Preferential Procurement and ESD

In May 2019 amendments were made to the Enterprise and Supplier Development Scorecard and are now in effect.
The aim of the Preferential Procurement scorecard is to encourage the usage of black owned professional services and entrepreneurs as suppliers while inherently encouraging measured entities to empower themselves on the broad-based principles of B-BBEE.
The Preferential Procurement scorecard allocates points for three key areas namely:

1. BEE Procurement from all suppliers
2. BEE Procurement from Qualifying Small Enterprise or from Exempted Micro-Enterprises
3. BEE Procurement as a percentage of Total Measured Procurement Spend from:
   ◦ Suppliers that are more than 50% black owned, and
   ◦ Suppliers that are more than 30% black women owned.

Some of the key aspects found in the preferential procurement element are:

1. Key measurement principles,
2. Black owned professional service providers and entrepreneurs,
3. Total Measured Procurement Spend (TMPS),
4. Exclusions from TMPS,
5. Measurement of the B-BBEE procurement expenditure, and
6. the calculation of preferential procurement contributions to B-BBEE.

The scorecard was amended by:

1. Condensing the EME and QSE indicator into one indicator with a target of 25%, equal to 5 points.
2. Spend with 51% Black Owned entities target has gone up to 50% from 40%, with 11 points allocated;
3. Clarity on the indicative profit calculation for Enterprise and Supplier Development targets;
4. Spend with 51% Black Owned or 51% Black Women-Owned suppliers will attract a further recognition multiplier of 2, while first time supplier recognition multiplier falls away;
5. Clarity has been provided on the difference between Enterprise Development and Supplier Development;
6. The introduction of 51% Black Owned generics as beneficiaries for Enterprise and Supplier Development contributions; and
7. Amendment to the ESD matrix – guarantees provided to ESD beneficiaries will now attract 50% recognition, up from 3%.

The measured entity can achieve enhanced recognition for the procurement spend attributable to a supplier if it can show that either or both the following:
• that the supplier it procures from is a Value-Adding Supplier (a value-adding supplier is defined by, NPBT + total labour cost > 25% of total revenue); and/or
• the supplier it procures from is an enterprise development beneficiary.
The spend attributable to these suppliers are multiplied by factors of 1.25 and 1.2 respectively.

Total Measured Procurement Spend (TMPS)
Targets of the Preferential Procurement scorecard are based on Total Measured Procurement Spend.
This includes:

1. Cost of sales
2. Capital expenditure
3. Operational expenditure
4. Public sector procurement
5. Monopolistic Procurement
6. Empowerment related expenditure
7. Labour brokers and independent contractors
8. Imports
9. Pension and medical aid contributions (excluding the capital investment portion of the employee)
10. Intra-group procurement
11. Trade commissions

It excludes:

1. Taxation
2. Salaries, wages and director emoluments
3. Pass-through third party procurement
4. Public Sector procurement (Procurement from organs of the state and public entities listed in Schedule 1 of the PFMA of 1999)
5. Qualifying Imports include imported capital goods or components for value added production in South Africa provided that:
   ◦ There is no existing local production of such capital goods or components; and
   ◦ Importing such capital goods or components promotes further production within South Africa
6. Imported goods and services (other than capital goods and components) if there is no local production of such goods or services that:
   ◦ carry a different brand to the locally produced goods or services; or
   ◦ have a different technical specifications to the locally produced goods and services.
7. Investments in or loans to an associated enterprise
8. Enterprise development and Socio-economic development contributions.

The Preferential Procurement scorecard for Qualifying Small Enterprises allocates points for BEE procurement from all suppliers based on the BEE procurement recognition levels as a percentage of the Total measured procurement spend and the rules relating to NPAT usage have been clarified.

The multiplier of 1.2x for first-time suppliers has been removed. A 1.2x recognition boost for purchasing from 51% Black Owned or Black Woman Owned suppliers whose qualification is achieved using the flow-through principle and not the modified flow-through principle has been introduced.

Beneficiaries of ED and SD contributions must be 51% Black-owned or Black Woman-owned EME or QSE suppliers whose qualification is achieved utilising the flow-through principle.

Generic Entities may also qualify as ED or SD beneficiaries if they were previously EMEs or QSEs who first received assistance from the Measured Entity within the past 5 years.

A similar principle applies to procurement from Generic entities recognised under the EME or QSE indicators. Procurement from a 51% Black-owned or Black Woman-owned Generic Supplier (using flow-through only) can be counted as procurement from an EME of QSE if the measured entity first procured from them within the past 5 years while they were still an EME or QSE.

The Benefit Factor Matrix is amended in that 50% of guarantees provided on behalf of a Beneficiary can be claimed instead of 3% as before.

The increase in the points and target in respect of procurement from 51% Black Owned
Suppliers increases the significance of black ownership and weakens the significance
of a supplier’s BEE Level.

Author Craig Tonkin