Increasingly companies, even those that have not had their BEE positions verified, are instituting systems to track their BEE procurement spend. The reasons for this being pretty obvious, procurement accounts for 20 points (out of 100) of a company’s BEE score. There is however a disconnect between the data procurement departments are preparing and what will be required by verification agencies.
“Unfortunately, the mere presence of a system to track BEE spending, also referred to as preferential procurement spending, does not guarantee any scoring,” says Robert Thorburn of Exceed Verification.
“Often these systems only record one piece of data such as what the supplier’s black ownership position is.” “This is out of touch with the broad-based scoring system.” he says.
“This disconnect between the data recorded by a company (client) and the data needed by a BEE Verification Agency to determine the client’s BEE status, may even result in a score of 0 out of 20 being awarded for procurement. ”
“All the more worrying is that procurement organisations put a significant amount of time and money into setting up and maintaining such systems.” Ensuring a return on this investment should therefore be a priority.
Thorburn argues that “To match the data gathered with the data required, a couple of basic questions should be answered.
1. What level of BEE scoring for suppliers is acceptable?
2. How should these scores be calculated,
3. How should they be recorded and
4. How will the procurement results be verified by Verification Agencies.
1. What level of BEE scoring for suppliers is acceptable?
The answer to the first question is a simple 30 out of 100, any score below this point is classified as non-compliant and procurement from non-compliant suppliers will not count towards your BEE score.
When it come to calculating a score though, things become significantly more difficult. The broad-based scoring system considers seven elements and requires extensive and accurate data to be considered. Doing this in-house could therefore be a significant financial and logistical burden.
Fortunately, according to the codes of good practice, this task will be fulfilled by Verification Agencies, who will have the legal authority to issue BEE verification certificates, with the business obtaining a certificate footing the bill.
In other words, a large part of the cost will shift from the procurement department to the supplier. Unfortunately no Verification Agencies have as yet been accredited by government, with the accreditation process only starting later in the year. This means that procurement departments will either have to accept certificates issued by unaccredited agencies, perform its own supplier ratings (calculations) or both.
One bit of relief though, is the transitional period. During this period, currently set at 12 months starting later this year, companies may calculate their BEE positions using only management and ownership and leaving out the other five elements of the broad-based system. After this score is determined it is multiplied by a factor of 1.92 to yield the final result. Since ownership and management jointly account for 30 points of the broad-based scoring system, this moves up to 57.6 as a maximum. Calculating a supplier’s score in this manner may be an effective interim measure, but should not be seen as a permanent or exclusive option, as first prize would still be to get verification certificates from your suppliers. The simple reason being that a supplier who has had its BEE status verified could potentially present a score of much higher than 57.6.
3. How should BEE scores be recorded?
It is general practice to record scores electronically, allowing for a supplier’s BEE score to be referenced in the same manner as invoices or other pertinent details. These systems also allow for scores to be changed, should a supplier’s status change, while also enabling preferential procurement performance to be calculated at any point. The procurement department should therefore be able to present the specifics of each purchase, such as amount, supplier name, invoice number and nature of the expenditure, along with the supplier’s BEE status. Care should also be taken not to use outdated data, since Verification Certificates will only be valid for 12 months.
A national empowerment directory
“A further bit of good news as far as the administrative burden is concerned is that the Department of Trade and Industry will set up and maintain a national empowerment directory. The directory will list the verified BEE status of all verified suppliers. The need to send out long questionnaires and perform calculations will therefore come to an end, with only the need to record preferential procurement spend remaining, ” says Thorburn.
4. How do verification agencies approach procurement?
Verification Agencies literally need to verify the data presented to them. For the procurement element this means that a Verification Agency will have to be able to confirm not only the company’s spend for the year, but also its spend with specific suppliers as well as the BEE status of those suppliers. If the procurement department determines supplier scores internally, the system by which this is done will also be scrutinised. A Verification Agency should therefore be able to follow procurement spending through from financial statements down to original source documents, such as invoices and supplier questionnaires.
To ensure a smooth verification, as well as a return on the time and money invested, procurement departments should check their systems against the actions listed above. Before a verification starts it would be a good idea to find out in what format the verification agency requires your information to be presented. Usually, though not always, this would be Excel.
Expecting to get it right the first time round is of course not totally realistic. A year on year improvement should however by a minimum target. To achieve this target proper insight into the preceding year’s Verification results is of critical importance, which is where a management report comes into play. Any verification agency worth its salt should provide clients with a management report detailing all aspects of the Verification results, including why certain points were awarded and others not. The value of such information for effecting improvements before the next verification, is clear.
In the final analysis it is a good idea to gain some insight into what will and what will not be accepted by the Agency appointed to, or which you’re thinking of appointing to, verify your company’s BEE status. Although Verification Agencies may not provide BEE consultation and verification services to the same client, they are free to answer any questions relating to BEE information which is in the public domain or which is not being created specifically for the client’s use. In other words, asking a Verification Agency if a certain piece of information is sufficient for calculation under the broad-based scoring system is fine, but asking for guidance on how to improve your own BEE status is not.
The author of this Article: Robert Thorburn of Exceed Verification can be contacted on: 082 877 1841
3 thoughts on “Measuring suppliers on ownership can result in no verified BEE points at all!”
do you verify companies bee status
Exceed Verification Agency currently offers B-BBEE verification services with a number of offices nationally. Please contact us on the listed number and we will gladly follow up with you.
With apology and respect to Robert, I’ve reworked his article as a result of experience in our company.
REPORTING ON BEE SPENDING
1 INTRODUCTION
A distinction must be drawn between reporting on BEE suppliers who benefit from preferential procurement spend; and qualifying suppliers with regard to their BEE status for the purpose of compliance with statutory and other procurement regulations.
The often overlooked distinction is that qualifying suppliers as BEE suppliers is carried out during the evaluation of offerings in the procurement process in terms of a BBBEE scorecard as described below. Reporting on preferential procurement spend is an output of systems that track total procurement spend, as well as BEE procurement spend.
Rating or verification agencies would perpetuate the confusion created between evaluation and reporting as they believe that the same data used for verification should be used for reporting. The reason is that they use all means to entrench their position in this new industry that has been created by pretending that their data can be used for purposes other than mere verification.
Unfortunately, the mere presence of a system to track BEE spending, also referred to as preferential procurement spending, is not and should not be used as an indicator of any scoring, which is used in the procurement process.
Reporting systems only record one piece of data such as the supplier’s BEE status, which for reporting purposes, could be stated in terms of black ownership and managerial control. This is not the same as the score obtained as a result of applying the broad-based score card scoring system.
The data recorded by a company to track preferential procurement spending only requires us to know whether or not a company is classified as a “BEE company” or not. There is no procurement scoring measure of how much BEE is involved.
If need be, BEE companies can be divided into the types of BEE companies that are prevalent such as a fully Black owned company, a Black empowered company with 51% or more Black shareholding, or a Black influenced company with Black shareholding of between 25 and 50%. These are, however arbitrary categorisations, i.e. they have no legal basis.
Once a contract has been awarded to a “BEE company”, the full contract price counts as BEE spend as the “BEE company” is a legal entity in terms of the South African company laws, and not merely a collection of Black people thrown together by chance depending on a score obtained during an evaluation of a tender which some how changes the contract amount awarded.
2 How BEE status is established and maintained
Fortunately, according to the codes of good practice, the task of verifying a supplier’s BEE status will be fulfilled by Verification Agencies, who will have the legal authority to issue BEE verification certificates, with the business obtaining a certificate footing the bill.
In other words, a large part of the cost will shift from the procurement department to the supplier. Unfortunately no verification agency has as yet been accredited by Government, with the accreditation process only starting later in the year.
This is why procurement departments believed that they will either have to accept certificates issued by unaccredited agencies, perform their own supplier ratings or both. This misunderstanding is conveniently perpetuated by Verification Agencies.
3. How should BEE status be recorded?
It is general practice to record BEE status electronically, allowing for a supplier’s BEE status to be referenced in the same manner as invoices or other pertinent details. These systems also allow for BEE status to be changed. The procurement department should therefore be able to present the details of each purchase, such as amount, supplier name, invoice number and nature of the expenditure, along with the supplier’s BEE status. Care should also be taken not to use outdated data, since Verification Certificates would only be valid for 12 months.
4 A national empowerment directory
The administrative burden involved in capturing BEE status would be lessened in that the Department of Trade and Industry will set up and maintain a national empowerment directory. The directory will list the verified BEE status of all verified suppliers.
The need to send out long questionnaires and perform calculations has therefore come to an end; with only the need to record preferential procurement spend in terms of the BEE status of a supplier. This BEE status should be evidenced by an official verification certificate.
The Department of Trade and Industry has invited nine existing rating agencies as founding members of the Association of BEE Verification Agencies (ABVA) which has subsequently been recognized by the DTI as the industry body for verification agencies. It is important to note that in terms of the draft Codes, membership to the industry body will be a prerequisite for attaining accreditation as a verification agency.
However, during the current twelve month period, suppliers may calculate their BEE positions using only management and ownership and leaving out the other five elements of the broad-based system. After this score is determined it is multiplied by a factor of 1.92 to yield the final result. Since ownership and management jointly account for 30 points of the broad-based scoring system, this moves up to 57.6 as a maximum. Calculating a supplier’s score in this manner may be an effective interim measure, but should not be seen as a permanent or exclusive option, as first prize would still be to get verification certificates from suppliers. The simple reason being that a supplier who has had its BEE status verified could potentially present a score of much higher than 57.6.
Whatever method is used to evaluate a supplier’s BEE status in the procurement process, once a supplier is compliant with the BEE requirements that supplier must be reported against the contract amount awarded. BEE suppliers can be divided into categories relating to shareholding and management control. Furthermore, these categories can be related to industrial sectors in which suppliers operate such as financial services, construction and the like. In this way, meaningful BEE spend reports can be generated from basic data collected at the procurement stage.