BEE Partner, South Africa Economy Watch

All capital expenditure, including fixed property, is included in the total measured procurement spend.

Fixed property was predominantly white owned at the effective date of the Codes. Unless fixed property is part of normal trade, buying a property is going to result in an abnormal total measured procurement spend for that year. The purchase will distort the real procurement intentions of a business, which it may perceive as being unfair. However, because procurement is only measured on an annual basis, it will not have a prolonged impact on the measured entity’s preferential procurement scorecard.

QSEs have the right to choose four of seven elements. In a year where the purchase of fixed property is anticipated, it may be an option to contribute to another element and exclude the preferential procurement element as an option.

Recognition of pass-through third-party procurement

There are going to be many QSE businesses that engage in pass-through third-party procurement, so I have gone into detail on this one. Third- party procurement occurs when a business uses the services of a value- added agent to facilitate, for example, their travel arrangements, media buying or property purchases. BEE refers to procurement through agents as pass-through third-party procurement. These agents are stand-alone enterprises who charge a fee for their services and perhaps receive incentives from the suppliers they place business with.

The agents facilitate the procurement of goods or services from suppliers to the business that is the ultimate beneficiary. In some cases the enterprise can dictate which suppliers it prefers. In other instances the agent chooses suppliers based on the best price, service and relationship to those suppliers. This is illustrated in the following diagram of a travel agent procuring the services of an airline, accommodation and car hire suppliers.

There are two questions in this example. Who recognises the expense as part of total measured procurement spend and which BEE status level is recognised for that expense?

The Statement provides that if the intermediary, such as the travel agent above, recognises the cost of the supplied product as an expense in their annual financial statements, then it must be included in its total measured procurement spend. Similarly, if the intermediary, or travel agent, includes the expense in its annual financial statements, then Company A would recognise the BEE spend by taking into account the BEE status of the travel agent, rather than the individual companies.

If the travel agent did not recognise the expense in its annual financial statements, then Company A would recognise R10 million in its total measured procurement spend. It would recognise R6 million at the airline’s BEE procurement recognition level, R2,4 million at the accommodation supplier’s BEE procurement recognition level, R1 million at the rental car supplier’s BEE procurement recognition level, and R600 000 at the travel agent’s BEE procurement recognition level.

Enhanced recognition

Statement 805 provides enhanced recognition specific to QSEs. Enhanced recognition is given to purchases from beneficiaries of enterprise development contributions by the measured entity at a multiple of 1,2 times the actual spend. The reason for this enhanced recognition is to encourage businesses to provide substance to their enterprise development initiatives and help sustain those Black businesses by encouraging the contributing business to procure from the beneficiary.

The second beneficiary of enhanced recognition is value-adding suppliers. Procurement from value-adding suppliers is recognised at a multiple of 1,25 the actual spend. The term “value-adding supplier” is not defined. However, it seems safe to assume it is the same as a value-adding enterprise, which means a business that is a registered VAT vendor and one in which the net profit before tax added to the total labour costs exceeds 25% of its total revenue.

Enhanced recognition is given to value-adding enterprises because the concept is supposed to discourage businesses purchasing from fronts. Practically, in the QSE environment the information will probably be difficult to obtain. Most suppliers will potentially be private businesses and unwilling to disclose their profitability to clients. However, where possible recognition at 1,25 times the actual spend is appealing and most legitimate business will probably qualify as value- adding enterprises.

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