How Preferential Procurement can enhance your B-BBEE scorecard and contribute to economic transformation in South Africa.
Broad-based black economic empowerment (B-BBEE) is a central policy underpinning the South African government’s transformation strategy for our economy. It is designed to increase the numbers of Black people who manage, own and control enterprises and to decrease racially based income inequalities.
The B-BBEE Codes are published under the BEE Act and detail how B-BBEE must be measured in South Africa. In assessing B-BBEE, a scorecard approach is used, with the five elements of B-BBEE (ownership, management control, skills development, enterprise and supplier development including preferential procurement, and socio-economic development), allocated points to reach a final score.
In a nutshell, the B-BBEE scorecard assesses the structure of your business in line with the five elements of B-BBEE and the points your business earns determine its B-BBEE Level.
To achieve the best possible results for your business, it’s important to fully understand all the elements that make up the B-BBEE scorecard and how the scoring works.
The 5 elements of the generic B-BBEE scorecard
Preferential Procurement: A Key Component of B-BBEE
The Preferential Procurement element of the B-BBEE Scorecard is a sub-element of Enterprise and Supplier Development and the biggest contributor to your B-BBEE scorecard when done right.
A sub-minimum of 40% of the scorecard points available on the Enterprise and Supplier Development element (10.80 out of 27 points) must be scored for a generic entity (above R50 million annual turnover), not to be discounted by one level on its overall B-BBEE scorecard.
Preferential Procurement refers to the sourcing and purchasing of goods and services from Black-owned business. A Black-owned business is defined as a business that is 50.1% owned by Black people and where there is substantial management control. Additional points are available for Black female-owned businesses.
A key advantage of the Procurement element is that it is a “no cost” element, with the only requirement to maximise points being that you’re strategic and consistent about who you spend your existing procurement budget with.
Strategies for Effective Preferential Procurement
To maximise the points and benefits available to your business, you must have a deliberate and measurable Preferential Procurement plan. Consider the following parameters:
- Set targets for sourcing from certain suppliers. Focus on Black-owned suppliers and track progress regularly to ensure accountability and transparency.
- Conduct an audit on your suppliers with the following criteria in mind:
Ownership
- Are they B-BBEE-compliant and what is their B-BBEE score?
- Do they have Black ownership?
- Who holds the Black ownership? Black males? Black females? Black people living with disabilities? Black youth? Black people living in rural and underdeveloped areas? Black military veterans?
Turnover
- Is the supplier an Exempted Micro-Enterprise (EME) with turnover under R10 million?
- Is the supplier a Qualifying Small Enterprise (QSE) with turnover between R10 million and R50 million?
- Is the supplier a large enterprise with turnover over R50 million?
Once you are clear on these issues, you can assess how each of your suppliers impacts your Procurement score, using the below measurement categories and points:
* The Preferential Procurement score of an entity is measured against its Total Measured Procurement Spend (TMPS) during a specific financial year, which includes all purchases, operational and administrative expenditure, capital expenditure and finance cost, among others. Certain exclusions may be deducted from the TMPS which includes costs such as tax, depreciation, bad debt and salary costs…
Preferential Procurement scoring is further based on the B-BBEE status of the suppliers your company sources goods and services from, taking into consideration Rand value spent. Therefore, you can increase scores on this element if you procure a greater percentage of goods and services from suppliers with higher B-BBEE ratings.
For example, procuring from a supplier with a level 4 B-BBEE certificate results in 100% of the Rand value of spend with this supplier counting towards the Preferential Procurement scorecard. Procuring from a level 2 supplier will result in 125% of the Rand value and Level 1 will result in 135% of the Rand value. The higher the B-BBEE level of your supplier, the greater the recognition you get for the same amount of procurement expenditure.
Here are the procurement recognition percentages for each B-BBEE scorecard level:
Understanding the Preferential Procurement category and criteria, and designing your procurement strategy around this, will go a long way to helping your company maximise its procurement points.
Benefits of Preferential Procurement Beyond Compliance
Prioritising Preferential Procurement is not just about compliance, however. It’s also about driving positive change and building a more equitable and inclusive society.
Preferential Procurement constitutes a big boost for small businesses, the engine room of every economy and massive employers in their own right. By prioritising Black-owned SME enterprises in your procurement strategy, your business provides access to markets that can be transformative to their growth, and in turn, their ability to create more jobs. A diversified supplier base also leads to greater innovation and healthy competition in the marketplace.
When businesses embrace sustainable Preferential Procurement practices, they contribute to economic transformation, support Black-owned businesses and enhance their own B-BBEE score. It’s win-win-win.
