The Puzzle of Procurement continues Look Beyond the Spend

In theory, procurement is straightforward. It is any service or product

invoiced by a supplier whereby they purchased on behalf of a customer

that appears in that supplier’s invoice. However, enter Third-party

Procurement Spend that must be measured as part of an organisation’s

Total Measured Procurement Spend (TMPS), and the process becomes

more arduous.

The Preferential Procurement criteria in Code Series 400 has the

potential to make a significant impact. It is a core instrument to drive

economic transformation throughout the economy, as it encourages

procurement from suppliers with a favourable B-BBEE Scorecard.

Practice Guide 1 of 2016 was issued as a non-binding guide purely

designed to assist organisations with the interpretation of ‘Third party Procurement Spend’ to ensure the application is consistent

with the requirements of the B-BBEE Act (The Act). However, should

circumstances apply, organisations must approach the B-BBEE

Commission directly for an advisory opinion.

Although this Practice Guide is not binding on the B-BBEE Commission,

it does set out the approach that the B-BBEE Commission is likely to

take on any matter relating to the recognition of Third-party Procurement

Spend for consistency.

Investopedia defines a third party as “an individual or entity involved in

a transaction but is not one of the principals2

”. Third-party Procurement

refers to a middle person who facilitates goods or services between two

parties in exchange for a commission payment.

Typical types of organisations that provide third-party procurement

services are property managers, travel agents, event co-ordinators, as

well as those sourcing and supplying corporate gifts, to name but a few.

The following is a typical example of a third-party procurement

transaction and how recognition occurs:

Third-party Procurement recognised as TMPS means that a supplier

invoice presented must differentiate and present the B-BBEE credentials

for each line item that appears on an invoice. For example, ABC Traders

contracts XYZ Promotions with a Status Level 1 to purchase 100 caps,

including branding and delivery. The line items for the invoice appear as

follows:

Line Item 1

100 caps purchased at R10,00 each – total R1,000.00

XYZ Promotions contracted and paid LMN Clothing (Status Level 5) for

the caps.

Line Item 2

Branding of 100 caps @ R3,50 each – R350.00

XYZ Promotions contracted and paid EFG Branding (Status Level 3) to

brand the caps.

Line Item 3

Delivery of cap consignment to ABC Traders – R250.00.

XYZ Promotions contracted and paid BEE Couriers (Status Level 6) to

deliver the consignment to ABC Traders.

Line Item 4

XYZ Promotions (Status Level 1) charges a 25% service fee for sourcing,

branding and delivering 100 caps – R400.00.

Individual B-BBEE Certificates or Affidavits for all purchases made on

behalf of the customer per line item must accompany the invoice as per

the example laid out below.

Line Item 1

LMN Clothing B-BBEE Certificate or Affidavit for a claim of R1,000.00;

Line Item 2

EFG Branding B-BBEE Certificate or Affidavit for a claim of R350.00;

Line Item 3

BEE Couriers B-BBEE Certificate or Affidavit for a claim of R250.00;

Line Item 4

Although XYZ Promotions were contracted to deliver the consignment

of goods, they can only use their B-BBEE Certificate to claim the 25%

service fee totalling R400.00.

Therefore, based on the ABC Traders scenario, four separate B-BBEE

Certificates or Affidavits should accompany the invoice. To ensure that

the collation of these invoices does not eat into already limited ABC

Traders resources, collecting the Certificates or Affidavits should form

part of XYZ Promotion’s mandate for doing the work.

Only the source of the goods or services rendered can recognise

the income in their financial statement. In the case of ABC Traders’

transaction in terms of section 6.3 of Code Series 400, the line items

should appear in the financial statements as follows:

Line Item 1

R1,000,00 transaction to reflect in the financial statements of

LMN Clothing only;

Line Item 2

R350,00 transaction to reflect in the financial statements of

EFG Branding only;

Line Item 3

R250,00 transaction to reflect in the financial statements of

BEE Couriers only;

Line Item 4

R400,00 transaction to reflect in the financial statements of

XYZ Promotions only.

Categorising claims in an invoice for third-party procurement benefits

EME and QSE suppliers as, more often than not, such purchases

drive up revenue. Therefore, an EME or QSE recording an income in

their financial statements for the full amount of third-party purchases

instead of the commission earned only will see them cross the financial

threshold, thus qualifying them to be categorised as a QSE or Large

Enterprise, respectively. Consequently, an EME or QSE wishing to

remain within this threshold will be able to do so by stating their actual

earnings in their financial statements

“Third-party Procurement refers to a middle person who

facilitates goods or services between two parties in exchange

for a commission payment.”

The same principle applies to credit card purchases. For example, one uses a VISA card for Sasol

petrol from a petrol station. The B-BBEE Certificate to support this purchase must be from the petrol

station, as VISA only facilitated the purchase on behalf of the petrol station, the real source of the

purchase. Therefore, to protect already stretched resources, the people filling their vehicle should

present the B-BBEE Certificate or Affidavit for the purchase.

In effect, it does not matter which organisation presents the invoice. However, it is the B-BBEE

credentials of the supplier that provided the goods or services that must be used for a claim.

Overlooking Third-party Procurement Spend for either the customer or supplier amounts to a

misrepresentation of an organisation’s B-BBEE credentials. In terms of section 13O (1)(a) of The

Act, this is an offence. By the same token, inaccurately claiming TMPS by not applying Third party Procurement Spend is an offence. Due to the impact of not accurately reporting on TMPS,

the Enterprise and Supplier Development Service Desk at the BEE Chamber is currently training

members to guide them to the source of their procurement spend to ensure they are measured on

the correct TMPS.

Any verification professional, procurement officer, any official or an organ of state or public entity that

becomes aware of the commission of, or attempt to commit, any offence referred to under section

13O(1) and fails to report it is guilty of an offence. In terms of section 13F(1)(d) read with section

13J of The Act, the B-BBEE Commission has the power to investigate, either on its initiative or in

response to a complaint received, any matter concerning B-BBEE. If an organisation violates The

Act, a fine of up to 10% of its annual turnover could apply. Furthermore, any individuals involved

could face imprisonment for up to 10 years and/or be fined.

The issued Practice Guide 1 of 2016 was issued as a guide purely to assist with the interpretation

and application of Code Series 400 concerning Third-party Procurement Spend. As indicated, it

does not constitute a legal document or ruling of the B-BBEE Commission, but how they are likely

to view it