|BEE’s Procurement Problem|
Is it possible to have a turnover of less than R5 million and expenses of R20 million?
This sounds like a simple question with a simple answer. No, it is not possible to run a sustainable business with expenses 4 times its income. The question would imply that the business makes a loss of R15 million.
Yet, this happens every day in the context of the B-BBEE scorecard.
It is prevalent in many industries where the supplier acts in a 3rd party capacity to its customer. Good examples are the travel and the freight clearing industries.
Let’s use the travel agency industry as an example. For the purposes of the example we will use a travel agency supplying airline tickets: A company that uses a travel agency will report that its spend (to use a recent situation) is R9 million with the travel agency per annum. The same agency reports that its annual turnover is R2.5 million (the threshold for EME’s in the tourism sector).
From the viewpoint of the travel agency it is instructed to purchase airline tickets for its client. It does so, and charges a commission for the service, e.g 15%. It gives its clients an invoice for the whole amount – commission plus airline tickets. The travel agency does not regard the airline tickets as its own expense, rather a 3rd party expense on behalf of its client. It also does not regard the payment of this amount as income. It only sees the commission earned as income, and the rest of the amount as a disbursement on behalf of its client. So, a large amount of money may flow through the travel agency, to reimburse the agency for paying money on behalf of its client to the airlines.
The client however sees it differently: It instructs the travel agency to purchase airline tickets, and it pays the travel agency when it receives the invoice. If the invoice is a tax invoice and shows VAT has been added on, then this is used by the company to claim input VAT. SARS themselves are happy as long as VAT is calculated correctly.
From a BEE Procurement viewpoint this becomes very problematic. From the travel agency’s viewpoint, they do not believe that the purchase of airline tickets is their procurement. They say they are doing it for their client, who must reimburse them. From the viewpoint of the client, they see themselves as paying the travel agency, not the airline. The client then records their procurement as coming from the travel agency and uses the travel agency’s certificate to calculate points earned. However the travel agency does not record their spend with the airline as part of their own procurement. Nor do they include the payment from their client as part of their income. We have the strange situation that a travel agency thinks their turnover is less than R2.5million, and confirmed by their auditor or accountant, while the client spends what they think is R9 million.
Who is right?
Both sides are slightly wrong: The travel agency should clearly state on their invoice which expense is for the client’s account, and which expense is their own commission. They should attach the actual invoice from the airline so this invoice can be used by the client as input VAT. If they do not do so, no one can blame the client from thinking that the true supplier of the airline ticket was the travel agency, who is reselling the ticket at a markup. This would then clearly imply that the agency is earning revenue on the airline ticket and should report the sale as part of its revenue. At the same time, the client should not automatically regard their spend with the travel agency as solely via the agency, and not from the airline. Most clients would rather use the procurement level of their travel agency than have to run around looking for BEE certificates of all the airlines.
What do the Codes say?
Code 500, preferential procurement explains what is included in procurement and what can be excluded. It does talk of third party procurement which is where the problem lies.
The code defines what is included and what is excluded from total measured procurement:
“Third-party procurement: all procurement for a third-party or a client, where the cost of that procurement is an expense recorded in the Measured Entity’s annual financial statements;”
“Pass-through third-party procurement: all procurement for a third-party or a client that is recorded as an expense in the third-party or client’s annual financial statements but is not recorded as such in the Measured Entity’s annual financial statements;“
From the travel agency’s viewpoint they do not see an airline ticket as being included because they do not record that expense in their financial statements.
However they cannot exclude the amount unless they can prove that that expense is recorded as an expense in their client’s financial statements. It becomes an almost impossible task for a verification agency to allow the exclusion, because they would have to have proof that the expense is recorded in the financial statements of every single client of the travel agency.
We have the strange situation where an item is not included, but also not excluded.
The intention of the codes is to allow genuine third party procurement. The true supplier of that procurement should be required to produce a certificate. No supplier should “escape the net” which is sometimes happening with the airlines. The travel agency industry does not see themselves as reselling airline tickets and it should not be included in their revenue or expenditure. That amount should however be included in the client’s procurement, as coming from the airline and not the travel agency. An agency that does R2.5 million turnover in commission but supplies airline tickets worth R9 million should be seen as an EME, and the client should not use the travel agency’s EME BEE certificate for anything more than the commissions paid. The remainder of the client’s spend should be seen to be with the actual airline.
How a Travel Agency can Help
The agency should carefully explain how BEE procurement works to its clients. It can help collect BEE certificates of these third party suppliers (eg the airlines).
EconoBEE’s consulting service allows companies to adequately plan and implement B-BBEE. Our service objectives are to help our clients earn more points while spending less time and money on each element. Our advise is practical, pro-active and effective. Through a complete managed service we will also contact suppliers, advise on verification and even sit in during the verification to handle any major queries.
Once again we are calling for the sector codes to be cancelled. The BEE Codes make allowances for sector codes for industries, and to date 9 sector codes have been gazetted since the first batch in 2009. They have not worked and have caused more problems than they solve.
- They are not so dissimilar to the codes – only that they serve a purpose to the industry they represent.
- Some of the sector codes are badly drafted, even after many years of drafts they become impossible to follow.
- Each sector code establishes their own sector council. Most sector councils are not in operation, and most are dysfunctional. It is impossible to obtain a simple answer from most sector councils or even contact them.
- The sector councils are mandated to issue annual reports and monitor progress in the sector, but do not.
- Fronting is rife amongst industries in the sectors. Many companies preferring to follow the codes (which is not allowed), but the sector councils take no action.
- Many companies use the sector code, or imminent release of a sector code as a reason to remain non-compliant, rather than follow the sector code. It is simply an excuse, but widely used by many companies. The process of gazetting the sector code has set back the sector by many years.
- Still today many verification agencies are unaware of the sector codes, or make the wrong decision about which set of codes to apply for their client.
- The sector codes add unnecessary complexity to the codes. All professionals in the industry need to understand all sector codes.
- When companies receive certificates from their suppliers, they are expected to check if the certificate is valid, and also if the correct sector code was used to verify their supplier.
- The sector codes cost industry, and government many millions in fees, meetings, lawyers. It is still costing/wasting money for dubious benefits.
- Every time the current codes are revised, the sector codes will need to be changed as well. One of the suggestions in the draft codes is to change the points to levels table, e g level 8 is proposed to be 40-55 points. Each of the sector codes needs to be re-written in-line with the revised codes. If this does not happen we can imagine many companies jumping on the bandwagon and pretending or trying to belong to a sector that has the “easiest” scorecard to follow. Since the sector councils are not interested in curbing this practice it will be used/abused.
The current codes can easily be used for all industries. We don’t need the sector codes, and call on the minister to cancel them when he issues revised codes.
Preferential Procurement – Save Time by using the BEE Procured database containing over 30 000 BEE Certificates.
Procurement Managed Service: Our consultants can phone your suppliers for a BEE certificate – Managed Service.
While there is demand for a B-BBEE Scorecard someone will be taking advantage, shouldn’t that someone be you…
26 March 2013
In this issue
- BEE’s Procurement Problem
- Sector Codes Failing BEE
EconoBEE is an expert BEE consultancy. EconoBEE helps businesses Become BEE Compliant, prepare for verification, earn maximum BEE Points and ensure that they achieve the BEE Level they need to get more business.
Our services include BEE Management Systems, Training, EME Pack, Complete Managed Services; consulting and advisory and Procurement Solutions.
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