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SED through Procurement
TABLE OF CONTENTS
- Question 1……………………………………………………………Page 2
- Question 2……………………………………………………………Page 3
- Question 3……………………………………………………………Page 4
- Question 4……………………………………………………………Page 7
- References……………………………………………………………Page 8
PREFERENTIAL PROCUREMENT, SOCIO-ECONOMIC DEVELOPMENT AND ENTERPRISE DEVELOPMENT
According to Statement 500 of the B-BBEE Codes of Good Practice (2007), the intention of Preferential Procurement is to promote the use of black owned professional suppliers and entrepreneurs as suppliers. By awarding points on the BEE scorecard for use of black owned businesses, it creates a massive demand for an entity with a good BEE scorecard. This in turn stimulates growth for black owned businesses who will benefit from clients by supplying these clients with goods or services required. This BEE spend by the entity will be rewarded on the entity’s preferential procurement scorecard and the measured entity may obtain a better score resulting in the measured entity becoming more competitive in seeking procurement from the public sector.
As a result of the increase in demand for Black owned suppliers, this results in more black owned businesses being established and stimulates economic growth in the areas where the black businesses are based which in general is from previously disadvantaged areas. This also helps in creating jobs and result in more blacks being employed.
ALEXIS (2013) states that“the BEE policy is designed to encourage measured entities to use Enterprise Development (ED) in conjunction with preferential procurement. The most effective manner of integrating the two is to invest in ED opportunities within the entity’s value chain. Encouraging the support of ED through preferential procurement stimulates reciprocal needs between the investor and the beneficiary that will ultimately lead to sustainable development of black business and economic growth.” Due to the above, the measured entity may want to aid their suppliers (being black owned businesses) by for example paying them under shorter payment terms such as 5 days as opposed to the standard 30 – 60 days, provide them with interest free loans to increase their financial capacity and access to cash flow. The measured entity can also provide them with operational support such as providing staff to these entities to train the black owned entities staff at a discounted (or free) rate. This can also facilitate a minority investment in these entities. Based on the above, the measured entity will also score points for enterprise development.
The above ultimately results in more black people being incorporated into the mainstream economy.
2.1 Value adding enterprise calculation
= Net profit before tax + total labour cost > 25% of total revenue
= R 263,589+R 1,450,000 > 25% of R 6,763,393
= R 1,713,589 > R 1,690,848.25
Therefore Company ABC is a Value-Added supplier (It should be registered for VAT as turnover exceeds R 1 million.
2.2 The entity must be registered as a VAT vendor under the Value Added Tax Act of 1991. To verify registration, inspect the VAT registration certificate (VAT 103) and if this is not available perform a vat vendor search on the SARS website – www.sars.gov.za
2.3 If an entity is a value added supplier, there will be enhanced recognition of 125% viz every rand spent will be multiplied by 1.25 first, before applying the relevant contribution status.
3.1 a)Cost of sales
Cost of sales is the cost of goods that have been sold, which are generally recognised either on First in First Out (FIFO) or weighted average basis. Costs include the cost of purchase, cost of manufacture (including material, labour, etc.).
Capital expenditure refers to the expense (spending of money) incurred in the obtaining of items of a capital nature (viz assets that will be in use for a period longer than 12 months) in order to increase capacity of efficiency.
It is an on-going cost for running an operation (business). These costs are not directly incurred in the cost of a product sold. It is the day to day expenses such as rental, accounting fees, etc.
d)Empowerment related expenditure
This is expenditure incurred via the use of black owned entities.
e)Public sector procurement
It is the process by which the government / organs of state / municipalities initiates for the obtaining of goods / services required from the private sector in order to meet its own needs. The process involves a tendering process.
It is the systematic allocation of the cost of an asset over its useful life. It is a non-cash item.
3.2 In terms of paragraph 5.11 of Statement 500 of the B-BBEE Codes of Good Practice (2007), all goods and services that are imported from a non-South African source are included in total procurement spend. However, in terms of paragraph 6.6 of Statement 500 of the B-BBEE Codes of Good Practice (2007), imported capital goods or components for value added production in South Africa (i.e. they are used in the production of other goods) will be excluded form Total Measured Procurement Spend if there is no existing local production of such capital goods or components (viz these cannot be sourced locally) and importing those capital gods or components promotes further value added production within South Africa (these goods will create new products that can be used for manufacture).
Further to this, any other imported goods or services if there is no local production of these foods or services including (but not limited to):
- Carry a brand different to the locally produced goods or services (branded imports if not produced locally may be excluded e.g. PEPSI) or
- Items that have different technical specifications to the locally produced foods or services (e.g. laptops)
3.3 Total Measured Procurement Spend
+ Cost of sales
+ Operating expenses
+ Capital expenditure
+ Finance charges
- Salaries, wages and commission (if paid to employees)
- Imports (that can be excluded in terms of paragraph 6.6 of Code 500)
- Empowerment related procurement (in terms of paragraph 6.5 of Code 500)
- Public sector procurement (in terms of paragraph 6.2 of Code 500)
= Total measured procurement spend
According to ANNEXE 500(A) of Statement 500 of the Codes of Good Practice (2007), the formula for B-BEE procurement spend is
A = sum of (BxC)
A is the calculated total B-BEE Procurement Spend (equal to the total sum for each supplier)
B is the value of procurement falling within total measured procurement spend
C is the B-BEE procurement recognition level of each supplier of the measured entity
3.4 Verification of SED
- One will need to verify the beneficiaries viz if at least 75% of the value directly benefits black people, then 100% of the spend can be recognised, if not, value of contribution will need to be multiplied by percentage that benefit black people.
- The amount of the contribution will need to be verified (via confirmation), SED certificate if available.
- A confirmation may also need to be obtained from an independent, competent person confirming the race of the beneficiaries.
- Beneficiaries must be identified and substantiated.
- Obtain representation from management via management representation letter.
3.5 Benefits of making socio-economic development contributions
- It carries 5 weighting points to the BEE scorecard which can elevate a measured entity’s BEE level.
- It is also aimed at the development of disadvantaged people / communities which can result in brand recognition / loyalty from such communities.
- It is seen as a form of giving back to the community.
- It can create greater alignment between the business objectives and the needs of the community.
Conditions of a valid enterprise development agreement:
- There must be an agreement in place.
- It must be in writing.
- It must be signed.
- It must state the purpose such as assisting or accelerating the development, sustainability and ultimately financial and operational independence of that beneficiary.
- It should state the nature of the support given (viz loan, grant, etc.).
- The support given should be used in part for purposes of improving beneficiaries overall BEE compliance level.
- The dates need to be specified.
- The beneficiaries must meet the requirements of a beneficiary entity.
ALEXIS B (2013) MD ACCOUNTANTS AND AUDITORS [Online] Available from: http://www.mdacc.co.za/index.php/the-link-between-preferential-procurement-and-enterprise-development/
[Accessed: 2nd October 2014].
Department of Trade and Industry. (2007) Codes of Good Practice on Black Economic Empowerment. Government Gazette. (Vol. 500, No. 29617)
HARTMAN, A. (2014) Management Development Programme, Preferential Procurement and Enterprise Development Presentation Slides