Enterprise Development Inconsistency – EconoBEE Newsletter – 14 September 2011
Enterprise Development inconsistency could cost you 12.75 points
Enterprise Development is worth 15 points for generics, or 25 for QSEs. It differs slightly for some sector codes.
Enterprise Development Definition
There are many ways of earning points on Enterprise Development.
One of the most controversial aspects of ED is the concept of “Shorter Payment Periods”.
Shorter Payment refers to the percentage of invoiced amount (only from your ED beneficiary, and if it meets the definition given above) and specifically says “Percentage being 15 days less the number of days from invoice to payment”.
When the codes first came out we initially saw this as saying that if an invoice was presented for payment today, and payment was made today (i.e the number of days from invoice to payment is 0), it would imply that the percentage was 15 – 0, and we should use 15% as the value. A relook gave us some problems. 15 days less number of days will give a number of days. i.e in our example the answer is 15 days – not a percentage. As a result we wrote to the DTI (back in the early days of 2007) to obtain clarity. We received an answer: The percentage would be based on 100% of invoiced value.
If an invoice is presented today and payment made today, then 100% of invoiced value is recognizable as ED spend.
If an invoice is presented today and payment made in 2 days time, then (15-2)/15% of invoiced value is recognizable as ED spend.
If an invoice is presented today and payment made in 6 days time, then (15-6)/15% of invoiced value is recognizable as ED spend.
This made a huge difference to the way that ED points are earned – using the “optimistic method” would yield 15 points, while the “pessimistic method would only earn 2.25 points – a differential of 12.75 points.
Practical Application in the Industry
We followed the dti approach and many agencies also followed this approach. In 2008 one agency refused to award full points on early repayments, so the measured entity approached the dti for clarification. The chief director responded with the same original response, i.e up to 100% of invoice value would be recognizable.
In 2009 we found a second agency (IQUAD) that followed the 15% route, and appealed their decision on behalf of our client. We submitted all the documentation received from the dti, as well as an additional explanation. The agency then agreed with us, and recalculated the points.
In 2010, ABVA issued “Practice Notes” covering a selection of issues. One of their practice notes was to go back to the 15% method.
The Practice Notes clearly stated that they had no formal legal standing as they were not legislation and they did not purport to be.
At the same time, ABVA began encouraging agencies to sign commitments to following the practice notes. Some, if not most agencies did sign their commitment. Recently we started finding that some agencies were applying the practice notes as a rule, in particular the 15% shorter payment rule. This concerned us because the DTI had never issued an updated document or letter changing their original interpretation. ABVA and some agencies continue to talk about “errors” that the DTI has made in the codes, that they want to “fix”.
What ABVA and those agencies following the new rules may not have realised is that the road transport sub-sector code of the transport sector codes ratified the 100% understanding:
Shorter Payment clause in road transport code
This probably proves that the dti does not consider their interpretation as an error, as the road transport subsector specifically encourages shorter payment periods for the full value of the invoice.
Correspondence from two respected verification agencies
Empowerdex At our request, an accredited agency Empowerdex approached SANAS for a ruling. This is the response received from Empowerdex, dated 17th August:
“We have finally received feedback from SANAS and reached a decision regarding the early payment terms. SANAS have informed us that not all verification agencies are applying the best practise notes and that they will apply the 100% recognition if asked to make a decision. We do not want our clients to be disadvantaged by us applying the 15% and so have decided to revert back to the 100% recognition of early payment terms.”
IQUAD At around the same time another client asked their verification agency, IQUAD, for their stance on the matter: This is IQUAD’s response:
“We have committed to applying industry best practice and have subscribed to the ABVA recommended technical interpretations. The treatment of Shorter payment periods has been a contentious point in the industry. There are 2 opposing views on how to calculate shorter payment periods:
Method 1: A Maximum of 15% of the invoice value of amounts paid to suppliers is recognized as an ED contribution (Calculated by taking the target of 15 days less the number of days from invoice to payment, say 5. i.e. 15-5=10. 10% is the percentage of invoice value that is recognizable
Method 2: If the number of days from invoice to payment is 5 days, and the target is 15 days, then 15-5=10, and 10/15=66%. 66% of the invoice value is recognized as ED. In terms of this method, if the supplier is paid in 0 days, then (15-0)/15=100%, and 100% of the invoice value is recognized.
We always subscribed to Method 1, but received an appeal (*) some time ago, in terms of which some correspondence from the dti was presented, which favored Method 2. We then changed practice and applied method 2 until the verification industry clarified the dti’s error, and committed to applying Method 1. From that point forward we have reverted back to our initial application of Method 1. This is in our view correct, in spite of it being the less favorable one for a measured entity.
The industry accepted application for Shorter payment periods is detailed on page 14 in the attached best practice notes. As a signatory to the attached declaration of intent, we are guilty of professional misconduct should we choose to apply Method 2.
We trust that you will support us in our efforts to maintain appropriate industry standards.”
(*) This is the appeal that we submitted.
Our comments: The whole point of accreditation/SANAS and the codes is to ensure a standard approach to B-BBEE. Here we have two different agencies, both belonging to the same industry body, both accredited by SANAS and both having the same documentation available to them applying different interpretations. One agency even believes that it will be guilty of unprofessional conduct if it follows a contradictory approach. The other agency is also a signatory, and is choosing to follow the route that the dti originally recommended.
Who is Correct? We believe that the verification industry does not have the right to “clarify the dti’s error”. If the codes are ambiguous the dti themselves issued a clarification to us in 2007 and another clarification in 2008 to Caxton! The road freight sub-sector codes also clarified this when its charter was gazetted.
According to Empowerdex, SANAS will apply the 100% rule if asked to make a decision. It is obviously a problem that SANAS did not say outright that the 100% rule applies, and the dti have been aware of this for some time. A simple gazette would solve the problem instantly, and the minister has indeed issued some new gazettes since 2007, including the one relating to certificates issued by verification agencies.
Until such time as this is challenged by someone in a court of law, we believe that the documents issued by the dti must take precedence over Practice Notes issued by ABVA, no matter how well intentioned ABVA is about ensuring consistency. A correction or communication from the DTI has to carry more weight than ABVA. On a more practical note a correction or communication from SANAS to verification agencies must be even more applicable because SANAS has the right to issue non-conformance or remove accreditation.
Now we have two respected agencies disagreeing with each other, and a potential 12.75 point discrepancy, enough to drop an entity from level 6 to level 8 or cost your company a tender!
We find it quite ironic that so many verification agencies and consultancies complain about the DTI not responding to technical queries. However when the DTI actually offers an explanation the same verification agencies/consultants refuse to use that explanation in favour of their own because they consider the DTI to have made an error.
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Enterprise Development inconsistency could cost you 12.75 points
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