This element of the Codes deals with your supply Chain and measures the extent to which you buy goods and services from BEE compliance suppliers and black-owned entities.
Preferential procurement is one of the most important elements of the BEE balanced scorecard and it comprises the main thrust of BEE. This is because it is this element that has the effect of promoting BEE compliance by all entities and encouraging transformation throughout the entire economy. This creates the "filtering down" effect of BEE in that it brings everybody that sell goods and services in South Africa within the realms of the BEE environment, notwithstanding that the Broad Based Black Economic Empowerment Act, in terms of which the BEE Codes are promulgated, stipulates that it is only binding on organs of state and public entities.
Whether or not you are required to comply with this preferential procurement element will depend on your annual turnover. For example, if you are an EME (Exempt Micro Enterprise) with an annual turnover of R5 million or less, you are not required to comply with any of the elements of the BEE scorecard and you are deemed to be 100% BEE compliant. If you are a QSE (Qualifying Small Enterprise), you can select four of the seven elements on the scorecard. If you select the preferential procurement element, this will be afforded a weighting of 25 points and your compliance target would be 40% for the first 5 years (bearing in mind that year one ran from 9 February 2007) and 50% for years 6 – 10. If you are a large entity, with an annual turnover of over R35 million, you have no choice but to comply with the preferential procurement element, which is given a weighting of 20 points, with compliance targets of 50% for years 0 – 5 and 70% for years 6 – 10, respectively. The fact that this element scores 20 points on the scorecard reinforces its importance to broad based black economic empowerment in that it is awarded the same amount of points as the ownership element in the scorecard, upon which narrow-based black economic empowerment was originally based.
When determining your score for preferential procurement, regard should be had to the scorecard for this element contained in the Codes. There are also formulae and a scoring matrix or BEE recognition level table contained in the Codes which will be required for the purposes of calculations. Calculating your score can often be complicated and it is prudent to take advice on this element as soon as possible in order to ensure that you secure the best possible score. This is because one of the major principles of preferential procurement is that your score will impact on the score of your clients and customers and, as a result, the better your score, the more likely you are to procure business.
If regard is had to the preferential procurement scorecard, it is apparent that the majority of the 20 points is awarded for dealing with suppliers that have high BEE scores or recognition levels. Consequently, before contracting suppliers, or buying goods and services in South Africa, it is wise to do your homework and establish the BEE scores of your suppliers. On this point, there has been some debate as to whether "self assessment" from entities is acceptable (as opposed to ratings from verification agencies). The position at present seems to be that these are acceptable, provided that you conduct a certain amount of "due diligence" into the scorecard so as to ensure that you are comfortable that the information that you have been given is correct. It seems that when conducting such a due diligence, you are not required to verify each and every piece of information, and that investigating a sample of the information presented will suffice.
A key measurement principle when evaluating your score under this element is that, unless your spend on goods and services is specifically excluded in terms of the Code, it will be included for the purposes of working out your total procurement spend. Therefore, when developing a strategy for securing the best possible procurement score, in addition to evaluating the scores of your suppliers, you should also consider the inclusions and exclusions, examples of which can be found in the Codes, for your calculation. Briefly, examples of inclusions in such a calculation would be cost of sales, operational expenditure, capital expenditure, certain imports and inter-group procurement. Examples of exclusions would be taxation, salaries and wages and imports where there is no local production available.
When strategising, also bear in mind that higher stores can be obtained if you procure goods or services from a supplier that is a recipient of enterprise development contributions from you and from an entity that is termed a "value-adding supplier" in terms of the Codes. Procuring goods and services from QSE's, EME's and suppliers that are 50% black-owned and 30% black women-owned also provides additional points on the scorecard.
In summary, the preferential procurement element is of vital importance and you should strategise effectively to obtain the best possible score. Advice on this element should therefore be sought sooner rather than later. It is also recommended that you do not rest on your laurels for the next few years, thinking that your compliance target (as a large enterprise) is only 50%, as there will be a huge leap to the 70% compliance target in year 6. You should therefore treat 100% BEE compliance for this element as optimal from day one!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.