B-BBEE: Ownership vs BEE status level

This article discuss the scenario of what could be more important: ownership versus verified BEE level.

To understand this scenario the reader must take note of the criteria used for determining ownership versus the end-result on the procurement scorecard.

As several B-BBEE sectors exist the targets may vary for ownership.

Ownership in the Amended Codes is measured by:

  1. Voting rights – % of shareholding held by black People
  2. Economic interest – % rights to participate financially
  3. Net value – the value of the shares after taking into account any acquisition debt

Within the codes one must also achieve a sub-minimum requirement as part of one of three priority elements as defined in the amended codes of 2013.

Should you fail to meet the Ownership, Skills Development or Enterprise and Supplier Development sub-minimum requirements it will result in discounting the final outcome by one status level.

The sub-minimum requirement for Ownership relates to the ‘net value’ and the criteria to achieve the sub-minimum requirement is that black shareholding must meet at least 40% of the target. This equates to an unencumbered or debt-free black shareholding of 10%. If this is achieved it assists in avoiding the one status level however the sub-minimum requirements for the two remaining priority elements still apply.

If you implemented 10% ownership in order to meet the sub-minimum, your ownership scorecard yields:

Voting Rights 1.59 points Economic Interest 1.60 points (economic interest of black people) and 2.00 points (involvement in the ownership in the enterprise of black new entrants) Realisation Points 3.20 points (net Equity Value) for a total of 8.39 points and for this priority element this will help avoid discounting by one status level.

This issue however extends beyond that; is a 10% nett ownership value enough? No, as values of at least 25% and higher are more useful in optimising the outcomes for companies purchasing services or goods from empowered suppliers as part of the Preferential Procurement aspect of B-BBEE. 30% black woman ownership or 51% black ownership enhances these scores at minimum.

Purchasing goods or services from an organisation with enhanced ownership will improve your preferential procurement score as it was designed to incentivise companies to obtain the best possible B-BBEE score and ownership level.

Significant points are awarded for procuring from companies that have at least 30% black women ownership, or at least 51% black ownership. The Preferential Procurement Scorecard allocates 9 points for spending 40% of Total Measured Procurement Spend (TMPS) with organisations that are at least 51% black-owned and 4 points for 12% spend with organisations that are at least 30% black women-owned and the scorecard incentivises procurement from Exempt Micro Enterprises and Qualifying Small Enterprises.

The issue however becomes more complicated when a company is required to purchase goods from original equipment manufacturers (OEMs) or any supplier deemed to be core to your business but may not necessarily have a good BEE score. A typical example would be in the mining industry where costly earthmoving machinery may be OEM based and subject to supply contracts directly between the OEM supplier and the end-user (mining company / contract miner). Such machinery could cost tens of millions of Rands yet the outcome on your preferential procurement scorecard is not very positive and the bulk of your procurement spend is not in line with the criteria.

Most companies would probably extend their procurement spend attention to other (often smaller) suppliers in the hope of improving the scorecard with the remainder of the available procurement spend. If not properly managed the end result is that companies would be spending substantial time and effort simply to place pressure on the small suppliers only. This may sideline such small companies to the detriment of all involved and destroy long-term working relationships in the end.

The approach should be one of a medium to long term strategy such that current suppliers are encouraged to transform their businesses where appropriate to an empowered supplier status; being short-sighted will harm all parties and discourage a positive B-BBEE outlook.

Ultimately it is in the best interest of businesses utilising products and services from OEM suppliers to convince the OEM supplier that transformation of their company to that of an empowered status is the ideal outcome as this will open additional avenues of business for all.

In terms of the mining industry example used above and the high expenditure attached to it the benefit to your preferential procurement element’s scorecard is a vital aspect.

  • Procurement Spend from all Empowered Suppliers 51%+ black-owned could yield 9 points
  • Procurement Spend from all Empowered Suppliers 30%+ black women-owned could yield 4 points and if
  • Procurement Spend from QSE Empowered Suppliers it could yield another 3 points

Considering that these points constitute the majority of achievable points in the Preferential Procurement element is it clear that a combined effort to utilise empowered suppliers is the ideal outcome for all.

The essence of the matter is not simply to chase after a supplier with a better BEE level number but rather to utilise smart procurement management principles by use of businesses with elevated ownership values as the impact has a greater effect on your procurement scorecard in the end.

It is vital that officials responsible for procurement management keep a running monthly tally of procurement spend versus supplier BEE level versus supplier BEE ownership at all times; there is no point in chasing the annual compliance target in the last quarter of your verification review period. By then it will be too late to make a significant change resulting in frustration to all and a poor points outcome.

The age-old business philosophy of “work smarter not harder” comes to mind with the management of B-BBEE matters.

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