Preferential procurement has always been a key component of the Broad-Based Black Economic Empowerment (BBBEE, or BEE) scorecard. It has long been promoted to enterprises as one of the major benefits of having a good BBBEE score, as it opens up potential trade opportunities with other companies seeking to boost their own scores. Gaining preferential procurement points serves as an incentive to support BBBEE-certified suppliers, thereby playing an important role in driving transformation across all levels of the South African economy. However, the preferential procurement category of the scorecard has undergone some big changes under the revised Codes of Good Practice, and here we discuss what they are.
Before the Codes were adjusted, preferential procurement was one of the seven pillars of the scorecard, together with ownership, management, employment equity, skills development, enterprise development and socio-economic development. It was often relied on as a way to earn a large number of BBBEE points.
A company’s preferential procurement score was dependent on the BBBEE scores of the companies from which they sourced goods and other supplies. The higher the suppliers’ ratings, the more points the company gained. Doing business with companies with BBBEE compliance levels of 4 or higher offered great benefits. BBBEE procurement spend was calculated based on the amount spent on each supplier yearly, multiplied by the percentage afforded by their BBBEE status.
Under the revised Codes, which came into effect in May 2015, the seven pillars were condensed into five, and as part of this change preferential procurement and enterprise development were merged into one category: enterprise and supplier development. The requirements for preferential procurement points have become quite a bit stricter and more complex, causing confusion and concern among companies.
For a start, engaging with suppliers that simply have BBBEE certificates, even if they are Level 1 or 2, is no longer sufficient; to earn points, they must be classified as “Empowering Suppliers”. If the companies do not meet the requirements of this label, no points can be awarded. To be classed as an Empowering Supplier, a business must be BBBEE-compliant and be a “good corporate citizen” that is compliant with all relevant laws and regulations. In addition, they must meet one of the following requirements if they are a Qualifying Small Enterprise (QSE) (companies with an annual turnover of R10 million to R50 million) or three if they are a large (Generic) enterprise (companies having an annual turnover of more than R50 million):
- At least 25% of the cost of sales (excluding labour cost and depreciation) is spent in South Africa (with some adjustments by industry).
- At least 50% of jobs created are for black people, provided the number of black employees in the prior year of BBBEE verification is maintained.
- At least 25% beneficiation/transformation of raw materials (locally).
- At least 12 days per year are dedicated to assisting black beneficiaries to improve their operational, technical and financial capacity (skills transfer).
- For those in the service industry, 85% of labour costs must be paid to South African employees.
The good news for Exempted Micro Enterprises (EMEs), which have an annual turnover of under R10 million, is that they are automatically classed as Empowering Suppliers.
There have been a few other shifts under the new Codes, bolstering the government’s overall intention of increasing the support of black-owned suppliers.
For companies dealing with imports, the situation may now be complicated, with suppliers no longer eligible for point-earning in certain sectors.
To get a clearer picture of what the changes to preferential procurement mean for your business, contact one of our BBBEE experts today.
Photo: Sergey Nivens