THE IMPACT OF IMPORT EXCLUSIONS ON PREFERENTIAL PROCUREMENT

Localisation contributes to an inclusive economy that generates job

creation and shareholding opportunities. However, there are several

reasons why organisations choose the route of importing items.

One reason might be the lack of availability. Another could be that

the production costs of locally producing such imported items are

high, thus making it cheaper to import them.

Yet, importing goods or components is the norm in international

trade. Essentially, South African law supports free trade and

importing goods, as long as organisations record each transaction

and pay any necessary tariffs or taxes to the Government.

However, enter the Generic Codes of Good Practice (Codes), which

support localisation, resulting in imports making the Preferential

Procurement targets and the B-BBEE Verification process more

complex. The realisation is that free global trade negatively impacts

an organisation’s overall B-BBEE scorecard. Let’s unpack why.

The calculation of an organisation’s Preferential Procurement target

is against its Total Measured Procurement Spend (TMPS). In other

words, the amount an organisation pays to all suppliers on all

invoices irrespective of where they operate in the world.

The TMPS calculation is generally straightforward as it is vetted

against an organisation’s financial statements. The complexity

arises as the Codes specify what spend on imports can be

excluded from an organisation’s TMPS and the qualifying criteria for

such exclusions.

Why would excluding imports impact

Preferential Procurement targets?

For every invoice paid to a local supplier, an accompanying B-BBEE

Certificate contributes to the points an organisation can earn

on Preferential Procurement. An invoice paid to an international

supplier obviously will not have an accompanying B-BBEE

Certificate. Therefore, the amount paid to that global supplier will

not contribute to an organisation’s Preferential Procurement score.

For example, ABC Traders’ core business is producing and

distributing coffee beans. It spends R100,000 to import coffee

beans from an international supplier and another R100,000

procuring the same from a local supplier.

International Supplier Local Supplier

B-BBEE

Credentials

No B-BBEE Credentials,

thus no Preferential

Procurement Recognition.

Status Level 2 with

125% Preferential

Procurement

Recognition.

Total earned

on Preferential

Procurement

Recognition

0,00 R125,000

Thus, ABC Traders’ importing of coffee beans would have

R100,000 included in its TMPS that B-BBEE Credentials do

not support. Therefore, in terms of Preferential Procurement,

excluding imports from ABC Traders’ TMPS would aid it in

meeting its Preferential Procurement targets.

What do the Codes say?

The 2013 Codes, subsequently amended in 2019, allow for the

automatic exclusion of certain imports from an organisation’s

TMPS. Paragraph 6.5.1 provides for the exclusion of imported

capital goods or components for Value-Added Production in

South Africa, providing that:

> 6.5.1.1 there is no existing local production of such capital

goods or components; and

> 6.5.1.2 importing those capital goods or components

promotes further Value-Added Production within South Africa;

How is this interpretation translated?

Imported Capital Goods or Components for Value-Added

Production in South Africa - paragraph 6.5.1.1 of Code 400.

There is no definition for Capital Goods, Components, or Value Added Production in any B-BBEE legislation.

> Generally, Capital Goods are non-finished goods used in

the manufacturing or production process which the end

consumer will later utilise. They can further be physical

assets like machinery, equipment and/or tools.

> Components are raw materials, or they may form part of a

larger product.

> Value-Added Production entails the processes or steps that

transform raw materials or components into something more

valuable to the end consumer.

Reverting to ABC Traders, raw coffee beans on their own have

no real value to the end consumer. However, flavour-enhancing

roasting process and product packaging result in a product

sought out by the end consumer. Hence, transforming the raw

coffee beans into a consumer product means that ABC Traders

added value to the product in South Africa.

For this reason, ABC Traders could exclude the cost of importing

machinery and equipment from its TMPS calculation, providing

there is no locally manufactured machinery and equipment that

can perform the same process.

> Other imported goods and Services - paragraph 6.5.1.2 of

Code 400. These are goods and services other than those

previously listed, which organisations may only exclude if

there is no local production of such goods or services.

The result could be that such goods or services carry a

different brand name or technical specification from ones

locally produced.

To exclude Other imported Goods and Services, an organisation

must develop and implement an Enterprise Development and

Supplier Development Plan, more commonly referred to as an

Imports Substitution Plan (ISP).

How do organisations import

in line with the Codes?

Even though there are coffee farms in South Africa, it imports

most of the coffee consumed due to the difference in technical

specifications and supply. For a coffee importer to exclude the

coffee beans from their TMPS, they need to have an ISP in place.

What information is necessary

for an Imports Substitution Plan?

An ISP is a prerequisite for excluding spend from an

organisation’s TMPS. It must have clear objectives and:

> Identify beneficiaries

The rationale behind an ISP is to facilitate local manufacturing

through Supplier Development. By applying the Flow-Through

Principle to determine Ownership, a supplier must be an EME

or QSE with at least 51% ‘Black’ Ownership. In determining

the ownership percentage of such a supplier, an organisation

should consider a ‘Black’ Shareholder’s Economic Interest

and Voting rights. Importantly, such an EME or QSE must

achieve full points for Net Value.

> Identify opportunities

Upon identifying items for import under paragraph 6.5.1.2,

a feasibility study and needs analysis will determine whether

there is a gap in the market for an organisation to produce

locally. An ISP must outline how Beneficiaries locally

producing such goods and services will grow them to

become financially independent and sustainable.

> Develop beneficiaries

The information must outline how an organisation will

develop a supplier to become sustainable, as well as

ultimately financially and operationally independent from

the host organisation.

> Identify priority interventions which may include:

o Reviewing import data to identify potential products

that have the potential for localisation.

o Investigating potential products.

o Prioritising opportunities against feasibility studies.

o Identifying strategic partners like the Government,

competitors or other businesses that would like to

acquire the same goods or services.

o Plotting the implementation of the project.

o Reporting progress on the project.

> Identify Key Performance Indicators specific to the

programme for those responsible for implementing the ISP.

> Identify milestones and clearly articulate what each of them is.

> Detail and track the implementation against each milestone.

What information must accompany

an ISP for a B-BBEE Verification?

During a B-BBEE Verification, a B-BBEE Rating Agency

will measure an organisation against the ISP supplied,

including implementation and tracking evidence. Without

exception, an organisation must substantiate all exclusions

from its TMPS. Generally, a B-BBEE Rating Agency will

request the following documentation > A list of foreign suppliers that are excluded from an

organisation’s TMPS that align with the ISP.

> Proof of expenditure. An organisation must provide

evidence that capital goods or components, as well as

other goods or services, were procured from a foreign

country by providing:

o Creditors Ledger;

o An invoice, which will show a supplier with a foreign

address, which could be in a foreign currency;

o Shipping documents;

o Proof of payment;

o Customs clearance documents pertaining to the

relevant invoice; and

o Foreign exchange reconciliation.

> Evidence of having registered as an importer in the form of

a SARS import certificate.

> Justification of the type of import as per paragraph 6.5.1.1

or 6.5.1.2 of Code 400:

o Confirmation from management that there is no local

production in South Africa;

o Evidence that goods imported are raw materials or

components for further value-added processing; or

o Confirmation that imports differ in terms of brand or

technical specifications.

* Note that some Sector Codes do allow for other exclusions

not highlighted in this article