BEE Partner, South Africa Economy Watch

Section 6 of Statement 500 excludes the following items from procurement in the calculation of the total measured procurement spend:

• taxes, levies and rates levied by organs of state and local government
• public sector procurement from organs of state or public entities listed in Schedule 1 of the Public Finance Management Act of 1998.

Schedule 1 entities include constitutional entities such as the Public Protector, the Human Sciences Research Council, national government, provincial and local government. The intention is not to require Schedule 1 entities to obtain BEE verification. However, Schedule 2 and 3 entities will require BEE verification.

Despite the exclusion of Schedule 1 entities, where a measured entity procures from a Schedule 1 entity that is acting as a reseller of the service of a private entity or Schedule 2 or 3 entity, the measured entity must include the spend at the BEE recognition level of the primary supplier.

For example, a company buys water through the local municipality, which is local government (Schedule 1), so it is exempt. However, the water is provided to the municipality by Rand Water, which is a Schedule 3 government entity and is not exempt. The BEE procurement spend must include the water spend using the preferential procurement recognition level of Rand Water. The total measured procurement spend must include the cost of the water. The selling municipality must provide the purchaser with the BEE status level of the service provider, in this case Rand Water.

Businesses must put pressure on Schedule 1 suppliers to provide the BEE status level of the original supplier. Schedule 1 suppliers are subject to the BEE Act under section 10 of the Act. By law they have to issue contracts using the recommendations of the Codes, which means they must consider the supplier’s BEE status before granting the contract. It is incumbent on the Schedule 1 supplier to supply the purchaser with the BEE status level of the actual servic_eprovider.

• Procurement from public entities or organs of state that enjoy a statutory or regulated monopoly in the supply of goods and services is exempt. For example, procurement from Eskom is exempt, which also means that there is no need to obtain a verification certificate of Eskom’s BEE contributions.
• Any amount paid to employees as salaries, wages or emoluments and equivalent remuneration is exempt. (This does not include independent contractors and casual labour.) Structured salary packages require careful analysis to determine which portion will be included as procurement and which not. Specific reference is made by the Codes to insurance products (retirement, medical and other insurance products).

A portion of this spend is to be included in the total measured procurement spend as follows. A distinction is required between the following:

The portion of contribution represented by fund management costs and commissions will form part of the total measured procurement spend.

The portion of the contribution that is a capital contribution invested on behalf of the employee is not part of the total measured procurement spend.

It is a logical differentiation as the portion that belongs to the employee constitutes salary while the portion belonging to the service provider is total measured procurement spend. Assurance companies will be forced to disclose the split between management fees, commissions, other fees and the capital portion of contributions.

Where goods or services are acquired on behalf of a third party, and the purchase is not recorded in the financial statements of the business it is passing through but rather in the third party’s financial statements, it does not form part of the total measured procurement spend of the business that the procurement passes through. It does form part of the third party’s total measured procurement spend. It is called pass-through third-party procurement.

Investments and loans specific to empowerment-related transactions, to an associated enterprise (ownership through sale of assets) or the beneficiary of enterprise development contributions or socioeconomic development contributions do not form part of total measured procurement spend. Note that this exclusion is specific to investments and loans, not purchases.

• Imports is an important section but is also tricky, so I have gone into more detail.

Section 6.1 is an exclusion for importing certain capital goods and section 6.2 is an exclusion for importing certain other goods.

To establish the basis for exclusion, the entity must determine whether the import is a capital good or not. The Codes do not give guidance on determining what is a capital good and what is not. If this matter goes to court, it is likely that the court will seek guidance from the Income Tax Act.

The reason the Codes allow an exclusion for certain imported goods is that South Africa will never be in a position to produce everything, nor is it desirable for a country to produce everything. To remain competitive in a global market, we may have to import things that are made cheaper elsewhere. At the same time, imports of cheaper goods should not occur at the expense of local production where we have the capacity to produce the goods.

This section suggests that where South Africa does not have the capacity or expertise to produce goods locally, it makes sense to import these goods and the preferential procurement scorecard should not penalise companies for doing so. However, companies that import goods to sell them in competition with locally produced goods have no grounds for exclusion, as importing these goods may undermine local production.

The exclusions for capital goods apply to imported goods or components for value-added production in South Africa. A capital good is a fixed asset that is used on a continuous basis to generate income. The exemption is granted where:

No existing local production of that capital good or component exists and

— importing such capital good or component results in further value-added production in South Africa.

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