does not meet the criteria to be recognised as an Empowering Supplier, your BEE certificate cannot be used by your customers to earn procurement points.
Empowering Supplier status counts
An Empowering Supplier, within the context of BEE, is a BEE compliant, ‘good citizen’ South African entity that complies with all regulatory requirements and must comply with three of the following criteria if it is a large (Generic) entity or comply with one of the following criteria if it is a Qualifying Small Enterprise (QSE):
1. At least 25% of cost of sales (excluding labour and depreciation) must be procured from local producers or local suppliers. For the service industry, labour costs are included, but are capped to 15%.
2. Job creation – 50% of jobs created are for black people, provided that the number of black employees since the immediate prior BBBEE measurement is maintained.
3. At least 25% transformation of raw material/beneficiation, which includes local manufacturing and/or production and/or assembly and/or packaging.
4. Skills transfer – at least spend 12 days a year of productivity deployed in assisting black EME and QSE beneficiaries to increase their operational or financial capacity.
Exempt Micro Enterprises (EME) and start-ups are deemed to be Empowering Suppliers.
Assuming your enterprise is an Empowering Supplier then your BEE competitiveness is affected by your size.
A Generic enterprise (turning over more than R50 000 000 a year) will only contribute towards the first 5 points (2.1.1 in the table above) out of the total 25 points of their customers procurement score. A QSE would contribute 8 points (2.1.1 and 2.1.2) and an EME would contribute 9 points (2.1.1 and 2.1.3) respectively.
Ownership structure counts
The ownership structure of your business would also affect your BEE competitiveness.
A 51% black-owned business would contribute 9 points (2.1.4) to a customer’s procurement score and if more than 30% of that ownership was in the hands of black women it would contribute a further 4 points (2.1.5).
The implication is that a 51% black-women-owned EME with Level 2 status will be a far more attractive supplier than a Generic business with a Level 1 status, as this allows a customer to claim procurement points on multiple levels.
Composition of ownership counts
There are bonus points available to companies that procure from suppliers that are owned by members of black designated groups. Black designate groups include unemployed people, youth, people with disabilities, people living in rural areas and military veterans.
The competitiveness of an organisation’s BEE status is affected by more than its BEE Level. Ownership and the empowering supplier status will be significant drivers of the procurement decision under the Amended Codes. Businesses that can address their ownership structure and empowering supplier status ahead of their competitors will be at an advantage.