Watch out for the little guy

As the idling engine of the government’s over-engineered broad-based BEE bus finally grinds into gear, experts fear that a group that was supposed to sit in front is in danger of falling off.

Black-owned small businesses ostensibly stand to lose substantial advantage as the government shifts from narrow-based BEE procurement to a broad-based approach.

‘White-owned businesses stand to benefit incredibly (from the shift).
Black-owned businesses no longer can rely on the fact that they are black-owned to get preference points in government business,’’ says BEE consultant Paul Janisch.

The changes are contained in draft regulations issued under the Preferential Procurement Policy Framework Act which, if accepted, will at last make government buyers play by the broad-based BEE rule-book painstakingly written over the past decade by government itself, but bizarrely adopted only by some private-sector players so far.

In the evolution of South Africa’s grand BEE experiment this step is probably as momentous as the publication of the BEE codes themselves a few years back.

But, during the years of hammering out the Byzantine BEE codes in committee, followed by years of government dithering in adopting them into its procurement policy, government suppliers had grown used to the current narrow-based system, in which businesses are given preference based on black ownership only.

It is a crude system, which makes life difficult for white-owned small businesses and leads to fronting or artificial partnerships between white and black entrepreneurs. But at least it has the advantage of being relatively simple and does not require the entire additional bookkeeping system that comes with the BEE codes.

Most importantly, however, it gives severely hobbled black-owned small businesses an advantage of as much as 20 points over their white peers for the one thing they have in abundance—black ownership. This goes some way to countering their lack of economy of scale to come in at a low price, or their lack of resources to measure their BEE contributions as the codes require.

By broadening the BEE measurement to seven criteria, of which black ownership is only one, the new draft regulations present black-owned small businesses with a Hobson’s choice—undergo an expensive annual BEE scoring exercise, or lose the current points advantage.

BEE consultants estimate that verification agencies charge between R3 500 and R8 000 for the annual BEE assessment of a R5-million turnover business.

Robin Woolley, managing director of the BEE consultancy, Transcend Corporate Advisers, believes the draft regulations represent a ‘huge step forward”, but warns: ‘The codes basically say that if you don’t have an empowerment certificate you can’t engage in this pricing preference type of structure. Now that’s great because it enforces a consistent process for everyone, but it does carry its attendent costs, so smaller black businesses get marginalised, and those are the businesses that it’s supposed to be helping.’’

Proponents of the codes argue that the system exempts businesses with annual turnovers of below R5-million from having to do BEE scoring and that exempt black-owned businesses are automatically deemed level-three BEE contributors and exempt whiteowned businesses level four. But even then the advantage is whittled down from as much as 20 points to as little as four points when bidding for government contracts.

A more powerful argument in favour of the new regulations is that government’s adoption of broadbased procurement will exert the kind of pro-BEE pressure throughout the economy that the designers envisaged. Because businesses will score BEE points for buying from other high-scoring businesses and also for helping small businesses, black small businesses are desirable to support and do business with.

They therefore stand to win more from other businesses than they would lose in government business. This may be true on paper, but looming over the system are huge uncertainties over its practicability.

Anyone who has glimpsed the BEE codes knows that scoring a business is an expert exercise and the department of trade and industry has created an industry of verification agencies to conduct the annual BEE audits. But only 30 of them have been accredited by government so far, says Janisch, who reckons that about 500 000 businesses will need to be scored each year.

To make matters worse, says BEE consultant Keith Levenstein, there is a proliferation of industry-specific codes and, according to government rules, a verification agency must be accredited for each code.

As from February next year only BEE scores by accredited verification agencies will be acceptable, which many believe will put an end to the allowance by government that businesses may draw up their own scorecard without having to hire an accreditation agency.

Pallas Moodley, owner of Olympia International Paints, says his clients have always accepted his self-assessment of his business’s level-one BEE score, which he believes saves him about R12 000 in verification fees a year. But most recently a client, which was itself was being scored by a verification agency, came back to Moodley and insisted on a verified scorecard.

Moodley countered this by arguing that self-assessment was officially sanctioned, as evidenced by the self-scoring tool on the department of trade and industry’s website.

Moodley, who is largely in favour of the move by government towards broad-based BEE procurement, points to an ongoing frustration that the new regulations won’t do away with.

If a government department or parastatal has its heart set on a specific supplier, the specifications of the tender are simply written in such a way that small, emerging black suppliers are disqualified. What is needed, Moodley says, is an ombudsman or forum to which small suppliers can take their complaints. His wish may yet come true.

The treasury is setting up a procurement compliance unit with investigative powers, which government procurement head Henry Malinga says will be ready by the end of the year.

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