Clarification on shorter payment periods
Original publish date – Tue, 04 Dec 2012 10:09:34 +0000, Keith
The dti minister, Dr Rob Davies has issued a gazette, notice 922 of 2012 on 7 November 2012 covering the shorter payment periods, and the definitions of Measurement Period and Measurement Date.
Background: Shorter payment periods is used as a method of performing Enterprise Development. Code 600 identifies many activities that will be recognised as ED. This includes a grant, minority investment in a black owned EME or QSE and shorter payment periods.
Shorter payment periods is described in code 600 as follows:
“220.127.116.11 settlement of accounts with beneficiary entities over a shorter period of time in relation to the Measured Entity’s normal payment period, provided the shorter period is no longer than 10 days;”
Annexure 600 gives the recognition value of each of the ED activities. For example a grant contribution is recognised at 100%. i.e if you spend R100 on a grant contribution to an ED beneficiary then you can recognise R100 * 100% = R100 as ED spend, and this counts towards the 15 points for generic companies.
Code 600 also defines exactly what constitutes ED:
“3.2.1 Enterprise Development Contributions consist of monetary or non-monetary, recoverable or non-recoverable contributions actually initiated and implemented in favour of beneficiary entities by a Measured Entity with the specific objective of assisting or accelerating the development, sustainability and ultimate financial and operational independence of that beneficiary. This is commonly accomplished through the expansion of those beneficiaries’ financial and/or operational capacity.”
Codes 600 also defines who can be beneficiaries of ED:
“(a) Category A enterprise development contributions involves enterprise development contributions to exempted micro-enterprises or qualifying small enterprises which are 50% black-owned or black-women owned;
(b) Category B enterprise development contributions involves enterprise development contributions to any other entity that is 50% black-owned or black-women owned; or 25% black-owned or black-women owned with a BEE status of between level one (1) and level six (6);”
Annexure 600 describes the recognition of shorter payment periods as follows:
“Percentage being 15 days less the number of days from invoice to payment”.
When we first saw this we contacted the dti for clarity. The chief director of dti gave an explanation that if payment was received on the same day as invoice, i.e zero days after invoice received, then the calculation would be (15-0)/15 = 100%. If payment was received one day later, the formula would be (15-1)/15 = 14/15 = 93.3% and so on. This has always been a controversial aspect a it was deemed “too easy” to earn points. What many people did not realise is the huge benefit to many EMEs that this provided. Our own ED beneficiary, Msizi Ngwenya of Mabuya Glass has a dream of selling thousands of glass whiteboard to one of the big corporations. His biggest fear is he will land the deal and not be able to pay his glass supplier. He has not yet won the deal, but if he could have benefited from shorter payment periods, and his customer earned points it would have given him the kickstart he needed. Like many others we also felt that this concept was abused, by both measured entities and their “ED Beneficiaries” that sometimes were large corporations. The error that was made was in allowing those “beneficiaries” to be considered ED beneficiaries, as the activities offered to them did not meet the definition of enterprise development.
Many agencies followed the dti’s letter, while some did not. Those that did not followed the logic that if you paid on the date of invoice you would recognise 15% of the invoice value. If you paid one day later you could recognise 14% of invoice value and so on to a maximum of 10 days late where you could recognise (15-10) = 5% of invoice value.
It gave rise to the ridiculous situation where a company could spend say R10000 on shorter payment and earn either 15 points or 2.25 points depending on which agency was chosen to verify your business. This is a 12.75 points differential – two levels.
Notice 922 issued by the minister on 7nd November 2012 (replacing an earlier gazette dated 2nd November 2012 gives a detailed explanation of how the minister would like this to be followed.
The public has 30 days to comment. The methodology that is being proposed is to use the “15-x”% principle.
The wording in the gazette is:
“The refined principle relating to shorter payment periods”
(a) In terms of recognition of enterprise development beneficiaries as per the Codes of Good Practice, shorter period means settlement of accounts with beneficiary entities over a shorter period of time by the measured entity.
(b) In order to claim points for shorter period, the payment must be made within a period of fifteen (15) days from the date of the invoice.
(c) This means that if payment is at least made within the first fifteen (15) days from the date of invoice by the qualifying supplier, then the amount that can be claimed is a percentage of the invoice amount which is equal to 15 minus the number of days from invoice to payment date.
Example: Say that the invoiced amount is R10 and that the measured entity makes payment thereof 5 days after the invoice date then the measured entities. contribution to Enterprise Development is measured as follows:
R10 x (15- 5)% = R10 x 10% = R1 (contribution amount)
(d) This mechanism is only applicable to shorter payments made to Exempted Micro Enterprises (EMEs).
The proposal is to recognise shorter payment up to 15 days (increased from 10 days). It also proposed that the lower calculation (maximum 15%) should be used. It further limits this benefit only to EMEs.
Shorter payment was heavily used, and did go to benefit some tiny black owned businesses that could otherwise not won any business. It was abused. The new method will be more expensive and not used as much as previously, to the detriment of some tiny businesses.
The limit to EMEs is acceptable, though we would like to see QSEs included. The minister should also clarify that it should only apply to ED beneficiaries.
Code 600 states:
5 The Benefit Factor Matrix
The Minister may from time to time, by notice in the gazette, revise or substitute the Benefit Factor Matrix. Any changes will only be applicable to Compliance Reports prepared for a Measured Entity in respect of the first 12-month period following the gazetting of a revision or substitution.
The question is whether the minister himself recognises that the move from 100% recognition to 15% is a revision of the codes. The gazette uses the term “refinement principle”
This is important because it will guide us to whether the new rules around shorter payments comes into effect on the day that it is gazetted, or gives a transition of a 12 month period. It will also help verification agencies know where they stand because even today some agencies use the 15% principles, whereas the majority use the 100% rule. We need to know what is going to happen for the next 12 months after the rules are gazetted.