The role of procurement, much like finance, has fundamentally changed in organisations operating in the market today. The subtle, but significant nuances that underpin the changes in legislation and policy relating to Broad-Based Black Economic Empowerment (B-BBEE) and localisation, as captured within the Industrial Policy Action Plan (IPAP 7) and, more recently, the Agricultural Policy Action Plan (APAP) require procurement to strategically support the business in more ways than supply chain management, Dionne Kerr, CEO of transformation consulting firm Siyakha Consulting, writes in this month’s SmartProcurement.
The procurement function will now need to enable transformation more so than most other divisions of an organisation. The ability to analyse the market and understand how to access quality and competent black suppliers who participate in the production or provision of localised products and services now becomes a core function of procurement. Forward-thinking the business demand and then collaborating, researching and analysing current capabilities, versus organisational demand, will need more structured planning and intentional development of the competencies needed within the supply chain.
The concept of localisation is intended to ensure that when government spends money it translates into economic growth and job creation. By no means unique to the South African environment, localisation forms the cornerstone of government incentives, grants, policy and legislation on a global level.
In South Africa, this commitment has been in place for several years through the procurement mechanisms contained within the public sector. Often seen as a draconian approach to tendering, the South African model applied by state-owned companies, and applied in strategic projects, may well be at the forefront of what is seen as a critical measure to ensure that the economy grows. B-BBEE is coupled with localisation to ensure that when economic opportunities arise, they enable empowerment for black South Africans. We now see this strategy for growth and equalisation of the South African economy pulled through into the revised B-BBEE legislation. Several key indicators contained within the Enterprise and Supplier Development (ESD) element of the Codes refer to the principles of localisation.
Within the generic scorecard, which applies to entities over R50-million in turnover and who do not fall within a specific sector code, the ESD element accounts for 40 points with 4 bonus points. For specialised enterprises, which includes public entities, this recognition increases to 50 points with 4 bonus points. As a key element for transformation, this element considers procurement performance with targeted suppliers and contribution to develop SMMEs who are suppliers that are black-owned (>51% black ownership).
To understand this better:
1. 40% of a company’s procurement spend should be spent with companies who are black-owned.
2. 12% of a company’s procurement spend should be spent with companies who are black women-owned.
3. 30% of a company’s procurement spend should be spent with companies who turn over less than R50-million per year.
Achievement of these targets accounts for 20 of the 25 points available for procurement recognition. So expenditure with traditional, BEE compliant businesses with limited or no black ownership that do not fall into one of these categories has relatively low significance in meeting the objectives of this element.
Doing business with small companies who are also black-owned means that you can count their participation in each of the indicators; meaning that preferential procurement with small black-owned businesses will achieve multiple indicators, whereas the traditional large BEE compliant businesses with limited or no ownership will provide a maximum benefit of 5 points on the procurement scorecard.
Practically this means that procurement teams will need to rethink the trend to outsource large contracts to large traditional suppliers with limited BEE compliance or to import flagrantly, but will rather need to identify opportunities to include small emerging enterprises in the entire value chain and will most certainly need to see an aggressive drive towards increased black ownership to achieve the desired performance within this element.
The result of these changes will mean that black businesses have a greater number of opportunities and participate in a higher value of opportunities. The time is now for these black-owned companies to ensure that they are geared for growth and for South African government to address the issues of access to funding to support this. The state of readiness and co-ordination of all of the interested parties needs to be aligned so that buying decisions are not hindered by an inability to mobilise the right resources, at the right price.
The inclusion of an ‘empowering supplier’ status will limit the ability to dump fully imported products into the South African market. Businesses that operate in South Africa will need to be committed to participating in the economy through job creation, through beneficiation and local procurement. The principle is that everyone is welcome, provided that if you wish to benefit from the South African economy then South Africa must benefit from you.
The much-utilised exclusion of imports based on brand or technical specification is still allowed, however, this exclusion will require a localisation plan. It is assumed that the existence of, and adherence to this localisation plan will be included in the verification process to ensure that avoidance of the localisation objectives is limited and to safeguard that 10 years from now we are not still arguing about the lack of access to quality products and services.
Transformation can only meaningfully be achieved if there is a growth in the number of opportunities that have scale, value and strategic importance. This cannot be realised without a robust economy, money and growth. Getting the concept of localisation right is something that will significantly affect the future of the South African agenda and the revision of the BEE Codes has done well to consider this. It is imperative to understand what this means and how businesses respond so that the shift in focus achieves a stronger result than our transformation efforts to date.
For more information please contact Dionne Kerr at Siyakha Consulting on dionne@siyakha.co.za
