8 September 2011 | Alan Jewson
The South African government is making changes to its black economic empowerment (BEE) supplier qualification policy that could reduce dishonesty in the system and result in economic development. Alan Jewson reports
The concept of black economic empowerment (BEE) was to bring meaningful participation of black workers (as well as mixed-race, Indian and Chinese) into the economic mainstream of South Africa.
To legislate for this, the government introduced the Broad-Based Black Economic Empowerment Act 53 in 2003 with a requirement for companies to comply with some, or all, seven elements of transformation. These elements are: ownership; management and control; employment equity; skills development; preferential procurement; enterprise development; and socio-economic development.
Each of these elements has a ‘weight’ in contributing to a company’s overall BEE compliance and is based on its turnover. Companies are classified as: exempt micro enterprises (turnover of less than R5 million a year); qualifying small enterprises (turnover of R5 million to R35 million a year); and generic enterprises (turnover exceeding R35 million a year).
Exempt micro enterprises are automatically considered to be BEE compliant. Qualifying small enterprises need to fulfil any four of the seven elements, while generic enterprises must fulfil all of the seven elements. If you want to improve your BEE score, you will buy products or services from a BEE-verified company with as high a rating as possible. If your company has a good BEE rating, companies will buy goods and services from you to better their own.
Commerce and industry in South Africa has generally embraced the introduction of the Broad-Based Black Economic Empowerment initiative and seen it as a necessary panacea to right some injustices of the past.
Many companies have put considerable effort into implementing the seven transformation elements, with varying degrees of success, and this has gone a long way towards levelling playing fields through the transfer of skills, creating a proliferation of new entrepreneurs and spreading wealth.
To take this to its full purpose, government should only be buying from fully empowered, BEE-compliant organisations that have directly or indirectly (through their own procurement policies) contributed significantly to all the elements of growth and transformation. However, this has not happened.
Exploiting loopholes
Generic enterprises have to embrace all seven elements of transformation to some degree. This has included addressing the ownership issue and selling equity. To be recognised as ‘black empowered’ means that at least 25.1 per cent of the equity is owned by black people.
(A ‘black company’ means it has at least 50.1 per cent black ownership). This requirement has created opportunities for a whole new class of highly skilled and competent black professionals to
take up meaningful positions in industry, adding to the growth of their companies and contributing
in widening the ownership of the South African economy.
However, it has also spawned a generation of politically connected, elitist, nouveau riche, passive black shareholders who are not engaged in any significant economic activity at all. More often than not, they are simply fronting for the company and only perform a peripheral or token role within an organisation, or they have little or no knowledge of the enterprise.
Elsewhere, the government has come under criticism for following a BEE procurement policy based on whether a supplier has black ownership and ignoring its own legislated criteria of basing supplier requirements on the prescribed empowerment interventions. There have also been a number of regular investigations into suspicious purchasing deals, where government officials have been shown to have financial interests in the supplier companies.
The unions, political opposition parties and the vast majority of poor black South Africans are now becoming increasingly disparaging about the effectiveness of the BEE policy. The concept has been good, but it hasn’t really worked. It has only enriched a niche and well-connected few who have jumped on the gravy train.
Changes afoot
Now the South African government has changed the rules governing how buyers assess black suppliers in order to meet contracting requirements. The Preferential Procurement Policy Framework Act comes into effect on 7 December 2011 and will apply to all public entities listed under the Public Finance Management Act.
From this date, all government and public departments must apply their contractor selection around productive activities and not simply equity investment – in other words, along the rules set out in the 2003 policy. Purchasers will now have to consider more than whether or not the supplier has black ownership. Instead, vendors will be measured across a range of criteria, including their own employment and procurement policies. The ranking on the ensuing scorecard will be taken into account when vendors bid on government deals. The switch brings public purchasing into line with the government’s overall policy of broad-based black economic empowerment and means supplier selection should be based on their ability to consistently provide, maintain and support quality goods
or services, rather than on shadowy political relationships.
The application of the rules has been extended to buyers working at state-owned enterprises, including energy supplier Eskom, telecoms provider Telkom and transport operator Transnet.
National Treasury says the December date was set to allow time to train all supply chain practitioners on the implementation of the revised regulations.
If this policy is followed openly and honestly (and is policed correctly), it should open the doors to competent suppliers who are truly adopting the spirit of economic development and who should bring renewed efforts to the other key elements of transformation.
Corporate social investment and the development of entrepreneurial activity is where this initiative is leading and companies must now focus their efforts to obtain the qualifying BEE ratings.
The advice we give is: treat the BEE initiative as a business reality, not just as a moral obligation and build it into key company strategy.
5 key facts
1. The Preferential Procurement Policy Framework Act comes into effect on 7 December 2011
2. It applies to all public entities listed under the Public Finance Management Act
3. Purchasers will now have to consider more than whether or not the supplier has black ownership
4. Vendors will be measured across a range of criteria, including their own employment and procurement policies
5. The ranking on the ensuing scorecard will be taken into account when vendors bid on government deals
☛ Alan Jewson is a director of professional verification services in Johannesburg, www.pro-verify.co.za
