PPPFA – Is Level 4 Good enough?

PPPFA Commentary.pngThe difference between a level 3 and level 4 can have a massive impact on your company’s profitability. Wayne Oosthuizen, CEO of Engeli Enterprise Development highlights some interesting facts about the evaluation of tenders in terms of the PPPFA, in this month’s SmartProcurement.

The new PPPFA must be applied in the adjudication of all tenders from 7 Dec 2011.

A number of companies may say that this does not affect them as they do not supply goods or services to public entities, but cognisance must be taken of the large market opportunities that will be coming through the public sector domain against the backdrop of the uncertain international economic trends and the cut in spending by private companies. Essentially spending will be driven by the public sector and the State Owned Enterprises in the foreseeable future. Also, even if your company does not supply directly to public entities, your customers may and thus it is inevitable that your customer would place pressure on your company to comply in order for them to improve their B-BBEE scores through the Preferential Procurement element of the scorecard.

The number of preference points allocated on the basis of B-BBEE varies depending on the size of the tender. The parameters for tenders valued between R30 000 and R1-million are adjudicated according to the 80/20 (price/B-BBEE score) rule. The previous upper limit was R500 000. For tenders above R1-million, the 90/10 (price/B-BBEE score) rule will be applied.

Essentially, there is generally a two-tier adjudication process where initially the tenders submitted will be adjudicated against objective functionality criteria, if required. Those tenders that achieve a minimum functionality score would then be adjudicated on the price/B-BBEE score mechanism and the company with the highest price/B-BBEE score will win the tender. If the price/B-BBEE scoring between the competing companies are identical, the company with the highest B-BBEE rating will win the tender.

The scoring for tender purpose as per the B-BBEE attainment level is indicated below.

3vs4points.pngGiven the above, it is self-evident that companies should be aiming for a B-BBEE level 3, as the points differential between a 4 and a 3 is weighted heavily towards a Level 3. This is also more evident in the 90/10 table, and thus it is clear that a score of 4 “is no longer good enough.”

To better quantify the above scenario, the following example is used:

Two companies A and B are tendering for a contract of around R1-Billion. Company A is a level 4 BBBEE company and thus scores 5 points whilst Company B is a level 3 BBBEE company and scores 8 points.

If Company A tenders a price of R970-Million, Company B can tender a price of R1.0023-Billion and still win the tender due to its higher BBBEE rating. This is a potential profit benefit of R32.3-million for being a level 3 instead of a level 4 B-BBEE company.

It is clear that this is a small price to pay for investing in your B-BBEE scorecard to potentially achieve a much higher profit. Conversely, Company A would need to reduce its profitability by approximately R32-million to effectively compete against Company B.

There are therefore significant advantages to “B-BBEE’ing a 3”, and “B-BBEE’ing a 4” may no longer be good enough.

Article used with from Wayne Oosthuizen CEO: Engeli Enterprise Development.

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